Guide To Filing And Paying Small Business Taxes will be described in this article. The majority, if not all, of the products we offer here come from partners who pay us. This could affect the goods we write about as well as where and how they appear on the page. But, this has little impact on how we evaluate things. Our thoughts are entirely our own. Below is a list of our associates.
Understanding and meeting your tax obligations is one of the most challenging aspects of operating a business. There is a lot more work involved in preparing and completing your business taxes than there is with your personal tax returns, which are typically finished with a few papers once a year. You presumably have a lot of questions about how to go about filing small business taxes, which forms to fill out, and when, especially if this is your first time. We’re here to assist.
Guide To Filing And Paying Small Business Taxes
In this article, you can know about Guide To Filing And Paying Small Business Taxes here are the details below;
The sorts of taxes you might be liable for, how to determine your tax obligations based on the structure of your company, and when and how to pay and file your business tax return are all covered in this article.
Types of Business Taxes
Let’s start by outlining the several kinds of small business taxes that you, as the business owner, may be liable for. Federal taxes, state taxes, and local taxes are the three main categories of business taxes. You may already be aware that the majority of your tax liability comes from the federal taxes you must pay to the IRS. Also check Digital Marketing Trends
State and local taxes differ from one state to the next and from municipality to municipality, thus your liability will be entirely based on where your firm is located and what the local tax rules are. We advise consulting your state and local tax agency for more information on these business tax duties as these taxes will be specific to your firm based on location. Having said that, there are normally six sorts of business taxes that you may be liable for when it comes to federal taxes (and perhaps state and local taxes as well).
They consist of:
- Income tax is the surcharge you pay on the money your company makes.
- Self-employment tax: The tax you pay as a self-employed business owner to cover social security and Medicare taxes.
- If you have employees, you must withhold employment tax, also referred to as payroll tax, from each employee’s paycheck to cover federal income taxes, social security taxes, Medicare taxes, and federal unemployment taxes.
- Excise tax is a charge you must make if your company deals in specific commodities or services, such as petroleum, tractors, or air travel.
- Notwithstanding the fact that there is no federal sales tax, 45 states oblige residents to pay sales tax.
You might be in charge of computing, collecting, and reporting sales tax if you offer goods and services. Property tax is a charge you make on any real estate, land, or commercial property that your company owns. Depending on where your firm is located, any business property taxes will be governed locally.
Small Business Taxes Based on Business Structure
The fundamentals of paying your small business taxes are as follows:
- What kinds of taxes are due?
- How much tax you must pay
- When you must pay company taxes
- And how do you pay business taxes?
But when it comes down to it, these four fundamentals are dependent on the legal framework of your company Your tax burden will depend on the sort of company organisation you have.
Let me explain:
Business Taxes for Sole proprietors
One person owns and runs a solitary proprietorship. A sole proprietorship has a single owner, making tax reporting for this type of company quite straightforward. As a sole proprietor, you will report business revenue and losses on your personal income tax return rather than submitting small business taxes on behalf of the company. Your personal income tax rate will apply to business profits.
In order to satisfy the business owner’s Medicare and social security obligations, sole entrepreneurs must also pay self-employment taxes. Having said that, if you operate a sole proprietorship, you must typically file a Schedule C or Schedule C-EZ with your Form 1040 and pay anticipated taxes on a quarterly basis.
All businesses employ estimated tax, which we’ll go over in more depth below, to pay income tax as well as social security and Medicare taxes. If you were an employee, your company would worry about withholding these taxes for you. Yet, as a sole owner, you must use the estimated tax method to make quarterly payments. Use Form 1040-ES, Estimated Tax for Persons, to calculate the amount of self-employment taxes you’ll have to pay, as well as whether quarterly payments are required.
Business Taxes for Partnerships
Businesses run by two or more owners are known as partnerships. Although general partnerships are the most common type of partnership, there are also limited partnerships and limited liability partnerships. Owners of businesses who are partners in the partnership are required to pay income taxes, self-employment taxes, and anticipated quarterly taxes. If you run a partnership, you must submit Form 1065, an annual information return that lists the income, deductions, gains, and losses from the business’s operations—even though the company doesn’t pay any income taxes.
