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 to file tax returns. If you live in the US, this step-by-step guide will help you get a jump start and file your tax return well before it’s due.
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Table of contents
- Know your tax deadlines
- Get your records and bookkeeping in order
- Find the right tax form to fill out
Step 1: Know your tax deadlines
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
Step 2. Get your records and books in order
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.
You can use a small business accounting software to process your own bookkeeping. Alternatively, if you’d prefer to have a professional do it for you, look into hiring a bookkeeper.
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.
Pro tip: Use an all-in-one money management account to simplify tax time by keeping your personal and business receipts separate.
Know your tax deductions
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:
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.
If you’re taking classes or workshops that add value to your business and/or increase your expertise—work-related education is fully deductible.
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.
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
Online services used for business purposes, such as Shopify, accounting tools, inventory management software, and any other apps you use to run your business, are deductible as business expenses.
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. In some cases, an accountant might even advise that you 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.
Legal and professional fees necessary and directly related to running your business, such as fees charged by accountants and bookkeepers, can be claimed as professional services.
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?
Step 3: Find the right tax form to fill out
Your required tax forms are dependent on your business structure. Those forms include:
- Sole proprietors and single-member LLCs: Schedule C for income and expenses, attached to personal income tax return
- Multi-member LLCs and partnerships: Form 1065
- C corporations: Form 1120
- S corporations: Form 1120-S
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!
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Online business tax filing FAQ
Do I need to file taxes for an online business?
Yes, you need to file taxes for an online business. The IRS requires sellers to report and pay taxes on this income.
How do taxes work for an online business?
An online business may pay income and sales taxes. They may also be required to charge tax to their customers, depending on the state.
How much can you sell online before paying tax?
You can sell up to $600 online before paying tax.
How do I file my taxes if I started my own business?
You can file your taxes if you started your own business with the free online tools from the IRS.