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Many entrepreneurs feel overwhelmed by the thought of filing their small business taxes. If that’s how you feel, we don’t blame you since there’s a lot that goes into preparing your business for tax day. Even before the deadline for actually filing your tax return, there’s a lot of tax prep that you should ideally be doing throughout the year.
Especially if this is your first time filing small business taxes, you probably have a lot of questions about how you go about it, which forms to fill out, and when. If you don’t even know where to start, we’re here to help. Here’s your step-by-step guide to everything you need to know about small business taxes.
These are the basics of paying your small business taxes:
When it really comes down to it, these four basics depend on your business’s legal structure. Whatever your business entity is, you’ll first need to know how it affects your tax burden.
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. Sole proprietors must also pay self-employment taxes, which cover the business owner’s medicare and social security obligations.
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 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—use Form 1040-ES, Estimated Tax for Individuals.
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.
To file 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 is shown on a Schedule K-1.
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 as “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 tax rate. Many corporations save on self-employment taxes by paying themselves a smaller salary and taking more money out of the company in distributions. There are several other tax advantages to C-corporations as well.
S-corporations are pass-through entities like sole proprietorships and partnerships. This means that each shareholders 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.
Similar to C-corps, S-corps can also divide business income between a salary and dividends. Salary is subject to self-employment taxes, and dividends are not. You can strategically try to save on self-employment taxes by paying yourself a salary. However, the IRS requires you to pay yourself a reasonable salary given your job title, industry, and qualifications. Both C and S-corporations must pay estimated taxes on a quarterly basis.
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, you won’t be 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.
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 C-corporation.
No matter what type of small business entity you have, you have to pay quarterly estimated taxes if the business owes income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect to owe $500 or more in tax for the year.
Before you owned a business, filing taxes was a one-time thing. But as a small business owner, you’ll have to pay the IRS four times per year. On one hand, that’s four more tax deadlines you might miss. But on the bright side, by the time your yearly tax deadline comes around, you’ll have already paid three-quarters of your tax return.
To make things even more complicated, businesses 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.
To calculate your quarterly payment, estimate your expected adjusted gross income, taxable income, deductions, and tax credits for the year. The best way to gauge these is just looking at your taxes from the previous year as a guide.
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’s Form 1040-ES Estimated Tax Worksheet.
These are the deadlines for quarterly estimated small business taxes:
Business owners must deposit federal income tax that’s withheld from employees, the employer and employee share of social security and medicare taxes, and federal unemployment taxes. Deposits occur on a semiweekly or monthly deposit schedule.
Along with deposits, there are related tax forms 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 $1000 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. The amount of unemployment tax is dependent on the amount of wages you pay to your employees. You must file Form 940 if you pay at least $1,500 in wages in a quarter.
Your deposit schedule depends on the total tax liability you report during a four-quarter lookback period. If your total tax liability, If you reported $50,000 or less in taxes during the lookback period, you follow a monthly deposit schedule. If you reported more than $50,000, you 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. And 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, deposit your taxes by the following Friday.
If you want to stay on top of your small business taxes, you need to carefully prepared in advance of any filing deadlines.
The process of filing your small 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.
Here’s what you’ll need to gather:
When you sit down to file your small business taxes, make sure you have these financial documents on hand.
And 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:
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 from your accountant.
Another reason to keep all those documents of your business’s expenses together? You can deduct your small business’s expenses to save money on your taxes—we’re talking hundreds or thousands of dollars for your small business each year.
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. Deducting your expenses means that you’re lowering your income—and lowering the amount you owe in taxes.
Credits are even better than deductions because they directly cut your tax bill by the amount of the credit.
The list of small business tax deductions and credits is quite long. Not all will be relevant to your business, but it’s worth getting familiar with them all so you can save as much money as possible on your small business taxes.
There are some tax deductions that no business owner should miss on their small business tax deductions.
These are the deductions that apply to almost all small businesses. And if you don’t take advantage of them, you’re just simply overpaying your taxes each year.
Most small business owners use a car, van, or truck for their company.
And 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—about 58 cents per mile in 2019. If you go the actual car expenses route, you’ll deduct the cost of your vehicle by all the costs you incur from operating it: gas, oil, repairs, auto insurance, and so on.
Whichever deduction method you choose to use, 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, and so on, you can deduct 100% of those premiums on your small business taxes.
If you rent the space you do business in, you can deduct your rent payments on your small business taxes. And that’s not just for office spaces or storefronts—you can also deduct your rent payments for the equipment and machinery you use.
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 small business taxes if you take the time to deduct them.
In the long list of small business tax deductions, you might stumble across some that you didn’t know existed.
Here are a few that you might have overlooked, but should absolutely take advantage of when filing your small business taxes.
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. But you can actually deduct all of these related costs on your 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. That could even be the costs of researching the business before you start.
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.
But if your business uses the cash method of accounting and chooses to treat inventory items as materials and supplies, you can deduct those expenses on your taxes.
And if you’re in a service-based industry, you can probably deduct the cost of your inventory. For instance, if you operate a beauty salon that offers hair cuts and sells shampoo and conditioner, you’re probably eligible for a tax deduction.
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.
Those six small business tax deductions are just a few examples of all the different deductions you can take advantage of on your small business taxes. There are also plenty of small business tax credits, particularly for businesses in the science and tech industries.
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, you might be opening the door for a business audit.
With some time, effort, and patience, any small business owner can navigate the process of filing small 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 precious time managing your business for being your business’s accountant.
If you don’t have the time to do your small business taxes right, you should absolutely consider hiring an accountant to help you out.
Here are some tips for searching for an accountant:
You can find business accountants online, but we’d advise you against it. 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. 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.
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. They 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, 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.
In the best cases, a business accountant does more than just file your small business taxes.
They’ll have a hold over 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.
So when you’ve found a few good business accountants to consider, 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 to ask them:
While not a comprehensive list of questions, ask these first to get a sense of whether the accountant will be a good match for your business.
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 small business taxes on your own, consider using an accounting app to make the process much easier. QuickBook is simple, powerful, and 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 so on. QuickBooks has many different editions that can meet any level of accounting need—you’ll just have to pay for varying levels of service.
If you want to file your small business taxes, you don’t have to go it totally alone. There are many small business accounting apps that you can use to stay organized, prepare your financials, and make tax season a breeze!
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There’s a lot that goes into preparing for tax season. To remain calm, cool, and collected when it’s time to file your small business taxes, remember these best practices.
Small 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 headache when you actually need to file your small business taxes. Make sure that all of your records are current and accurate, and keep everything you might need in the future.
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 tax deadlines. 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, ask for help with your small business taxes! If you don’t have time to do your small business taxes properly, hiring a business accountant to step in is well worth the cost. An accountant can also give you the best tips on how to maximize your tax return. Now that you know everything about small business taxes, you can file successfully and focus on running your company.