Like many other small business owners, you started your company to pursue your dreams, not to learn about accounting or taxes. Most small business owners don't feel very confident about things like filing business taxes. Whether you're doing it together or on your own, here are five important things about preparing and filing your business taxes.
1. The structure of your small business is important.
How you register your business has an impact on how you pay taxes. The most common business structures are sole proprietorship, limited liability company (LLC), S corporation, and C Corporation. The tax implications of each business structure differ.
The basic business structure is a sole proprietorship. As a sole proprietor, you conduct business under your name and use your social security number as your tax ID. Your company is not taxed separately. You'll file a Schedule C with your annual 1040 form to claim all revenue and business deductions on your tax return.
The second most common business structure for small businesses is an LLC. Single-member LLCs are taxed similarly to sole proprietorships.
A traditional corporation, or C corporation, comprises shareholders, officers, directors, and employees. C corporations pay company-level taxes. Furthermore, shareholders must pay personal taxes on any dividends received. The term "double taxation" refers to the taxation of the company and its shareholders.
By passing income directly to shareholders, S corporations avoid double taxation. Shareholders report business income, expenses, losses, and deductions on their tax returns.
Some business structures benefit from more tax breaks than others. However, selecting the business structure that best suits your needs is critical. If you're unsure, a lawyer or business advisor can assist you.
2. Look into small business tax breaks.
Small business owners benefit from tax breaks that significantly reduce their tax bills. Tax deductions reduce the total income subject to federal and state taxation. There are dozens of tax deductions for which you may be eligible; the real challenge is determining which ones.
Business meals, marketing, rent, travel, and other business expenses can be written off or deducted when filing taxes. However, each deduction has its own set of eligibility requirements. For example, business meals for a company-wide party are fully deductible, but business meals for entertaining clients are not. Before you file your tax return, consult a CPA or tax professional to ensure you've deducted all of your expenses correctly.
To maximize your tax deductions, itemize your deductions on your tax return. Itemizing takes a little longer than the standard deduction and, more importantly, necessitates meticulous record keeping on your part. However, the payoff is well worth the extra effort for small businesses.
3. Recognize startup cost deductions.
Starting a business is thrilling, but it is also costly. Aside from recurring costs such as rent, payroll, taxes, professional services, utilities, and marketing, starting a new business entails a slew of one-time startup costs such as logo design, website design, down payments, permits, and licenses. Fortunately, many of these startup costs may be tax deductible.
If your total startup costs are $50,000 or less, the IRS allows you to deduct $5,000 in business startup costs and $5,000 in organization costs. If your startup costs exceed $50,000, your allowable deduction will be reduced by the overage amount. The deduction is null and void if your startup costs more than $55,000.
To take advantage of this specific tax break, you must claim the startup deduction for the tax year in which your business first opened its doors. You have six months to file an amended return if you miss the deadline.
4. Make your quarterly tax payments on time.
Anyone who files a federal income tax return and expects to owe more than $1,000 must make quarterly estimated tax payments. You've probably been paying quarterly taxes for a long time but didn't realize it. If you worked for an employer and filed Form W-4, your employer automatically calculated your quarterly tax payments for you and deducted them from your paychecks. You must calculate and make those payments now that you work for yourself.
If you have a year or two of tax payments, you can estimate your tax payments using your previous year's income. If you're just starting, divide your average monthly income by 12 to get a ballpark figure. These figures may change, and that's fine! There's a reason they're called estimated quarterly payments. However, you must pay at least 90% of the taxes you owe throughout the year, or you will be penalized. In addition, late payments will be assessed as a late fee.
The IRS provides free resources to help you calculate and pay your quarterly payments online. A tax professional can calculate quarterly tax payments for you and ensure you meet quarterly deadlines.
5. Continue to pay additional taxes.
Aside from income tax, you may have to account for a few other taxes as a small business owner.
• If you are self-employed, you must pay a 15.3% self-employment tax. On your tax return, however, you can deduct half of the self-employment tax.
• If you have employees, you are obligated to pay payroll taxes on their wages. This includes withholding on federal income taxes, Social Security and Medicare taxes, and federal and state unemployment taxes.
• If you sell products subject to excise taxes, such as cigarettes, gasoline, or liquor, you must collect and remit the taxes to the IRS.
• If your state levies a sales tax, you must collect and report the tax to your local and state governments.
• If you own commercial property, such as a storefront, you must pay taxes to the city or county where you do business.
Taxes are just that: taxes. The deck may be stacked against you. However, the tax system is designed to offset potentially high costs for small business owners during tax season. Tax deductions should be maximized to reduce your tax liability. And knowing when and how to pay your taxes can help you avoid costly late penalties.
Working with a new business owner as a tax professional can help you avoid mistakes like underreporting business expenses or missing important tax payments. However, investing in good small business tax software is a good start.