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When you run your own small business, you’re in charge. That comes with benefits, but it also means tackling chores like filing small business taxes.
Whether it’s your first tax season or your 10th, filing a business tax return can feel like a never-ending task. If you live in the US, this step-by-step guide will help you learn how to file small business taxes well before they’re due.
What are the most common taxes that small businesses pay?
The type of business you run plays a role in determining which taxes you owe. Sole proprietors are liable for different taxes than corporations with employees and lots of assets.
Here are basic categories of tax that most small businesses need to pay:
Income tax
Income tax is a percentage of the business’s income paid to the IRS. Rates vary depending on a business’s structure and location. Forty-three states impose a state tax on corporate income. A self-employed individual will pay business income taxes on their personal returns, ranging from 10% to 37%.
Payroll tax
If your business has employees, you’ll need to pay payroll taxes. This includes costs toward Social Security and Medicare, which is split into two parts: one that comes out of your employees’ paychecks, and one that you, as the employer, match.
- For Social Security, you and your employee each pay 6.2% of the employee’s wages, adding up to a total of 12.4%.
- For Medicare, the total tax is 2.9% of the employee’s gross wages. You and your employee each pay half, so that’s 1.45% each.
- Small businesses also need to pay a federal unemployment tax for each employee. This is 6% of their wages, up to the first $7,000 they earn in a year.
Self-employment tax
Self-employment taxes are for Social Security (12.4%) and Medicare taxes (2.9%). The self-employment tax rate is therefore 15.3% of the business income.
Capital gains tax
Small businesses with investments that increase in value, or those who have sold assets, may owe capital gains taxes. This tax rate varies by income and is a percentage of the increase in value gained. Capital gains tax typically is 15%, but can be as high as 28%. The applicable rate may also depend on ownership length and asset type.
Property tax
If your small business owns real property such as land or buildings, the county where the property is located may assess property taxes. Property taxes are based on property value and vary by location.
Dividend tax
A dividend is a portion of corporate income that’s distributed to shareholders. The dividend is considered taxable income to the shareholder. Tax rates for dividends are 0%, 15%, or 20%, depending on the length of the investment and the shareholder’s taxable income.
How to file small business taxes
There are four steps to filing your small business taxes:
- Collect your records
- Find the correct form and fill it out
- Know the filing deadlines
- File your small business taxes
1. Collect your records
Keeping your accounting records in order before tax time can simplify the filing process. As a small business owner, here’s what you need to keep track of:
- Business expenses: Keep a record of all costs related to your business.
- Income: Track all the money your business has made.
- Profits and losses: Maintain a clear record of your earnings and any losses.
- Salaries: Document what you’ve paid your employees.
You can gather this information from:
- Receipts
- Deposit slips
- Invoices
- Bank statements
Also, if you’ve been making quarterly estimated tax payments, don’t forget to keep proof of payments to show how much you’ve already submitted in taxes.
2. Find the correct form and fill it out
Filing small business taxes involves several IRS forms. The ones you’ll need depend on your business structure and whether you have employees. Let’s look at some common forms and the info required for each:
- Schedule C with Form 1040. If your business is a sole proprietorship or single-person LLC, use this form to report business income. To fill out this form, you’ll need to know the amount of income earned, business expenses, and cost of goods.
- Schedule SE with Form 1040. Self-employed individuals file this form with their income tax return (Form 1040) to calculate how much self-employment tax is due.
- Form 1120. If your business is a corporation, Form 1120 is used to report its income and losses. The information needed includes gross receipts, business expenses for deductions, dividend information, and basic information about the corporation.
- Form 1065. Businesses organized as a partnership use this form to report income. Similarly, this form requires information about total income received, losses, and deductions.
- Form 940. Businesses with employees file Form 940 to report paying the federal unemployment tax.
- Form 941. Form 941 is where employers report withholding amounts from employee wages. Taxes reported on this form include Social Security, Medicare, and income taxes.
3. Know the filing deadlines
Stay penalty-free by understanding when you should file your forms.
