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Small business owners are in charge of their destiny, but that also means taking care of less fun aspects of the business, like taxes.
Whether it’s your first year in business or your 10th, it always feels like there’s an endless list of tasks to get through when filing your tax return. 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
Table of Contents
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: Income tax is a percentage of the business’s income paid to the IRS for federal tax requirements. Rates vary depending on the business structure and location. Forty-three states impose a state tax on corporate income. A self-employed individual set up as a sole proprietorship or similarly taxed entity will pay business income taxes on their personal returns ranging from 10% to 37%.
- Payroll tax: A business with an employee pays payroll taxes, which 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%. 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.
- Self-employment tax: Self-employment taxes are for Social Security (12.4%) and Medicare taxes (2.9%). The self-employment tax rate is 15.3% of the business income.
- 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 a high of 28%, but typically is 15%. The applicable rate may also depend on the ownership length and asset type.
- Property tax: 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.
- Dividend tax: 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 0% to 20%, depending on the length of the investment and the shareholder’s taxable income.
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
Here are four steps for filing small business taxes.
1. Collect your records
It helps to have your accounting records organized prior to tax time to make the process easier and smoother. 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.
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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’ll need to fill out will depend on your business structure and whether there are employees. Here are some of the most common forms and the information you need 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 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 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. Form 941 is 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
Understanding which taxes may apply to your business is helpful, but equally important is knowing when to file small business taxes to avoid fines.
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 annual or quarterly. Quarterly filings are typically on the 15th of specific months, 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 filings for Form 941.
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 to update your calendar accordingly, as the dates may change each year.
Key tax deadlines to know include:
- Corporate and personal tax filing deadline (usually in mid-April)
- Business tax deadline for partnerships (typically a month prior to the general filing deadline)
- Quarterly estimated tax payments
- Extension deadline, if you filed for one (often in October)
You can check the IRS Online Tax Calendar for the latest deadlines.
It’s important to understand that a tax extension does not get you out of paying taxes owed by the regular deadline. It simply gives you more time to file.
To file for a tax extension, you’ll need to fill out the tax extension form that corresponds with your business type and estimate the amount of taxes you owe for the year. Then, submit the completed form and your payment for taxes owed to the IRS, electronically or via mail, on or before the deadline.
As long as you file before the deadline, the extension is automatic. The IRS will only contact you if your application isn’t approved.
If you don’t make a payment for taxes owed by the regular tax deadline, you could be liable for penalties and interest, even if you’ve filed for an extension.
To file for a tax extension, use the form that corresponds with your business type:
- Partnerships: Form 7004 for a seven-month extension
- Corporations: 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, which is 5% of the taxes owed, per month it’s late.
Small business tax best practices
Ensure your bookkeeping is up to date
It’s important to ensure your books are up to date. A clear set of books gives an accurate view of your business’s income and expenses. They’re also your first line of defense in case of an audit. If the information in your books is incorrect, you run the risk of unintentionally making a false claim to the IRS.
When it comes to getting your books up to date, choose a method that’s best for you based on the amount of time you have to dedicate to bookkeeping, your budget, and how confident you feel about managing your own books.
If you haven’t done so already, it’s time to go paperless. Storing your receipts online will save you from a mountain of paper to sort through come tax time.
These tools will help you organize your receipts the paperless way:
- Evernote (free): You can upload and access scans or photographs of receipts, business cards, and important documents from any device. Upload documents straight into your Evernote account.
- Shoeboxed (up to $100/month): If you have a huge backlog of receipts to store, you can opt to mail them off in one of Shoeboxed’s Magic Envelopes, and Shoeboxed will enter all of the data for you.
- Expensify (starts at $5/month for each active user): Payments made with connected bank cards are automatically imported, and cash expenses are added manually. Expensify’s mobile app also lets you photograph and store receipts on the go. Receipts are automatically matched with the correct expense using the service’s SmartScan technology.
Understand sales tax requirements
Sales tax laws are complex at the best of times. You’ll want to consult your accountant on this, but let’s briefly look at how sales tax applies to online businesses.
State tax requirements are dictated by a legal concept called “nexus.” Nexus means a business needs to have a physical connection to a state in order to collect sales tax there. If your business develops nexus in a state, you must collect sales tax in that state.
While many businesses will only have nexus with the state it operates in, there are instances where your business could develop nexus in additional states.
Here are some examples of things that develop nexus:
- An office
- A warehouse
- Hosting a pop-up shop or selling at a craft fair
- Storing inventory
You’re legally 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 adequately meeting state sales tax requirements.
