Small Business Taxes for Beginners
Small business owners are far too preoccupied with running their companies to devote any more time than is reasonable to concerns such as taxes. However, failing to properly handle your small business taxes could result in a rude awakening from the IRS or other taxing authorities.
With that in mind, this article will offer you an overview of taxes for business owners as well as a place to start for tax planning, all while allowing you to focus on running your company.
What are Business Taxes?
Business Taxes are all the taxes payable by a business with the exception of federal/state/local/foreign/net income or franchise tax. Business taxes refers to levies, duties, license fees, rates, interests, penalties, assessments, tenancy, etc payable to governments directly or indirectly.
How a business owner pays business tax is dependent on how the business is set up. There are three (3) types of business taxes in general and they include;
1. Income Taxes
An annual income tax return is required of all businesses. Whereas other businesses are considered “pass-through” entities and are taxed at the individual rate, C corporations pay income tax at the corporate rate.
2. Estimated Taxes
Taxes must be estimated and paid quarterly by freelancers, independent contractors, and small business owners who estimate owing at least $1,000 in taxes. If you don’t pay them, or if you don’t pay enough, you could face penalties and interest, as well as a slew of other problems. As a result, you must ensure that you are aware of the estimate’s due dates and payment timeframe.
3. Employment Taxes
Self-employed people must pay self-employment taxes, which include Social Security and Medicare contributions. If you are self-employed, you must pay self-employment taxes if:
- Your net earnings are $400 or more
- You make upwards of $108 or more in compensation when working for a church or a qualifying church-controlled organization that has adopted a Social Security and Medicare tax exemption. Ministers and members of religious orders, such as nuns, are exempt from this rule.
For small business employers, you are expected to pay employment taxes which include:
- Social Security and Medicare taxes
- Federal income tax withholdings (paid by your employee, but you’re expected to enforce compliance)
- Federal unemployment tax (FUTA)
Depending on the sort of business, there are also numerous excise taxes. These are sometimes referred to as sin taxes, and they can range from levies on the purchase of heavy-duty trucks to taxes on the selling of alcohol and cigarettes.
How to File Small Business Taxes
When it comes to filing a federal income tax return for your small business, you have a few options depending on whether you run it as a single proprietorship or through a formal structure like an LLC or corporation. You must report your business revenue and costs on a distinct tax form for each type of entity. You compute your taxable business income in the same way regardless of the form you employ. If you’re looking to estimate your income tax for this year, then try out Taxfyle’s calculator.
1. Gather all your records
Gather all of your company’s records. You should have all records that report your business revenues and spending in front of you before filling out any tax form to declare your business income. Calculating your revenue and deductions is considerably easier if you use a computer application or a spreadsheet to arrange and keep track of all transactions throughout the year rather than having to recall every sale and expenditure.
2. Determine the appropriate form
Choose the appropriate IRS tax form. You must always report and pay tax on your business earnings to the IRS, but the form you use to declare earnings depends on how you run your business.
A sole proprietorship permits many small business owners to record all of their business sales and expenditure on a Schedule C attachment to their personal income tax return. The IRS also enables you to use the Schedule C attachment if you conduct your firm as an LLC and are the sole owner. If you use a corporation or elect to treat your LLC as one, you must always file a separate Form 1120 corporate tax return (or Form 1120S if you are an S-Corp).
3. Fill out your form
Complete Schedule C or Form 1120. Because Schedule C is only two pages long and outlines all of the costs you can claim, it is an easy way to do business taxes. To get at your net profit or loss, simply deduct your expenses from your business earnings. This figure is subsequently transferred to your personal income tax return and combined with all other personal income tax items.
However, if you use Form 1120 you can compute your taxable business income in the same way, but the form demands more information that may not necessarily apply to a small business. The fact that a Form 1120 is different from your personal income tax return is its major disadvantage.
4. Be wary of deadlines
Keep track of various filing deadlines. When you use a Schedule C, it becomes part of your Form 1040, so you don’t have to worry about different filing deadlines. The same April 15 deadline applies in most cases.
If you are taxed as a C-Corp, you must file Form 1120 by the 15th day of the fourth month following the end of the tax year, which is April 15 for most taxpayers. If you are taxed as an S-Corp, you must file Form 1120S by the 15th day of the third month following the end of the tax year, which is March 15 for most taxpayers. This form cannot be submitted with your personal income tax return to the IRS.
Tips to Reduce Your Business Taxes
Here are tax preparation and small business accounting best practices for small businesses that can help you save money on taxes:
1. Hire a suitable accountant
Your accountant should offer more than just financial statement preparation and tax preparation. If that’s all they offer, they’re not the ideal accountant for a small company. Throughout the year, an accountant should work with you to track income and expenses, ensure you don’t have a cash flow problem, and monitor your gross and net earnings. Work with your accountant from the start of your firm, not only during tax season in March and April.
2. Claim all income that is reported to the IRS
The IRS receives a copy of your 1099-MISC forms so that they can compare what you’ve reported to what they know you’ve received. Make sure the amount of income you submit to the IRS matches the amount of income shown on the 1099s you got. For the IRS, failure to do so constitutes a red signal. Even if a client fails to send a 1099, you must still record the income. When it comes to state taxes, the same restrictions apply.
3. Separate business from personal expenses
If the IRS audits your firm and discovers personal costs mixed in with business expenses, regardless of whether you properly reported business expenses, the IRS may begin looking into your personal accounts. Always open a separate bank account and credit card for your business and use it just for business needs.
4. Correctly classify your business
Failing to properly classify your firm could result in you paying too much in taxes. Your taxes will be affected differently depending on whether you categorize your firm as a C Corporation, S Corporation, Limited Liability Partnership, Limited Liability Company, Single Member LLC, or Sole Proprietor. Small businesses should speak with a lawyer and an accountant to establish how their company should be classified.