Starting a small business comes with a lot of new financial responsibilities. You’ll need to figure out payroll for yourself and other employees, how to manage and track your expenses, and the best process for invoicing clients. Then, of course, there are the dreaded taxes. Taxes are one of life’s great certainties and the constant that small business owners can look forward to each spring.
If you’re starting your small business and facing taxes for the first time, you likely have questions about taxes that range from the very basic (when do I need to file taxes?) to the more complex (do I need to pay estimated quarterly taxes, or just once a year?).
The good news is that the IRS wants to make it easy for you to pay them their due, which is evident through the abundant online resources they provide. And there are plenty of tax professionals that can support you on this journey. In this article, we’ll cover the basics of preparing for taxes throughout the year, which types of taxes you may need to pay, and how to file your taxes.
Note: We highly recommend consulting with legal and tax professionals on the intricacies of business taxes before making any tax preparation and filing decisions.
Key considerations
- Small businesses are subject to various taxes, including income, property, franchise, business, and sales tax.
- Some taxes may apply federally and locally, and the types of taxes you’ll pay depend heavily on your business structure, location, and income.
- Hiring a tax professional to file business taxes is a popular choice for business owners who want to leverage the expertise, efficiency, and strategy of an experienced preparer.
Small business tax preparation
You can take several steps throughout the year to make tax prep season less stressful.
Understand your business structure
Your business structure drives virtually everything when it comes to taxes. When forming your business entity, you’ll likely choose to operate as an LLC, partnership, sole proprietorship, or corporation. While other entity types, like a limited partnership or non-profit, exist, the four previously mentioned are the most common, especially for a small business. Each entity requires that you file a different form and adhere to a specific deadline.
Sole proprietorship
As a sole proprietor, you are the sole owner of (and employee in) your business. With a company of this size, you can report business income and expenses using Schedule C on your personal tax return at the same filing deadline used for personal taxes. You’ll also be taxed at the individual tax rate. Keep in mind that you’ll need a separate Schedule C form for each type of work you do. So, if you have two side hustles, one as a web developer and the other as a personal trainer, those are two distinct forms. If you earned over $400 during the year, you must also file a Schedule SE for applicable self-employment tax.
Form: Schedule C and Schedule SE (Form 1040)
Tax deadline: April 15th
Partnership or limited liability partnership (LLP)
If you operate as a partnership or LLP, you must file Form 1065, U.S. Return of Partnership Income, which outlines the total income or loss for the year. In addition, the partnership will fill out a Schedule K-1 form that is provided to each partner. The partners then use Schedule K-1 to report their share of the partnership’s income, deductions, and credits on their personal tax returns. There are different requirements for personal tax returns depending on if you’re a general or limited partner. A tax professional is the best resource to confirm you’ve filed appropriate forms based on your position within the organization. And, yes, you will have to pay small business taxes starting with the year you are a seller or buyer in a partner buy-in or partner buy-out, if applicable.
Form: U.S. Return of Partnership Income and Schedule K-1 (Form 1065)
Tax deadline: March 15th
Limited liability company (LLC
An LLC can choose to pay taxes as a sole proprietorship, partnership, or corporation. Single-member LLCs file taxes like sole proprietors, while multi-member LLCs file as partnerships unless they elect to be taxed as corporations. This flexibility means understanding your specific election and corresponding tax forms (e.g., Form 1120 for corporations or Form 1065 for partnerships).
Form: An LLC will use a form from one of the other structures depending on whether the LLC is taxed as a disregarded entity, corporation, or partnership.
Tax deadline: March or April 15th, depending on whether you’re a single or multi-member LLC
C corporation
In lieu of outright acquiring another business, creating and maintaining strategic partnerships can be a powerful catalyst for business growth. By collaborating with other business owners, you may tap into new customer bases, share resources, and combine expertise to offer enhanced value propositions. If these synergies prove accretive, you can always approach these business owners about developing your professional relationship further with a partnership buy-in or buy-out proposal.
S corporation
If your small business chooses to structure as a C Corporation, you’re likely running a larger business that consists of employees and shareholders. Because of the structure of a C Corp, it’s subject to double taxation—once on corporate income and again on dividends paid to shareholders. The entity will file Form 1120, U.S. Corporation Income Tax Return, while shareholders will receive a Form 1099-DIV that will be filed as part of personal tax returns.
Form: U.S. Corporation Income Tax Return (Form 1120)
Tax deadline: April 15th
Collect and organize financial records
Tax season can become more challenging if you fail to keep accurate records throughout the prior calendar year. Putting processes in place to keep track of the following can help.
- Balance sheet
- Income statement
- Cash flow statement
- Receipts
- >Invoices
- Bank statements
- Credit card transactions
Plenty of small business accounting tools, like QuickBooks and others, can help you track income and expenses throughout the year. At tax time, having everything readily available in a software program makes it far easier to do taxes yourself or share information with your preferred tax professional.
Consult with a tax professional
Advice from an expert tax professional is the quickest way to ensure you understand expectations. For a first-time business owner on the fence about hiring a professional, paying for an hour or two with a local tax preparer may make sense to ask questions about federal and local tax laws and potential deductions and credits.
Understanding different types of taxes
When you become an employee of your small business, you’re subject to taxes, some of which your employer used to pay on your behalf. Small business taxes may include the following.
Income tax
When you work for an employer, they withhold income tax from your paycheck, so it makes sense that you’d be responsible for paying it as a small business owner. Income tax is based on your business’s earnings. So, as you calculate income tax, you’ll need to first figure out if your business operated at a net profit or loss for the prior year. If your business experienced a loss in the prior year, you may be able to deduct it from gross income, potentially reducing your overall tax burden.