Partnerships benefit from “pass-through taxes,” in which revenue is taxed on the business’s owners rather than at the corporation rate. Owners who are part of a partnership must therefore declare their separate shares of the business’s profits and losses on their personal tax returns in order to file small business taxes. A Schedule K-1 details each partner’s portion of the company’s profits and losses.
Business Taxes for C-Corporation
Your small business is legally separate from you as the owner if it is set up as a C-corporation. C-corporations are liable to what is known as “double taxation.” C-corporations are initially subject to a fixed income tax rate of 21%. When gains are dispersed to shareholders as dividends, tax is then due on their individual tax returns. Form 1120 is the main income tax document used by C-corporations. Employees are shareholders who take an active role in the corporation’s operations.
Self-employment taxes only apply to the employee’s wage. Dividends are subject to a distinct dividend-specific tax rate. By moving more money out of the company in distributions and giving themselves a smaller salary, many corporate business owners reduce their self-employment taxes. (But, the IRS mandates that you pay yourself a salary that is reasonable considering your position, industry, and credentials.) C-corporations also have a number of other tax benefits.
Business Taxes for S-Corporation
S-corporations are businesses that have chosen to be taxed similarly to sole proprietorships and partnerships by being treated as pass-through entities. Profits are taxed at the personal income tax rate and each shareholder must record corporate revenue and losses on their personal tax returns.Form 1120S, an informative tax return, is filed by an S-corporation, but the company does not owe any corporate taxes.
An S-corporation can avoid double taxation as a result. S-corps can also split business income between a salary and dividends, just like C-corps can. Similar to a C-corporation, an S-distributions corporation’s are not subject to self-employment taxes, but employee salaries are. Paying yourself less can be a calculated attempt to reduce self-employment taxes, but the IRS again asks that it be reasonable given your qualifications. If C-corporations anticipate owing $500 or more in taxes, they must pay anticipated taxes on a quarterly basis. If S-corporation shareholders anticipate having a tax liability of $1,000 or more, they must submit anticipated tax payments.
Business Taxes for Limited Liability Companies
A limited liability firm (LLC) is a type of corporate entity that legally insulates its owners from any obligations or liabilities incurred by the company. As an LLC owner, you will enjoy the tax advantages of a sole proprietorship or partnership along with the liability protection of a corporation.You will be liable to pass-through taxation if you run an LLC, just like you would be if you ran a partnership.
In other words, unlike corporations, LLCs are not subject to double taxation. As an LLC owner, you will instead pay your quarterly taxes on your personal income tax returns. Also, you must file Form 1065 annually for informational purposes.Furthermore, compared to other business structures, LLCs give you more tax freedom.From a legal sense, you can exist as an LLC. You can select to be taxed as a partnership or an S-corporation, but, from a tax perspective.
Additional Business Taxes
You may also be liable for the other taxes we previously covered—employment taxes, sales taxes, and property taxes—depending on the particulars of your firm, in addition to these small business taxes, which you’ll be required to pay and file based on your entity type. There are 21 tax deductions for small businesses that you should be aware of.
Business Taxes: When to Pay
If you anticipate having an income tax liability of $1,000 or more, regardless of the type of small business company you have, you must pay quarterly estimated taxes. Only if a corporation anticipates an annual tax liability of $500 or more are they required to make quarterly anticipated tax payments. Before you had a business, you just had to file taxes once a year. On the other hand, as a small business owner, you will have to pay the IRS four times a year.
Even though there are four deadlines to remember, you’ll have paid three-quarters of your tax return by the time your yearly tax deadline rolls around. However, if your business employs people, it must also deposit federal income tax withheld from employees, federal unemployment taxes, and both employer and employee social security and Medicare taxes. This adds to the complexity of the situation. Deposits can be made weekly, biweekly, or monthly.
Quarterly Estimated Small Business Taxes
You must therefore estimate your anticipated adjusted gross income, taxable income, deductions, and small company tax credits for the year in order to determine the quarterly payment for your business taxes. Using your taxes from the prior year as a benchmark is the best approach to estimate these figures. If this is your first year filing a business tax return, you might seek advice from your accountant or another tax professional in establishing these estimations. You merely need to figure out how much you’ll owe in your expected quarterly small business taxes once you’ve assigned a number to these figures.