Find the right accountant
It’s important to find the right tax accountant to work with.
If you have an existing relationship with a business accountant or bookkeeper, you might ask them for a referral. No one to tap into? Check with your accounting software to see if it has a directory of vetted tax specialists and accountants.
When looking for an accountant to file your taxes, take into consideration how well they understand your industry, the specific needs of your business, and whether they bill by the hour or charge a flat fee.
Once you’ve hired an accountant, ask them the following questions to see if there are other ways you can reduce your tax bill:
- Are there any local tax credits available? (This is a big one entrepreneurs often miss.)
- Does my business have nexus in any other states? Have I dealt with sales tax properly?
- Are there advantages to changing my business structure?
Common tax deductions for small businesses
A tax deduction is an “ordinary and necessary” business expense 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.
Note: If your business is new, you’ll need to consult with your accountant, as some of your expenses could fall under start-up costs.
You might be able to write off the following business tax deductions:
Rental expenses for property are tax deductible. Lease or rental payments for office space, storage units, or warehouses are deductible business expenses if used exclusively for work.
To qualify for the home office deduction, you need to meet three requirements: exclusivity, regularity, and precedence.
- Exclusivity: Your working area needs to be used solely for business.
- Regularity: Your home office needs to be used on a regular basis. This doesn’t need to be every day, but it should be consistent.
- Precedence: You should spend the majority of time in your home office, and conduct the most important business activities there.
To calculate your home office deduction, you can either use the simplified method or the regular method. With the simplified method, you take a standardized deduction of $5 per square foot of your home that’s used for business, up to a maximum of 300 square feet.
With the regular method, you’re required to calculate the actual percentage of your home that’s used for business by dividing the area used for business by the total area of your home.
If you calculate your deduction using the regular method, you’ll also need to fill out Form 8829.
The cost of supplies like shipping materials, printer ink, labels, paper, pens, and software are prime examples of deductions for a small business owner to leverage.
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
If you have a phone number solely for business purposes, the cost of the phone plan is fully deductible as a utility cost. If you use your phone for both business and personal purposes, you can only deduct a percentage of the total cost of the phone bill based on how much you used your phone for business.
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, should you ever be audited.
Your internet bill can also be deducted as a utility cost. If you work out of a home office and use a single internet connection, you’ll need to account for personal use. Calculate the percentage of business-related use and apply it to the total.
Web hosting and online store themes
The costs of domain registration and ecommerce hosting, also known as web hosting, are deductible under other expenses. You can also deduct the cost of any online store templates or custom Shopify themes you purchase for your business, as either a software or marketing expense.
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.
If you have an employee you pay a fair salary, their salary is a tax deduction.
The cost of shipping goods to your customers, such as postage and packaging costs, can be claimed as other expenses.
To deduct the business use of your vehicle, you’ll need to track your mileage for business trips. You can do this quickly with a mileage tracker tool. At the very least, you should record the number of miles driven throughout the year (record your odometer reading on January 1 and then on December 31), and keep a record of meetings, trips to the post office, etc., in your calendar.
Another common technique is to track business and personal mileage for a two-week period every quarter. You can use this at year end to figure a business versus personal-use ratio.
Once you have established the total mileage driven, divide the business miles by the total miles driven to determine your business use percentage.
Online service fees
The cost of business equipment, such as your business computer, camera, and mobile phone (if you own it outright), can be recovered either via depreciation or through a section 179 deduction. The cost to rent equipment or machines for your business, such as a copier or postage machine, is a deductible business expense. In some cases, an accountant might even advise you to deduct the cost of business equipment as a standard business expense.
It’s strongly advised to work with an accountant who can properly deduct equipment costs. All of these approaches to deducting equipment costs can provide different financial benefits for your business. For example, it may be more beneficial to deduct equipment costs in one hit (using the section 179 deduction or as a standard business expense) or depreciating the cost over several years.
What’s more, different items are depreciated using different depreciation methods, and setting up a depreciation schedule can be extremely tricky to get right.
The proper way to deduct the cost of business equipment is to keep a record of all business equipment purchases and ask your accountant to advise you on how to deduct them in your tax return.
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.
Legal and professional fees necessary and directly related to running your business, such as fees charged by lawyers, 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 probably aren’t your favorite part of business ownership, but with some planning and organization, you can maximize deductions and take the stress out of tax season.
If you have any questions about preparing your online business for tax time, let us know in the comments below and we’ll do our best to help you out!