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According to the Small Business Administration (SBA), 99.9% (nearly all businesses) in the US, are considered small businesses. Small business owners are in charge of their destiny, but that means taking care of less fun aspects of the business, like taxes. Specifically, knowing what small business taxes apply. Although there are many tax deadlines and forms to file, not every one is necessary for your business.
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What are common taxes that small businesses pay?
When thinking about taxes, consider your business entity to determine what is applicable. Often, your chosen business structure or whether the business has employees or assets impacts what taxes you’re liable for.
Income tax is a percentage of the business’s income paid to the IRS for federal tax requirements. Income tax rates vary depending on the business structure. Businesses set up as a corporation pay an income tax rate of 21%. Most states also impose a state tax on corporate income. If the business is a sole proprietorship or similarly taxed entity as defined by the IRS, the self-employed individual will pay business income taxes on their own individual tax return, if they earn at least $400. Those tax rates range from 10% to 37%; 43 states impose a state income tax.
A business with an employee has additional small business taxes, including payroll taxes. Payroll taxes include Social Security and Medicare taxes. These taxes have two components: an employee part that the employer withholds from the employee’s wages and the employer’s matching portion. Each pays 6.2%, for a total Social Security tax of 12.4%. The Medicare tax is 2.9% of the employee's gross wages, with the employee and employer each responsible for paying 1.45%. A small business must also pay the Federal unemployment tax for each employee, which is 6%, up to $7,000 of an employee’s annual wages.
Small business owners are responsible for paying self-employment taxes. The self-employment tax pays the Social Security (12.4%) and Medicare taxes (2.9%). The self-employment tax rate is 15.3% of the business income since it covers both the employer and employee’s portions of the tax. The small business owner pays this by making quarterlyestimated tax payments, typically on the 15th of the month in April, June, September, and the following January.
Capital gains tax
Small businesses that sell assets for a profit or have investments that increase in value may owe capital gains taxes on that increase or profit. The tax rate varies by income. The capital gains tax is a percentage of the increase in value and can range from a low of zero to high of 28%, but typically is 15%. The applicable rate may also depend on the ownership length and asset type.
Other small business taxes that can apply are property taxes. If the small business owns any real property, such as land or buildings, the county where the property is located may assess property taxes. Property taxes are based on the property’s value and vary based on location.
A dividend is a portion of a corporation’s income that it distributes to its shareholders. The dividend is considered taxable income to the shareholder. The tax rate for dividends ranges from zero to 20%, depending on the length of the investment and the shareholder’s taxable income.
Common tax deductions for small businesses
A tax deduction is an “ordinary and necessary” business expense that a small business owner can deduct from their income. Tax deductions, or tax write-offs, reduce a business’s taxable income, resulting in the business paying less taxes. There are numerous small business tax deductions. Some of the most common include:
- Rental expenses for property. Lease or rental payments for office space, storage units, or warehouses are tax-deductible business expenses if used exclusively for work.
- Rental expenses for equipment. The cost to rent equipment or machines for your business, such as a copier or postage machine, is a deductible business expense.
- Office supplies. The cost of supplies like shipping materials, printer ink, labels, paper, pens, and software are prime examples of deductions that a small business owner can utilize.
- 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 if travel is for legitimate business purposes. The cost of travel expenses—transportation, lodging, and meals—are typical deductions.
- Advertising and marketing. A small business owner can deduct the costs of web design, business cards, and print and digital advertising.
- Telephone and internet. The cost of these services, if necessary and solely for business purposes, are tax deductible.
- Professional services. If you utilize the services of lawyers, accountants, and other professionals for business reasons, their fees are tax-deductible expenses.
- Independent contractor fees. The fees paid for any contractors or freelancers used by your business are tax deductible.
- Employee salaries. If you have an employee you pay a fair salary, their salary is a tax deduction.
How to file small business taxes
- Collect your records
- Find the correct form and fill it out
- Know the filing deadlines
- File your small business taxes
Understanding what taxes may apply to your business is helpful, but equally important is knowing when to file small business taxes to avoid fines. Fortunately, preparation makes the process easier. Here are four steps to prepare and file your tax return.
1. Collect your records
Small business owners need careful records of all business expenses, income received, profits and losses, and salaries paid when it comes time to file a tax return. Items such as receipts, deposit slips, invoices, and account statements can provide this type of information. Also, collect duplicate checks, credit card statements, payment confirmations or any other records of the amount of taxes you have already paid if you’ve made quarterly estimated tax payments.
2. Find the correct form and fill it out
There are numerous forms from the IRS for filing small business taxes. The types of forms you will fill out will depend on your business structure and whether there are employees. Here are some of the most common forms and what information you need for each.
- Schedule C with Form 1040. If your business is a sole proprietorship or single-person LLC, you will use this form to report business income. To fill out this form you need to know the amount of income received, 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 the business is a corporation, Form 1120 is used to report the corporation’s 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. Another form for businesses with employees is Form 941, where the employer reports withholding amounts from an employee’s wages. Taxes reported on this form include Social Security, Medicare, and income taxes.
3. Know the filing deadlines
There are many tax deadlines to know, and some are only applicable if you have a certain business structure or employees. Deadlines for filings can be annually or quarterly. Quarterly filings are typically on the 15th, but for 2023 the due dates are: April 18, July 15, October 15, and January 16, 2024 for the previous year’s fourth quarter.
- Corporations. Corporations must file Form 1120 annually. The due date depends on if the corporation uses a calendar or fiscal year. The filing is due on the 15th day of the fourth month after the end of the corporation’s tax year.
- Sole proprietors.Schedule C and Schedule SE are due on April 15 with the individual tax return. Estimated tax payments are due quarterly.
- Partnerships.Form 1065 is due March 15.
- Businesses with employees.Employers have additional filing deadlines to know: January 31 for Form 940 and quarterly filingsfor Form 941.
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, which is 5% of the taxes owed, per month it’s late.