One of the most complex parts of running your business is understanding and fulfilling your tax responsibilities. Unlike your personal tax returns, which are usually completed with a few forms once a year, there’s a lot more involved with preparing and filing your business taxes. Especially if this is your first time filing small business taxes, you likely have a number of questions about how you go about it, which forms to fill out, and when. We’re here to help.
In this guide, we’ll explain everything you need to know about small business taxes—including the types of taxes you may be responsible for, how to identify your tax responsibilities based on your business structure, and finally, when and how to pay and file your business tax return.
Types of Business Taxes
First and foremost, let’s explain the types of small business taxes that you, as a business owner, may be responsible for. Generally, business taxes can be broken down into three levels—federal taxes, state taxes, and local taxes. Your federal taxes, as you may already know, are those that you’ll need to pay to the IRS—making up the largest part of your tax burden.
As for state and local taxes, these will vary from state to state and municipality to municipality, and therefore, your responsibility will depend wholly on where your business is located and what the tax laws are in that location. Because these taxes will be unique to your business based on location, we’d recommend consulting your state and local tax agencies for more information on these business tax obligations.
This being said, when it comes to federal taxes (and sometimes state and local taxes as well), there are typically six types of business taxes that you may be responsible for. These include:
- Income tax: Tax you pay on the income your business earns.
- Self-employment tax: Tax you pay, as a self-employed business owner, to cover social security and Medicare taxes.
- Employment tax: Also known as payroll tax, this is a tax you deduct from employee paychecks (if you have employees) for federal income taxes, social security taxes, Medicare taxes, and federal unemployment taxes.
- Excise tax: Excise tax is a tax you pay if your business is involved in certain goods or services, such as air transportation, fuel, or heavy trucks and tractors.
- Sales tax: Although there is no federal sales tax, 45 states have a sales tax requirement. If you sell goods and services, you may be responsible for calculating, collecting, and reporting sales tax.
- Property tax: A tax you pay on any commercial property, land, or real estate that your business owns. Any business property tax will be regulated on the local level based on where your business is located.
Small Business Taxes Based on Business Structure
All in all, these are the basics of paying your small business taxes:
- What types of taxes you need to pay
- How much you have to pay in taxes
- When you have to pay business taxes
- And how you pay business taxes
When it really comes down to it, however, these four basics depend on your business’s legal structure. Your business entity type will dictate your tax burden. Let’s explain:
Business Taxes for Sole Proprietors
A sole proprietorship is a business that’s owned and operated by one individual. Because the owner of a sole proprietorship is flying solo, filing taxes under this business structure is relatively simple.
Instead of filing your small business taxes on behalf of the business, as a sole proprietor, you’ll report business income and losses on your personal income tax return. Business profits will be taxed at your personal income tax rate. Additionally, sole proprietors will be responsible for paying self-employment taxes, to cover the business owner’s Medicare and social security obligations.
This being said, if you run a sole proprietorship, you’re generally required to file a Schedule C or a Schedule C-EZ with your Form 1040 and pay quarterly estimated taxes.
Estimated tax, as we’ll explain in more detail below, is the method that all businesses use to pay social security and Medicare taxes along with income tax. If you were an employee, you wouldn’t worry about this—your employer would withhold these taxes for you. But as a sole proprietor, you are responsible for making quarterly payments with the estimated tax method.
To figure what you’ll need to pay in self-employment taxes—and if you have to pay quarterly—you’ll use Form 1040-ES, Estimated Tax for Individuals.
Business Taxes for Partnerships
Partnerships are businesses operated by two or more owners. Most partnerships are known as general partnerships, but there can also be limited partnerships or limited liability partnerships. Business owners who are a part of the partnership must pay income taxes, self-employment taxes, and quarterly estimated taxes.
If you operate a partnership, the business has to file Form 1065, which is an annual information return that shows the income, deductions, gains, and losses from the business’s operations—but the business itself doesn’t pay any income tax. Partnerships enjoy what’s called “pass-through taxation,” meaning the income is taxed on the owners of the business instead of being subject to corporate tax rates.
Therefore, to file small business taxes, owners who are included in the partnership have to file their respective share of the business’s income and losses on their personal tax returns. Each partner’s share of the business’s income and losses are shown on a Schedule K-1.