Using the IRS Form 1040-ES Estimated Tax Worksheet is the simplest way to accomplish this. You have until these dates to submit your quarterly anticipated small business taxes for 2019: April 15 (encompassing the period from January 1 to March 31) (covering the period from January 1 to March 31) June 17 (encompassing the period from April 1 to May 31) (covering the period from April 1 to May 31) September 16 (covering the period from June 1 to August 31) 15 January (covering the period from September 1 to December 31)
Depositing Small Business Taxes
As we said above, depositing federal income tax withheld from employees, the employer and employee portion of social security and Medicare taxes, and federal unemployment taxes on a semiweekly or monthly basis will be a component of your business tax obligations. There are related tax forms that you must file in addition to these deposits. Also check What Is Cost Of Quality
Companies that deduct social security, Medicare, or federal income tax are required to file Form 941 every three months. You can also file Form 944 annually if your employment taxes for the year will be less than $1,000. Businesses must also file Form 940 annually if they have employees to disclose their federal unemployment tax responsibilities. The salary you pay to your employees determine how much unemployment tax you must pay.
If you pay at least $1,500 in salaries in a quarter, you must file Form 940. In light of the foregoing, your deposit schedule is determined by the overall tax burden that you disclose on form 941 for a four-quarter lookback period.You will adhere to a monthly deposit schedule if you reported $50,000 or less in business taxes during the lookback period.On the other hand, if you reported more than $50,000, you’ll adhere to a semiweekly deposit plan.
When using the semiweekly deposit schedule, you must deposit employment taxes for payments made on Wednesday, Thursday, and Friday by the following Wednesday. When using the monthly deposit schedule, you must deposit employment taxes for each month by the 15th day of the following month. You must deposit your taxes by the following Friday for payments made on Saturday, Sunday, Monday, and Tuesday. You can use the EFTPS, or Electronic Federal Tax Payment System, to make these small business tax deposits.
How to Prepare your Business Tax Return
Eventually, you’ll need to properly plan ahead of any filing deadlines if you want to stay on top of your small company taxes. Having said that, preparing all of your small business’s financial records and documentation before tax season begins will make the process of submitting your business taxes much simpler. The explanation is straightforward: You’re setting yourself up for failure if you’re rushing to get everything together a few days before a deadline for filing business taxes.
The following information will help you prepare your business tax returns:
- Business tax return from the previous year
- Payroll records
- Bank and credit card statements
- Accounting records
- Partnership Agreements
- Schedules for depreciation
Make sure you have these financial records on hand when it comes time to file your small business taxes. Also, it will be helpful if you have kept these documents because you will need to create an accurate accounting of all the revenue and costs connected with your small business:
- Gross revenue
- Interest on checking and savings accounts
- Refunds and severance pay
- Sales figures
- Uncategorized earnings
- Employee pay
- Premiums for insurance
- Fees for experts
- Payments to contractors
- Office rental (or portion of the rent or mortgage paid on your home)
- travel costs and transportation
- Costs associated with advertising
- Office equipment and supplies
- Phones and other forms of communication
When it comes time to submit your small business tax returns, you’ll have a far more accurate revenue and cost statement if you maintain track of all these receipts and papers. The majority of these income and cost categories need to be simple to find on your accounting software for businesses or obtain from your accountant.
Business Tax Deductions and Credits
Another justification for keeping all those records of your company’s expenditures in one place? You can write off your expenses to reduce your small business taxes, which might result in yearly savings of hundreds or even thousands of dollars for your company. Having said that, depending on how your business is legally set up, you may be able to deduct “ordinary and essential” costs that your business incurs simply by running. You may deduct the deduction from your taxable income if you can demonstrate that it is pertinent. By subtracting your expenses, you essentially reduce your income, which lowers your tax liability.
You could also be eligible to claim credits, which are preferable to deductions because they directly reduce your tax liability by the credit’s value. However even with this in mind, there are a lot of small business tax breaks and credits available. Although if not every deduction and credit will apply to your company, it’s still a good idea to become familiar with them all so you can reduce your small business taxes as much as possible.
The 3 Most Common Business Tax Deductions
While submitting their business tax forms, small business owners shouldn’t forget about a few tax deductions. As almost all small firms are eligible for these deductions, failing to use them will result in yearly tax overpayments.
