Gathering all necessary documents for all your business expenses and income before you start the filing process can make the process easier and faster.
Jump to insightSmall businesses are eligible for tax deductions and tax credits that can help lower the tax bill.
Jump to insightSmall businesses can file their returns electronically.
Jump to insightTypes of small business taxes
The tax you pay depends on the kind of business you operate. However, there are six general types of business taxes that most businesses must pay. They are:
Income tax
All businesses must pay an annual income tax, except for partnerships(they file an information return). The forms you use depend on how your business is structured (more on this later).
The federal income tax is a-pay-as-you-go so you pay it as you receive income during the year. For employees, the tax is deducted from monthly gross income – if your income isn’t withheld, you might be required to pay estimated tax. If you aren’t required to pay estimated tax, you can pay any tax due when filing returns.
Self-employment tax
Self-employment tax (SE) is a social security and Medicare tax for self-employed individuals. Social coverage provides survivor, retirement, disability and hospital (Medicare) benefits. Sole proprietors and individual partners in a partnership must pay SE tax and attach Schedule SE to (Form 1040 or 1040-SR).
Employment tax
As an employer, you must pay the following taxes:
- Social Security and Medicare taxes (employee and employer each pay a portion).
- Federal income tax withholding (this is the income you withhold from your employees to cover their income taxes).
- Federal unemployment (FUTA) tax (as an employer, you make the whole payment).
Estimated tax
The estimated tax is for small business owners and independent contractors whose tax isn’t automatically withheld from their paychecks like regular employees. If you’re subject to estimated taxes, you must make quarterly payments. At the end of the year, you can file the usual tax paperwork and request reimbursement if you’ve made an overpayment or top up any balance due.
Excise tax
An excise tax is a tax imposition on specific goods and services. For example, if you offer transportation with certain trucks, tractors and trailers on public highways, you might be eligible for excise tax.
Some excise taxes are imposed to discourage using certain products by making some activities expensive. This type of tax is known as sin taxes; a good example is the tax on cigarettes.
Sales tax
A sales tax is a consumption tax levied by the government on the sale of specific goods and services at the point of sale. As a business owner, you’re required to collect the sales tax and remit it to the government.
There are many factors that determine if your business should pay sales tax. For example, if you have a brick-and-mortar location, the local government in that jurisdiction may require you to pay sales tax. How much sales tax you pay will depend on the location of your business and the type of product or service you offer.
Steps to file small business taxes
Having a step-to-step process is crucial and can help you file taxes accurately and significantly reduce the anxiety of filing taxes. Here is an easy process you can follow:
Gather the documents you need
Before you start filing taxes, the first step should be gathering all the necessary documents. This includes all your business earnings and expenses. Some of the documents include:
- Invoices
- Canceled checks
- Sales and deposit slips
- Credit card statements
- Year-end payroll reports
- Employment tax records
- Paid and unpaid bills
To simplify the process, you can use a spreadsheet or a computer program to keep track of all your transactions annually.
Ross Loehr, a certified financial planner with 20 years of experience, says planning is critical for a smooth filing process. “Keep detailed records of all income, expenses, and deductions throughout the year. This will make it MUCH easier come tax filing time,” he said.
Figure out the right forms
The types of IRS forms you file depend on your small business structure. Here are some business tax forms you might need to file your return based on your business structure:
- Sole proprietorship: Schedule C IRS form (you must attach your personal tax returns).
- Partnership: Form 1065
- Corporation: Form 1120 (or Form 1120S, if you’re using a S-corporation structure).
- Limited liability companies (LLCs): Single-member LLCs are taxed like sole proprietorships, and multi-member LLCs are taxed like partnerships.
Fill out the forms
Schedule C forms are easy and fast to fill in, as they are only two pages long. However, Form 1120, Form 1120S and Form 1065 require more time to fill and complete. Having the proper documents before you start or using accounting software can help you stay organized.
Stick to the tax deadlines or file an extension
Falling behind on filing taxes can attract penalties, so it’s essential to be aware of the deadlines. For example, sole proprietors, single-member LLCs and corporations with a fiscal year that ends on December 31 are required to file returns by April 15. In years in which April 15 falls on a weekend, the tax deadline is typically extended to the next business day. Partnerships and multi-member LLCs should file returns by March 15.
Loehr emphasizes the importance of sticking to deadlines. “Accuracy and organization are paramount. Maintain thorough records, report all income, and make sure to claim eligible deductions,” he said. “Familiarize yourself with all the relevant tax laws and deadlines to avoid penalties.”
You can also request an extension with Form 7004, which grants you six more months without attracting penalties.
» COMPARE: Tax relief companies
Tax deductions and credits for small businesses
Tax deductions and credits are types of tax relief programs that help lower your tax bill. Here are some deductions and credits you may be eligible for:
Business expenses
Business expenses are the necessary costs of running a business, such as advertising, bank fees and interest, insurance, legal fees, office equipment etc. For an expense to be tax-deductible, it has to be considered necessary and ordinary.
Depreciation
If you purchase assets such as computers, vehicles and machinery for your business, you can write off their depreciation from your taxable income.
There are rules regarding depreciation; you can depreciate cars and computers over a five-year period, but you can only write off the depreciation on furniture over a seven-year period.
Home office expenses
You can deduct up to $1500 from your taxable income if you operate your business from a home office. That is $5 per square foot of the space you use for an office (up to 300 square feet).
The home office deduction includes utilities such as Wi-Fi, electricity and heat, so you can’t deduct them separately.
Tax credits
Tax credits lower your tax debt by allowing you to directly deduct the amount you’re eligible for from your tax bill. There are so many small business tax credits you can be eligible for, so be sure to check what you qualify for. For example, you may qualify for a work opportunity credit if you hire veterans, ex-felons or individuals receiving Supplemental Security Income (SSI).
» COMPARE: Best tax software and services
FAQ
Can I file my small business taxes online?
Yes you can file your taxes online, the IRS has an e-file for small businesses that allows you to conduct business electronically.
How can I reduce my small business tax liability?
Check the IRS updates to know the deductions and tax credits you qualify for before filing your taxes to lower your tax bill.
What are the deadlines for filing small business taxes?
April 15. In years when April 15 falls on a weekend, the tax deadline is typically extended to the next business day. Partnerships and multi-member LLCs should file returns by March 15.
Bottom line
From a small business owner’s point of view, taxes can seem unfair and overwhelming. It feels like the IRS takes everything you’ve worked so hard for. However, knowing how the tax system works can help make the process more bearable. It can also help you take advantage of the tax credits and deductions you qualify for to reduce your tax bill.
Article sources
- IRS, “About Form 1040, U.S. Individual Income Tax Return.”Accessed April 2, 2024.
- 2. IRS, “About Form 1040-SR, U.S. Tax Return for Seniors.” Accessed April 2, 2024.
- 3. IRS, “About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).” Accessed April 2, 2024.
- 4. IRS, “About Form 1065, U.S. Return of Partnership Income.” Accessed April 2, 2024.
- 5. IRS, “About Form 1120, U.S. Corporation Income Tax Return.” Accessed April 2, 2024.
- 6. IRS, “About Form 1120-S, U.S. Income Tax Return for an S Corporation.” Accessed. April 2, 2024.
- 7. IRS, “About Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.” Accessed. April 2, 2024.