Business Taxes for C-Corporations
If your small business is structured as a C-corporation, your business is legally separate from you as the owner. C-corporations are subject to what’s called “double taxation.” To start, C-corporations are subject to a flat income tax rate of 21%. Then, shareholders are taxed on their personal tax returns when profits are distributed as dividends. The primary income tax form for C-corporations is Form 1120.
Shareholders who actively participate in the work of the corporation are considered employees. Only the employee’s salary is subject to self-employment taxes. Dividends are subject to a different dividend-specific tax rate. Many corporate business owners save on self-employment taxes by paying themselves a smaller salary and taking more money out of the company in distributions. (However, the IRS requires you to pay yourself a reasonable salary given your job title, industry, and qualifications.) There are several other tax advantages to C-corporations as well.
Business Taxes for S-Corporations
S-corporations are corporations that have elected to be treated as a pass-through entity for tax purposes, like sole proprietorships and partnerships. This means that each shareholder reports business income and losses on their personal tax return and profits are taxed at the personal income tax rate. An S-corporation files an informational tax return, called Form 1120S, but the business itself doesn’t pay a corporate tax. This allows an S-corporation to avoid double taxation.
Moreover, similar to C-corps, S-corps can also divide business income between a salary and dividends. Like with a C-corporation, in an S-corporation, employee salary is subject to self-employment taxes, and distributions are not. You can strategically try to save on self-employment taxes by paying yourself a lower salary, though, again, the IRS requires that it be reasonable for your qualifications.
C-corporations must pay estimated taxes on a quarterly basis if they expect to owe $500 or more in taxes. S-corporation shareholders are required to make estimated tax payments if they expect to owe more than $1,000 or more.
Business Taxes for Limited Liability Companies
A limited liability company (LLC) is a business entity that keeps the owners legally separate from the company’s debts or liabilities. As the owner of an LLC, you’ll have the liability protection of a corporation with the tax benefits of a sole proprietorship or partnership.
If you operate an LLC, you’ll be subject to pass-through taxation, just as you would be as a partnership. In other words, with LLC taxes, you’re not taxed twice like corporations are. Instead, as an owner of an LLC, you’ll make quarterly tax payments on your personal income tax forms. On top of that, you’ll also have to submit Form 1065 each year for informational purposes.
Furthermore, LLCs offer you additional tax flexibility compared to other business entities. From a legal standpoint, you can exist as an LLC. However, from a tax standpoint, you have the option to be taxed as an S-corporation or partnership.
Additional Business Taxes
On top of these small business taxes, which you’ll be required to pay and file based on your entity type, you may also be subject to the other taxes we discussed above—employment taxes, sales tax, and property tax—based on the specifics of your business.
Business Taxes: When to Pay
No matter what type of small business entity you have, you have to pay quarterly estimated taxes if you expect to owe income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect to owe $500 or more in business taxes for the year.
Before you owned a business, filing taxes was a once-per-year occurrence. But as a small business owner, on the other hand, you’ll have to pay the IRS four times per year. Although this means there are four deadlines to keep track of, it also means by the time your yearly tax deadline comes around, you’ll have already paid three-quarters of your tax return.
This being said, though, to make things even more complicated, if your businesses has employees, it must deposit federal income tax withheld from employees, federal unemployment taxes, and both the employer and employee social security and Medicare taxes. Depositing can be on a semi-weekly or monthly schedule.
Quarterly Estimated Small Business Taxes
Therefore, to calculate the quarterly payment for your business taxes, you’ll estimate your expected adjusted gross income, taxable income, deductions, and small business tax credits for the year. The best way to gauge these numbers is to look at your taxes from the previous year as a guide. If this is your first year filing a business tax return, you might consult your accountant or another tax advisor for assistance in making these estimates.
Once you’ve put a number on these figures, you’ll just have to calculate how much you’ll owe in your estimated quarterly small business taxes. The easiest way to do this is to use the IRS Form 1040-ES Estimated Tax Worksheet.
These are the deadlines for you to file your quarterly estimated small business taxes for 2019:
- April 15 (covering the period from January 1 to March 31)
- June 17 (covering the period from April 1 to May 31)
- September 16 (covering the period from June 1 to August 31)
- January 15 (covering the period from September 1 to December 31)
Depositing Small Business Taxes
As we mentioned above, part of your business tax responsibility will be depositing federal income tax that’s withheld from employees, the employer and employee share of social security and Medicare taxes, and federal unemployment taxes on a semiweekly or monthly deposit schedule.