1. Vehicle Expenses
A car, van, or truck is typically used by small business owners. You may be able to remove the cost of operating the vehicle if you can demonstrate that you use it for business reasons. There are two ways to deduct automobile expenses from your small business taxes: the normal mileage rate and real car expenses. The normal mileage rate technique allows you to deduct the cost of operating your car based on how much you drive it for work—roughly $0.58 per mile in 2019.
On the other hand, if you choose the actual automobile expenses option, you’ll subtract the actual cost of your car that is relevant to your business by looking at all the charges you have for operating it, such as gas, oil, maintenance, auto insurance, and so forth. As you’ll need to divide your vehicle costs between personal and corporate use, this necessitates more paperwork. Whatever kind of deduction you decide to employ, be sure it will result in the most tax savings for your small business.
The majority of small business owners will insure their enterprise in some capacity. You can deduct 100% of the premiums you pay for your business owner’s policy, health insurance, malpractice insurance, etc. from your business taxes.
You can write off your rent payments on your small company taxes if you rent the space where you conduct business. Also, you can deduct your rent payments for the tools and machinery you utilise, not only for office or retail space. Having said that, you might conduct your business out of your home if it’s just you and a few other people. You can write off the rent you pay for the area of your house that you use for your business if you rent it out. Your small business should definitely take advantage of the home office tax deduction. Rent payments can be expensive, but if you take the time to write them off on your business taxes, you can save a lot of money.
More Business tax Deductions
You might come across certain business tax deductions on the lengthy list that you were unaware of. Here are a few that you might have forgotten about but should definitely use when submitting your small business taxes.
1. Startup Costs
You understand how costly starting up may be if your small business is just getting off the ground. To get started, you’ll need to pay a lot of initial expenses. Fortunately, all of these associated expenses are truly deductible on your business tax returns. The IRS classifies any startup and administrative expenses as capital expenditures. The IRS defines startup and organisational expenditures quite broadly. They might even be the costs of investigating the business before you start it; they are essentially any sums paid or incurred when you establish a firm. In light of this, you have the option to write off up to $5,000 in organisational expenditures and up to $5,000 in business launch costs, provided your initial costs do not exceed $50,000.
If your initial expenditures total greater than $50,000, the deduction will be reduced by that amount, and if your overall costs totaled $55,000 or more, you cannot deduct any beginning costs at all. The remaining starting expenditures can be amortised and written off over a 180-month period after the initial deduction.Inventory is typically not regarded as a tax-deductible item, which may be why you failed to include it in your small business taxes. Before, inventory could only be written off as a business expense when it was sold.
Hence, if you had a clothing store, you could deduct the cost of goods sold, or the money you spent on inventory, when a client actually visited and purchased the stock. But, the Tax Cuts and Jobs Act altered the question of whether inventory is deductable before it is sold. You can write off such costs on your taxes if your company employs the cash method of accounting or decides to classify inventory items as materials and supplies.
3. Business Loan Interest
If you have a mortgage, a business credit card, or a small company loan, you will be required to make interest payments to the lender.It may come as a surprise, but those interest payments are deductible from your small business taxes. Nobody like paying interest on loans, but it makes the payments a bit easier to chew if you know you can write them off on your taxes.
Take Advantage of Business Tax Deductions
There are many various deductions you can use for your business taxes, and these six small business tax deductions are just a few examples. Also, there are several small business tax advantages available, especially for companies in the tech and research sectors. As a result, you should extensively investigate your tax deductions and take the time to sort through the ones you can use and the ones you can’t. Nevertheless, if you misinterpret the tax code and claim deductions that are improper, you risk inviting a business audit.
Where to File Your Business Taxes
You typically have two alternatives for actually filing your small business taxes—electronically or by mail—depending on the IRS business forms you’re using. Normally, filing online is more simpler, either through the IRS e-file system or by using the right tax or accounting software. In reality, the IRS not only advises but in some circumstances even requires you to submit your business taxes electronically. On the other hand, if you do ultimately decide to file your business tax returns by mail, you’ll want to make sure you adhere to the IRS instructions based on the form you’re filing and that you mail your return to the correct address. Doing so will lessen the possibility that the IRS will experience issues receiving or processing your returns.
