Filing Small Business Taxes For The First Time? Here’s Everything You Need To Know
If this is your first time filing small business taxes, following our six steps to filing your business taxes will help ease some of your tax-related stress.
Two words can strike fear in the hearts of even the most seasoned entrepreneur. Those words? Tax season. And if you’re filing small business taxes for the first time, the fear of the unknown can really 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. In fact, if you plan, prepare, and know what to expect, filing your taxes can be just another ordinary task in your world of business ownership — no scarier than ordering inventory or applying for a business loan.
The key, though, is making sure that you’re prepared. Don’t know where to start? You’re in luck; you can start right here! In this post, we’re going to go over what to expect when filing small business taxes for the first time. 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.
Let’s jump in!
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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.
Check out these six tips so you can head into this tax season with confidence.
1. Know Which Forms You Need To File & When
The tax forms you need to file are based upon your legal business structure. A corporation, for example, has far more paperwork requirements than a sole proprietorship. 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||✔︎||✔︎|
2. Choose The Right Accounting Method For Your Business
One thing to keep in mind when filing your small business taxes is what type of accounting method you are going to use. There are two types: cash-basis and accrual.
Cash-basis accounting means that income and expenses are recorded only when the transaction is complete and money has exchanged hands. 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 would not be recorded until the client sends you the $500 that is owed.
In cash-basis accounting, it works the same way for expenses. You have two bills for $100. The first bill has already been paid. The second isn’t due until next month and has not yet been paid. The paid bill would be a recorded transaction. The unpaid bill would not be recorded until you make the payment.
Accrual accounting is different because all transactions are recorded as soon 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 two bills, each for $100. One bill is paid. The other has been received but hasn’t been paid. Using the accrual method, your total expenses would be $200, even though one bill is still unpaid.
When it comes to taxes, cash-basis accounting has the advantage. If you have outstanding invoices, for instance, you won’t pay taxes on this revenue until payment has been received. But that doesn’t necessarily mean that cash-basis accounting is the right choice for you. Accrual accounting may have tax implications, but it also has a host of other benefits, such as higher accuracy and better long-term cash flow tracking.
Before you make your decision, learn more about the advantages and disadvantages of each accounting method in our post, Cash Basis VS Accrual Basis Accounting: What’s Better?
3. Track Income & Expenses Using Accounting Software
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. That’s because you can easily access your transactions, separate business and personal expenses, and have the numbers you need right at your fingertips without having to shuffle through piles of paperwork.
Accounting software makes it easy to maintain accuracy when filing your tax return.
Even better, many accounting programs 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 a number of free and low-cost options and software that are perfect for beginners. Start your search by checking out our picks for the best accounting software for small businesses.
4. Take Eligible Business Deductions
Your business did well this year, but how will it affect you this tax season? 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. Claiming eligible business deductions can help ease your tax burden, leaving more money in your pocket.
There are a number of deductions that may apply to your business. Many of the common expenses you have during the course of operations can be deducted. This includes but isn’t limited to these expenses:
- Home office
- Commercial vehicle
- Telephone & internet
- Legal fees
Make sure to take advantage of every single write-off applicable to your business to lower your tax liability as much as possible. Check out our post on small business tax deductions to learn more about the write-offs that can help you save this tax season!
5. Gather The Proper Tax Filing Documents
I can’t stress enough how important it is to be organized when filing your taxes, and part of this organization is keeping your documentation and information in a safe place. No one wants to rush around at the last minute to gather what they need to file taxes, so keeping this information 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 on hand in order to file your small business taxes:
- IRS Tax Forms
- Federal Tax ID Number
- Prior Year’s Tax Return
- Income Records
- Expense Records
- Payroll Records
- Inventory Records
- Financial Reports
- Investment Records
6. Hire An Accountant For Extra Help
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 filing your own taxes. 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. And if you’re properly prepared and have all of your documentation and paperwork at the ready, 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. If you think hiring an accountant is the right choice for your business, find out more about picking the right accountant for your business needs.
The Bottom Line On Filing Small Business Taxes For The First Time
Filing your taxes isn’t necessarily the most fun task to tackle, but preparing in advance and knowing what to expect can help make the process a little less painful. With planning and preparation, tax season doesn’t have to be intimidating, even if you’ve never done small business taxes before.
Start off by finding accounting software you love, getting acquainted with the various IRS tax forms you’ll need, and keeping your records organized.
Still not feeling confident? Merchant Maverick has a variety of resources at your disposal to help you survive tax season. Start off by making sure you check every box on our small business tax checklist. You can also learn how to identify red flags to avoid an IRS tax audit. If your business has employees, make sure you’re up-to-date on filing and paying payroll taxes to avoid trouble with the IRS.
And if you can’t make the April filing deadline? Make sure you know how to file for a business tax extension.
Finally, don’t forget to reach out to an accountant if you need a professional to step in. Good luck!