Along with these deposits, there are related tax forms you’ll need to file. Businesses that withhold federal income tax or social security and Medicare taxes must file Form 941 each quarter. If your employment taxes will be less than $1,000 for a calendar year, you can alternatively file Form 944 on an annual basis. Employers must also file Form 940 annually if they have employees to report their federal unemployment tax obligations. The amount of unemployment tax you’ll be responsible for is dependent on the wages you pay to your employees. You must file Form 940 if you pay at least $1,500 in wages in a quarter.
All of this being said then, your deposit schedule depends on the total tax liability you report on form 941 during a four-quarter lookback period. If you reported $50,000 or less in business taxes during the lookback period, you’ll follow a monthly deposit schedule. On the other hand, if you reported more than $50,000, you’ll follow a semiweekly deposit schedule.
Under the monthly deposit schedule, you must deposit employment taxes for each month by the 15th day of the following month—under the semiweekly deposit schedule, you must deposit employment taxes for payments made on Wednesday, Thursday, and Friday by the following Wednesday. For payments made on Saturday, Sunday, Monday, and Tuesday, you’ll deposit your taxes by the following Friday. You can make these small business tax deposits using the EFTPS, or Electronic Federal Tax Payment System.
How to Prepare Your Business Tax Return
Ultimately, in order to stay on top of your small business taxes, you’ll need to carefully prepare in advance of any filing deadlines.
This being said, the process of filing your business taxes is much easier if you take time to prepare all your small business’s financial documents and records before tax season rolls around. The reason is simple: If you’re scrambling to get everything together a few days before a business tax deadline, you’re setting yourself up for disaster.
To make preparing your business tax returns easier then, here’s what you’ll need to gather:
- Last year’s business tax return
- Payroll documents
- Bank and credit card statements
- Accounting documents
- Partnership agreements
- Depreciation schedules
When you sit down to file your small business taxes, you’ll want to make sure you have these financial documents on hand.
Additionally, because you’ll have to make a thorough accounting of all income and expenses associated with your small business, it’ll help if you’ve saved these documents, too:
- Gross receipts
- Checking and savings account interest
- Returns and allowances
- Sales records
- Unclassified income
- Employee wages
- Insurance premiums
- Professional fees
- Contractor payments
- Office rent (or portion of the rent or mortgage paid on your home)
- Transportation and travel expenses
- Advertising costs
- Office supplies and equipment
- Phones and other communication devices
If you keep hold of all these receipts and documents, you’ll have a much more accurate income and expense statement when it comes time to file your small business tax returns. Most of these income and expense categories should be easy to locate on your business accounting software or get from your accountant.
Business Tax Deductions and Credits
Another reason to keep all those documents of your business’s expenses together? You can deduct your expenses to save money on your small business taxes—meaning possibly saving hundreds or thousands of dollars for your business each year.
This being said, depending on how your business is legally structured, you’re allowed to deduct “ordinary and necessary” expenses that your business incurs by just operating. If you can prove that the deduction is relevant, you can deduct it from your taxable income. Essentially, deducting your expenses means that you’re lowering your income—and therefore, lowering the amount you owe in taxes.
In addition to deductions, you may be able to claim credits—which are even better than deductions because they directly cut your tax bill by the amount of the credit.
With this in mind, however, the list of small business tax deductions and credits is quite long. Not all deductions and credits will be relevant to your business, but it’s nevertheless worth familiarizing yourself with all of them, so you can save as much money as possible on your small business taxes.
The 3 Most Common Business Tax Deductions
There are some tax deductions that no small business owner should miss when filing their business tax returns.
These are the deductions that apply to almost all small businesses—and therefore, if you don’t take advantage of them, you’re overpaying your taxes each year.
1. Vehicle Expenses
Most small business owners use a car, van, or truck for their company.
If you can prove that you use the vehicle for business purposes, then you can deduct the cost of operating the vehicle.