There are many tax deadlines. Some are only applicable if you have a certain business structure or employees. Deadlines for filings can be annual or quarterly.
Some tax filing dates to bear in mind are:
- January 31. Employers should file Form 940 by January 31.
- March 15. Partnerships should submit Form 1065 by March 15, or the 15th day of the third month following their fiscal tax year.
- April 15. Calendar year filers must submit forms annually by April 15. This includes Form 1120 for corporations, and Form 1040 with Schedules C and SE for sole proprietors.
- Quarterly. Most businesses are expected to make estimated tax payments on a quarterly basis. Employers are also required to file Form 941 quarterly.
- Four months + 15 days after the fiscal year. Small businesses who use their own fiscal calendar must file taxes by day 15 of the fourth month after the fiscal year ends.
Tax deadlines can sneak up on you. Missing them can result in expensive penalties. That’s why it’s important to keep track of key dates and update your calendar. Remember: filing dates may change each year.
💡 Here is the IRS’s online tax calendar with all the latest deadlines.
Tax extensions
If your business needs more time to file, you can submit a form to request an extension. As long as you file the extension form before your tax deadline, the extension is usually automatic.
Filing for an extension does not give you extra time to pay your taxes. You’ll still need to pay the estimated amount owing before the deadline. Otherwise, you could be liable for penalties and interest.
To file for a tax extension, use the form that corresponds with your business type:
- Corporations and partnerships: Form 7004 for a six-month extension.
- Sole proprietors: Form 4868 for a six-month extension.
4. File your small business taxes
Once you know the deadlines, file your taxes on time to avoid the risk of a late filing penalty.
The IRS charges 5% of unpaid taxes for each month that a tax return is late, up to 25% of unpaid taxes.
Small business tax best practices
Follow these best practices for a smooth tax filing season:
Keep your bookkeeping up to date
Accurate bookkeeping is crucial. It gives you a clear picture of your business’s income and expenses, and it’s your first line of defense if you’re audited. If your books aren’t accurate, you could unintentionally make a false claim to the IRS.
You have options for managing your books. You can use small business accounting software to do it yourself. Or, if you’d rather have a pro handle it, consider hiring a bookkeeper. The best method depends on your time, budget, and comfort level with bookkeeping.
If you haven’t already, consider going paperless. Storing receipts online can save you from a pile of paper at tax time. Here are some tools to help you organize your receipts digitally:
Expensify
(From $5 per user, per month)
Expensify is a popular bookkeeping platform that lets you photograph and store receipts. Receipts are automatically matched with the correct expense using the service’s SmartScan technology. Payments made with connected bank cards are also automatically imported.
Evernote
(Free plan available)
With Evernote, you can upload and access scans of receipts, business cards, and important documents from any device. Upload documents straight into your Evernote account.
Shoeboxed
(From $18 per month)
If you have a large backlog of receipts, mail them to Shoeboxed and have its software compile all your expense data before shredding the paper copies or sending them back to you.
Understand sales tax requirements
Sales tax rules can be tricky, especially for online businesses. It’s a good idea to talk to an accountant about your sales tax liability.
Sales tax depends on a rule called nexus. Nexus means your business has a physical or economic tie to a state. If your business has nexus in a state, you must collect sales tax there.
Your business might have nexus in more than just the state where it operates. Here are some things that can create nexus:
- An office
- Employees
- A warehouse
- Hosting a pop-up shop or selling at a craft fair
- Storing inventory
You’re required to collect sales tax in any location where your business has developed nexus. Tax laws vary between states, so before you file your return, consult with a tax professional to confirm that you’re meeting state tax requirements.
Find the right accountant
If you already work with a business accountant or bookkeeper, try asking them to recommend an accountant that specializes in taxes. Alternatively, your accounting software may list trusted tax specialists.
When choosing a tax accountant, consider their understanding of your industry, your business’s specific needs, and their billing method (hourly or flat fee).
After hiring an accountant, ask them these key questions to potentially reduce your tax bill:
- Are there any local tax credits available? (Many entrepreneurs overlook this.)