Property tax
Some local governments assess business personal property tax on tangible personal property your business owns, which can include furniture, fixtures, inventory, supplies, and equipment. The rates and assessment methods vary by location, so it’s important to understand your local requirements.
Franchise tax
Franchise tax is a state-level tax imposed on businesses for the privilege of operating within that state. It’s often based on your business’s net worth or capital. Not all states have franchise taxes, so check your state’s regulations to ensure compliance and avoid penalties.
Sales tax
Sales tax is a state or local tax that’s collected on the sale of goods. If you run a business that sells physical goods, you are responsible for registering a sales tax permit and collecting sales tax from customers at purchase. Failure to do so could result in a fine or legal action.
Use tax
Use tax is a companion to sales tax and is typically imposed on goods purchased outside your business’s home state, where no sales tax was paid. If you operate a business that regularly purchases goods from out-of-state and resells them locally, you’ll want to consult a professional about use tax requirements.
Self-employment tax
Self-employment tax applies to individuals who work for themselves and includes Social Security and Medicare taxes. If you operate a sole proprietorship, partnership, or LLC, you’ll need to calculate and pay this tax as part of your annual tax return. It’s based on your net earnings from self-employment and is critical for your future Social Security and Medicare benefits.
Employment tax
Employment tax includes federal income tax withholding, Social Security and Medicare taxes, and federal unemployment tax (FUTA). If you have employees, you are responsible for withholding and remitting these taxes and filing the appropriate forms (which may include the Employer’s Quarterly Federal Tax Return, Form 941, or the Employer’s Annual Federal Unemployment (FUTA) Tax Return, Form 940) to report these taxes.
Estimated tax
You’ll need to pay estimated tax payments in the current year if you expect to owe at least $1,000 to the IRS for taxes when you file next year. As a business owner, these estimated quarterly taxes cover your income tax, self-employment tax, and other taxes not covered by withholding. Failure to pay enough tax throughout the year could result in an underpayment penalty.
Excise tax
Excise tax is enforced on specific goods, services, and activities considered potentially harmful. If your business operates in fuel, tobacco, alcohol, gambling, air transportation, firearms, or a similar product or service, you’ll want to consult a tax professional to understand how to collect and pay excise tax.
Gross receipts tax
Gross receipts tax exists in a handful of states and jurisdictions and is imposed on a business’s total gross revenues, regardless of their source. Unlike income tax, it’s not based on profits but total sales.
Local taxes
Local taxes can include additional sales taxes, local income taxes, and business license taxes. These vary widely by municipality, so it pays to talk to a local tax professional who can confirm which local taxes you’ll need to pay attention to.
Import and export taxes
If your business operates internationally, you’ll need to understand import duties, tariffs, and export taxes and how they apply to goods entering or leaving the country on behalf of your company.
How to file your small business taxes
While the sheer number of potential taxes for small businesses to consider can seem overwhelming, filing your taxes can be simplified into a few simple steps.
Know your filing deadlines
Understanding and adhering to tax filing deadlines is crucial to avoid penalties and interest charges. Different business structures have varying deadlines, so if your business will file as a sole proprietor, single-member LLC, or C Corp, circle April 15th on the calendar. If your business will file as a partnership or S Corp, March 15th is your date to know.
If you plan to pay quarterly estimated tax, payments are due on April 15th, June 15th, September 15th, and January 15th of the following year. Mark these dates on your calendar and set reminders to ensure timely submissions and avoid penalties.
Gather relevant personal and business financial documentation
Accurate and thorough documentation is the foundation of a smooth tax filing process. Gather all necessary financial records, including income statements, balance sheets, cash flow statements, receipts, invoices, and bank statements substantiating your income and deductible expenses.
For personal documentation, ensure you have records of any additional income sources and personal tax forms, including W-2s or 1099s. Properly organizing these documents helps facilitate accurate reporting and identification of potential deductions.
Fill out the appropriate tax forms
You’ll have different tax forms to complete depending on your business structure. Each form has specific sections for reporting different types of income and expenses. Carefully read the instructions for each form to ensure all necessary information is included and accurately reported. When in doubt, consulting a tax professional can help prevent costly mistakes.
Understand which deductions you qualify to use
Maximizing your tax deductions can significantly reduce your taxable income. Common deductions for small businesses include:
- Mileage: Deduct business-related vehicle expenses using the standard mileage rate or actual expenses method.
- Home office: If you use a portion of your home exclusively for business, you may deduct related expenses based on the square footage used.
- Insurance premiums: Health, liability, and other business-related insurance premiums can often be deducted.
- Employee compensation: Salaries, wages, bonuses, and employee benefits, like contributions to a 401(k) plan, are generally deductible.
- Equipment: The cost of business equipment, including vehicles, software, computers, and office furniture, may be deducted under Section 179 or through property depreciation.
Validate and submit
Before submitting your tax return, thoroughly review all information to ensure accuracy and completeness. Validate that all numbers are correct, forms are filled out properly, and required documentation is attached. It’s critical to double-check your calculations and ensure you have signed all necessary forms.
If you’re filing electronically, use reputable tax software that includes validation checks. If you’re filing by mail, use a reliable delivery service or return receipt postage to confirm receipt by the IRS. Once validated, submit your tax return by the appropriate deadline to avoid penalties and interest. Keeping copies of all submitted forms and documentation for your records is also essential for future reference and potential audits.
Seek professional assistance
While some small business owners may feel comfortable handling their taxes, consulting with a tax professional can provide invaluable expertise and ensure compliance with all tax laws and regulations. Tax professionals can help identify all eligible deductions, provide strategic tax planning, and represent you in case of an audit.