There are two ways to deduct your vehicle expenses on your small business taxes: standard mileage rate and actual car expenses. With the standard mileage rate method, you’ll deduct the cost of operating your vehicle based on the amount you drive it for business—about $0.58 per mile in 2019. If you go the actual car expenses route, on the other hand, you’ll deduct the actual cost of your vehicle that is related to your business by reviewing all the costs you incur from operating it: gas, oil, repairs, auto insurance, and so on. This requires more recordkeeping as you’ll need to separate your vehicle costs between personal and business use.
Whichever deduction method you choose to use, you’ll want to make sure it’s the one that saves you the most money on your small business taxes.
Most small business owners will protect their company with at least one form of business insurance. If you pay for your business owner’s policy, health insurance, malpractice insurance, etc., you can deduct 100% of those premiums on your business taxes.
If you rent the space you do business in, you can deduct your rent payments on your small business taxes. Plus, this doesn’t only apply to office spaces or storefronts—you can also deduct your rent payments for the equipment and machinery you use.
This being said, if it’s just you or a few others running your business, you might operate out of your home. If you rent your home and use it as part of your business space, you can deduct the rent you pay for that portion of your house, too.
A home office deduction is one tax deduction that your small business definitely shouldn’t miss. Those rent payments can be pricey, and you can save a lot on your business taxes if you take the time to deduct them.
More Business Tax Deductions
In the long list of business tax deductions, you might stumble across some that you didn’t even know existed.
Here are a few that you might have overlooked, but should absolutely take advantage of when filing your small business taxes.
1. Startup Costs
If you’re just opening the doors of your small business, you know how expensive starting up can be. There are lots of startup costs you’ll need to cover to get going. Luckily, you can actually deduct all of these related costs on your business tax returns.
Any business-related startup and organizational costs are considered capital expenditures by the IRS. Startup and organizational costs are pretty broadly defined by the IRS. They’re essentially any amounts paid or incurred when you start a business—they could even be the costs of researching the business before you start.
With this in mind, as long as your startup costs don’t exceed $50,000, you can choose to deduct up to $5,000 of business startup costs and up to $5,000 of organizational costs. If your startup costs are higher than $50,000, the deduction will be reduced by that amount—and you can’t deduct any startup costs if your total costs amounted to $55,000 or more. After the initial deduction, the remainder of your startup costs can be amortized and deducted over a period of 180 months.
In most cases, inventory isn’t considered a tax-deductible expense—maybe that’s why you’ve overlooked them on your small business taxes.
Previously, inventory could only be counted as a business deduction when it was sold. So if you owned a clothing boutique, you could take a deduction for the money spent on your inventory (called “cost of goods sold”) when a customer actually came in and bought the inventory.
But the Tax Cuts and Jobs Act changed whether inventory is deductible before it’s sold. If your business uses the cash method of accounting or chooses to treat inventory items as materials and supplies, you can deduct those expenses on your taxes.
3. Business Loan Interest
If you have a small business loan, a business credit card, or a mortgage, you’ll make interest payments on what you’re borrowing from the lender. This might come as a surprise, but those interest payments are deductible on your small business taxes. No one likes paying interest on what they borrow, but those payments are a little easier to swallow if you know you can deduct them on your taxes.
Take Advantage of Business Tax Deductions
These six small business tax deductions are just a few examples of all the different deductions you can take advantage of on your business taxes. There are also plenty of small business tax credits, particularly for businesses in the science and tech industries.
Therefore, you’ll want to research your tax deductions thoroughly and take the time to weed through the ones that you can take advantage of—and the ones that you can’t. If you interpret the tax code wrong and take deductions that you shouldn’t, however, you might be opening the door for a business audit.
Where to File Your Business Taxes
Depending on the IRS business forms you’re filing, you generally have two options for actually filing your small business taxes—electronically or by mail. Typically, it’s much easier to file online, either by using an appropriate tax or accounting software or through the IRS e-file system. In fact, not only does the IRS recommend that you file your business taxes electronically, but they also require it in certain cases.
If, on the other hand, you do ultimately decide to file your business tax returns by mail, you’ll want to be sure you follow the IRS instructions based on the form you’re filing and that you mail your return to the correct address—this will decrease the likelihood that the IRS has problems receiving or processing your returns.
Finding an Accountant for Your Business Taxes
With some time, effort, and patience, any small business owner can navigate the process of filing business taxes on their own. But as a small business owner, you’re juggling a lot of things at once, and you might not want to sacrifice any of your time managing your business to also serve as your business’s accountant.
