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.
Small Business Taxes Depend on Business Structure
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 small business taxes
- And how you pay 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.
Small 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. 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.
Small 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.
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.
Small 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 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.
Small Business Taxes for S-Corporations
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.
Small 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, 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.
When to Pay Small Business Taxes
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.
Quarterly Estimated Small Business Taxes
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:
- April 15 (covering the period from Jan. 1 to March 31)
- June (covering the period from April 1 to May 31)
- September (covering the period from June 1 to Aug. 31)
- January (covering the period from Sept. 1 to Dec. 31)
Depositing 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 semi-weekly
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 semi-weekly 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 semi-weekly 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.
How to Prepare for Your Small Business Taxes
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:
- 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, 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:
- Gross receipts
- Checking and saving 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 from your accountant.
Small Business Tax Deductions and Credits
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 ofsmall 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.
The 3 Most Common Small Business Tax Deductions
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.
1. Vehicle Expenses
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.
2. Insurance
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.
3. Rent
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.
More Small Business Tax Deductions
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.
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. 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.
2. Inventory
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.
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.
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.
Hiring an Outside Small Business Accountant
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.
Small Business Taxes: The Key Takeaways
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.