- Does my business have nexus in other states?
- Would changing my business to an LLC offer any advantages?
Common tax deductions for small businesses
A tax deduction, or write-off, is an expense that’s an “ordinary and necessary” cost of doing business in your industry.
Small business owners can deduct these expenses from their income to reduce the amount of tax they need to pay.
The IRS allows online sellers to deduct certain business expenses. If your business is new, you should consult with your accountant, as some of your expenses could fall under start-up costs.
You may be able to write off the following small business tax deductions:
Business property
Rental expenses for properties where you do business are tax deductible. Lease or rental payments for office space, storage units, or warehouses are deductible business expenses if used exclusively for work.
Home office
If you regularly use part of your home as your principal place of business, you may be able to write off a portion of household expenses as a home office deduction.
Your home office needs to be used solely for business, and be the place where you conduct your core business activities.
Calculating home office deductions
The easiest way to calculate a home office deduction for your small business is to use the IRS’s simplified method:
- With the simple method, you can deduct $5 per square foot of your home that is used for business, up to a maximum of 300 square feet.
- This method caps the deduction at $1,500 per year.
You can also deduct home expenses using the regular method, by dividing household expenses by the percentage of your home that’s used for business.
Office supplies
The cost of supplies like shipping materials, printer ink, labels, paper, pens, and software are examples of deductions that a small business owner can leverage.
Education
Work-related education is fully deductible if you’re taking classes or workshops that add value to your business and/or increase your expertise.
Phone and internet bills
If you have a phone number solely for business purposes, the cost of the phone plan is deductible as a utility cost. If you use your phone for both business and personal purposes, you can deduct a percentage of your phone bill based on usage.
For instance, if you use your phone 60% for business and 40% for personal, you can deduct 60% of the associated costs.
Keeping an itemized phone bill is a good way to support your claim, in case you’re audited.
If you pay for video conferencing services such as Zoom, you can deduct these as office expenses, too.
Your internet bill can also be deducted as a utility cost. If you use your household internet for work, you’ll need to calculate the percentage of business-related use.
Web hosting and online store themes
The costs of domain registration, ecommerce hosting, and web hosting are deductible business expenses.
You can also deduct the cost of custom Shopify themes as a software or marketing expense.
Contractor work
You can claim the cost of hiring an independent contractor as contract labor. If you pay an independent contractor more than $600 during the tax year, you should send a Form 1099 to the contractor early in the year and then submit a copy to the IRS by the established deadline.
Employee salaries
If you have an employee, their salary is a tax deduction.
Shipping costs
The cost of shipping goods to your customers, such as postage and packaging costs, can be claimed as expenses.
Vehicle use
To deduct the business use of a vehicle, you’ll need to track your mileage for business trips.
You can do this using a mileage tracker tool, or by keeping a manual log based on your vehicle’s odometer.
Another common technique is to track business and personal mileage for a two-week period every quarter. You can use this to calculate an approximate business-use ratio.
Online service fees
Online services such as Shopify that you use to run your business are deductible as business expenses.
Equipment
The cost of business equipment such as your computer and mobile phone can be recovered either via depreciation or through a Section 179 deduction.
Rented equipment for your business, like a copier or postage machine, is also tax-deductible.
It can help to work with an accountant to correctly deduct equipment costs. Different methods offer different financial benefits. For example, it might be more helpful to deduct equipment costs all at once (using the Section 179 deduction or as a regular business expense) or spread out the cost over several years.
Travel expenses
Traveling outside your usual place of business for an extended period can result in necessary and ordinary expenses that may count as deductions. The cost of travel expenses like transportation, lodging, and meals are potential write-offs.
Professional services
Legal and professional fees directly related to running your business, such as fees charged by accountants and bookkeepers, can be claimed as professional services.
Advertising and marketing
A small business owner can deduct the costs of web design, business cards, and print and digital advertising.
Until next tax season
Taxes might not be the highlight of running a small business. But with some planning, you can boost your deductions and make tax season less stressful.
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