Finding an Accountant for your business Taxes
Each small business owner can handle the process of filing business taxes on their own with a little time, effort, and patience. Yet since you’re a small business owner, you probably have a lot on your plate, so you might not want to give up any of the time you spend running your company to act as its accountant. So, you should definitely think about hiring an accountant to assist you if you don’t have the time to properly complete your small business taxes (or even if you just want some help).
Here are some recommendations for finding an accountant:
- You can discover company accountants online, but we’d suggest looking elsewhere first.
- A smart company accountant may do more for you than just file your small business taxes if you engage them.
- The ideal business accountant can serve as a reliable financial advisor for the duration of your company.
- So, you should start with references rather than choosing the first business accountant you find online.
To discover a reputable business accountant, you can turn to a small business association or contact a business counsellor, lawyer, or banker for referrals. Attending small business events offered by your neighbourhood Chamber of Commerce or Small Business Development Center may also help you receive referrals.
Go the CPA Route
A certification process to become a Certified Public Accountant has been completed by certain business accountants (CPA). Working with a CPA gives you the assurance that your accountant has been carefully chosen, is knowledgeable, and has plenty of expertise.
You can be sure that these professionals will be knowledgeable about all accounting procedures and best practises because they must pass a test to get certified and renew their certification on a regular basis. You can go directly to the American Institute of Certified Public Accountants to find a CPA (AICPA). To locate a fantastic accountant for your company, use the AICPA’s list of CPAs, accounting firms, and regional accounting associations.
Choosing th Right Small business Account
As we previously discussed, a business accountant typically provides more services than just filing your small business taxes. A professional business accountant can offer helpful advice and direction for managing your company’s finances since they will be familiar with how your company runs and handles its finances. Consequently, once you’ve identified a few qualified business accountants to take into account, you’ll want to spend some time determining which one will be the greatest fit for your company.
Here are some inquiries you can make during an interview with a candidate:
- How long have you been working in my sector?
- Have you ever dealt with a company that is similar to this one?
- Beyond small business taxes, what other services do you offer?
- How frequently will we speak?
- What are your rates?
Although this is not an exhaustive list of inquiries, you may start with them to see whether the accountant will be a suitable fit for your company. In light of this, if you don’t want to search for a specific business accountant to assist you with your taxes, you might opt to use an online service, such as BenchTax from Bench Accounting, for example, that connects your company with a professional or team of professionals to offer you tax assistance, advice, and even file your taxes on your behalf.
Using Accounting Software Instead
Whether you have some accounting knowledge or you simply cannot justify hiring someone to handle your small business taxes. If you decide to handle your company’s taxes on your own, you should think about adopting accounting software to simplify the process. In fact, you should use accounting software to manage and streamline your financial procedures even if you do engage a corporate accountant. As an illustration, QuickBooks is a straightforward yet effective accounting programme that is used by millions of small businesses.
QuickBooks can assist you with payroll, inventory management, profit and loss analysis, and other tasks in addition to small business tax accounting. Additionally, QuickBooks comes in a variety of editions that can accommodate all types of accounting requirements; you just have to pay for different 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. You may use a variety of apps to keep organised, prepare your finances, and simplify tax season.
The Key Takeaways
In the end, there is a lot that goes into being ready for tax season. In light of all we’ve covered thus far, you can be ready to file your small business taxes by keeping these recommended practises in mind. First off, while you might only think about your business taxes in the weeks before deadlines, planning and managing them should always be a top priority. You’ll save yourself a lot of hassle when it comes time to submit your business tax returns if you take steps to get ready before tax season.
Make sure all of your records are current and accurate at this point, and make sure you keep everything you might need in the future. Second, deadlines need to be carefully observed even though small business taxes can be challenging and time-consuming. If you don’t pay your taxes on time, you’ll be assessed penalties that only increase in severity the further away from the original due date you are.
As a result, as we previously stated, the ideal time to begin preparing your small business taxes is right now. But, as a general rule of thumb, you should begin your work at least two weeks before the due date. Finally, don’t be embarrassed to seek assistance with your small business taxes. Hiring a business accountant to help you out is definitely worth the expense if you don’t have the time to do your taxes correctly. An accountant can assist you with filing your business taxes, provide answers to your problems, and provide the best advice on how to optimise your tax refund.