Therefore, if you don’t have the time to do your small business taxes right (or even if you just want some help), you should absolutely consider hiring an accountant to help you out.
Here are some tips for searching for an accountant:
Look for Referrals
You can find business accountants online, but we’d advise exploring other routes before turning to Google. If you hire a great business accountant, they can do more for you than just file your small business taxes. The right business accountant can be a trusted financial advisor throughout the life of your business.
So, instead of just going with the first business accountant you find online, you should start with referrals. You can ask a business advisor, lawyer, or banker for recommendations, or tap into a small business association to find a trusted business accountant. You could also get referrals by attending small business events hosted by your local Chamber of Commerce or Small Business Development Center.
Go the CPA Route
Some business accountants have gone through a qualification process to become a Certified Public Accountant (CPA).
If you work with a CPA, you can be sure that your accountant has been pre-screened and is well-trained and experienced. These professionals have to take a test to qualify and periodically renew their certification—so you can be confident that they’ll be up-to-date with all accounting methods and best practices.
To find a CPA, you can go straight to the American Institute of Certified Public Accountants (AICPA). You can take advantage of the AICPA’s directory of CPAs, accounting companies, and local accounting organizations to find a great accountant for your business.
Choosing the Right Small Business Accountant
As we mentioned, in the best cases, a business accountant does more than just file your small business taxes.
They’ll have an understanding of how your business operates and manages its money, so a great business accountant can give valuable advice and guidance for managing your business’s financials.
Therefore, when you’ve found a few good business accountants to consider, you’ll want to take the time to figure out which one will be the best match for your business.
When you’re interviewing a candidate, here are a few questions you can ask:
- What’s your experience working in my industry?
- Have you worked with a similar business entity before?
- What are your services beyond small business taxes?
- How often will we communicate?
- What are your rates?
Although not a comprehensive list of questions, you can ask these first to get a sense of whether the accountant will be a good match for your business.
This being said, if you don’t want to go through the process of finding a specific business accountant for help with your taxes, you might choose to utilize an online service, like BenchTax from Bench Accounting, for example, that matches your business with a professional or team of professionals to provide you with tax assistance, advice, and even file your taxes on your behalf.
Using Accounting Software Instead
Maybe you have a little accounting experience under your belt or you just can’t justify paying someone to do your small business taxes for you.
If you choose to tackle your business taxes on your own, you’ll want to consider using accounting software to make the process much easier. In fact, even if you do hire a business accountant, you’ll nevertheless want to use accounting software to help you manage and streamline your financial processes.
As an example, QuickBooks is a simple, powerful accounting software used by millions of small businesses.
First and foremost, QuickBooks can help you with your small business tax accounting—but it can also help you with payroll, inventory management, profit and loss analysis, and more. Plus, QuickBooks has many different editions that can meet any level of accounting need—you’ll just have to pay for varying levels of service.
All of this being said then, if you choose to file your own small business taxes, you don’t have to go it totally alone. There are many apps that you can use to stay organized, prepare your financials, and make tax season a breeze.
The Key Takeaways
Ultimately, there’s a lot that goes into preparing for tax season. Therefore, keeping in mind everything we’ve discussed so far, you can be prepared for filing your small business taxes by remembering these best practices.
First, your business taxes might only be on your mind a few weeks leading up to deadlines, but preparing and organizing them should really be a priority all the time. If you take steps to prepare before tax season, you’ll save yourself a lot of headaches when you actually need to file your business tax returns. To this point, you’ll want to make sure that all of your records are current and accurate, and that you keep everything you might need in the future.
Second, although small business taxes can be complicated and time-consuming, you’ll want to pay close attention to deadlines. If you don’t pay your taxes on time, you’ll be charged fees that only get worse and worse as you get further away from the original deadline date. Therefore, as we said, the best time to start preparing your small business taxes is now, but as a good rule of thumb, you should start working on them at least two weeks before the deadline.
Finally, don’t be afraid to ask for help with your small business taxes. If you don’t have time to do your business taxes properly, hiring a business accountant to step in is well worth the cost. Not only can an accountant answer questions and help you file your business taxes, but they can also give you the best tips on how to maximize your tax return.
This article has been reviewed by tax expert Erica Gellerman, CPA.