The Complete Guide To Filing Small Business Taxes For The First Time
If it's your first time filing taxes for your small business, make sure you're prepared in just six easy steps.
If you’re filing small business taxes for the first time, the fear of the unknown can make you question why you started a business in the first place. But here’s a secret for you: filing your business taxes doesn’t have to be scary.
If you’re prepared, filing your taxes can be just another ordinary task in your world of business ownership. In this post, we’ll take the confusion out of tax forms, point you toward money-saving deductions, and help boost your confidence going into the tax season.
Need more tax help? Make sure to check out our small business tax guide, which is perfect for beginners.
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Do I Have To File Small Business Taxes?
If you’re a new business owner, you may be unsure if you have to file small business taxes.
If you’re self-employed, you are required to file a tax return if you made at least $400 from any one client. If you own a business, you must file a return, even if you didn’t make a profit.
Some taxpayers may also opt to file a tax return if they qualify for credits, overpaid taxes, or are facing another situation where they may be due a refund.
How To File Small Business Taxes For The First Time
Filing small business taxes for the first time can be intimidating. But with careful preparation, you can save time, reduce stress, and potentially save money by lowering your tax liability.
With these six tips, you can head into this tax season with confidence.
Step 1: Understand Required Tax Forms & Tax Deadlines
The tax forms you need to file are based on your legal business structure.
Let’s look at the different types of business entities, the tax forms associated with each, and important filing dates to avoid penalties.
|Can have more than one owner
|Owners report profit/loss on individual income tax return
|Owners have personal liability protection from business debts
And now, let’s take a closer look at each of these types of structures and what filing taxes might look like:
Step 2: Choose An Accounting Method For Your Business
You must choose one of the two accounting methods for your business: cash-basis or accrual.
With cash-basis accounting, income and expenses are recorded when the transaction is complete. Let’s look at a quick example. You have two invoices, each for $500. One client has paid their invoice and has sent the $500. The other invoice has not been paid. In this example, only the paid invoice would be recorded. The unpaid invoice is not recorded until the client sends you the $500 that is owed.
In cash-basis accounting, it works the same way for expenses.
Accrual accounting is different because transactions are recorded as they occur. In other words, the transaction doesn’t have to be complete before the transaction is recorded. Let’s use the same examples from above. You have a paid invoice for $500 and an unpaid invoice for $500. Using the accrual method, you would record an income of $1,000 — even though half of this is still unpaid.
You have to weigh the benefits of each to determine which method is right for you. Cash-basis accounting has tax implications, as you won’t pay taxes on revenue until you’ve received payment. On the other hand, accrual accounting offers better cash flow tracking and higher accuracy throughout the year.
Step 3: Use Accounting Software To Track Income & Expenses
The key to stress-free tax filing is to be organized, and there’s no better way to stay organized than by using accounting software. Accounting software allows you to track your income and expenses for your business. Not only does this help you keep on track with your financial goals, but it simplifies tax filing.
Many accounting programs also offer tax support, providing additional resources and help for tax time. Don’t have accounting software? There’s no better time than right now to get started. Best of all, there are several free and low-cost options perfect for beginners. Start your search by checking out our picks for the best accounting software for small businesses.
Step 4: Gather Your Tax Documents
No one wants to rush around at the last minute to gather what they need to file taxes, so keeping your records and documentation organized throughout the year can reduce stress and shave hours off your tax prep time.
Here are a few of the most common documents you’ll need to have before filing your small business taxes:
- IRS tax forms
- Federal tax ID number
- Prior year’s tax records
- Income records
- Expense records
- Payroll records
- Inventory records
- Financial reports
- Investment records
Step 5: Take Eligible Business Deductions & Credits
It’s normal to be worried about how much you’ll owe the IRS, but the good news is that there’s an easy way to lower your tax liability with deductions and credits.
Claiming eligible business deductions can help ease your tax burden, leaving more money in your pocket. Tax deductions lower your taxable income, potentially putting you in a lower tax bracket.
Many of the common business expenses you have can be deducted. This includes but isn’t limited to these expenses:
- Home office expense
- Commercial car & truck expenses or mileage
- Advertising costs
- Phone & internet service
- Legal fees
Tax credits are another way to lower your tax liability. Tax credits work differently than deductions in that they lower your tax deduction dollar-for-dollar.
There are several tax credits available, including the Employee Retention Tax Credit, the Research and Development Tax Credit, and the Work Opportunity Tax Credit. Learn more about other small business tax credits, and consider hiring an accountant. An accountant can help you determine what credits you’re eligible to receive, which leads to our next step.
Step 6: Hire An Accountant To Help File Your Taxes
It is possible to file your own small business taxes, especially with the help of accounting and tax software. But this may not be the best choice for your business.
Sure, you can save money initially by going the DIY route. But hiring an accountant may be well worth the extra expense, especially if you have no prior tax experience. An accountant makes sure that all forms are properly completed and filed with the IRS. Failing to complete a form or doing your taxes incorrectly can result in payments and penalties that can add up quickly.
Additionally, you may even end up saving money by hiring an accountant. A professional can find deductions that you previously overlooked, helping to reduce your tax liability. If you’re properly prepared and have all of the documentation your accountant needs, you’ll reduce the number of hours an accountant spends on your tax return. In other words, a little bit of preparation can help cut this expense significantly.
If your tax return is particularly complicated or you just don’t know where to begin, there’s no shame in leaving it to the pros. You can also hire an accountant to review your return before you file.
Next Steps For First-Time Tax Filers
Tax season doesn’t have to be intimidating, even if you’ve never done small business taxes before. Start by finding accounting software you love, getting acquainted with the various IRS tax forms you’ll need, and keeping your records organized.
Once you start your taxes, make sure you check every box on our small business tax checklist. If your business has employees, ensure you’re up-to-date on filing and paying payroll taxes to avoid trouble with the IRS.
Finally, don’t forget to reach out to an accountant if you need a professional to step in.