Filing Small Business Taxes For The First Time? Here’s Everything You Need To Know
Two words can strike fear in the hearts of even the most seasoned entrepreneur. Those words? Tax season. And if it’s your first time filing small business taxes, 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!
Table of Contents
Know Which Tax 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||✔︎||✔︎|
Freelancers are self-employed individuals that work for themselves. Freelancers typically perform work for various clients. In some cases, freelancers may perform one-time services for clients, while other times they may work on longer-term or recurring projects. Freelancers may work for themselves full-time, or simply take on side gigs in addition to their traditional job.
If you’re a freelancer, the process for filing small business taxes is quite simple. In addition to the traditional forms you file annually (like Form 1040), there are just a handful of other forms that must be filed with your individual tax return. Those include:
- 1099-MISC: The 1099-MISC is a form that reports self-employment earnings from a single person or business. The income you received is reported in Box 7, Nonemployee Compensation. If you made over $600 with a client, the client is required to send you a 1099-MISC. If your income was less than $600, the client is not required by the IRS to send you a 1099-MISC. However, please note that all income must be reported on your tax return, even if you do not receive a 1099-MISC form. These forms are required to be sent out by January 31 and are used to report income on your annual tax return due on April 15.
- Schedule C: Schedule C is used to report your profit or loss from your business. On this form, you will provide your business name (or your legal name, if you don’t use a separate business name), contact information, gross sales, expenses, and cost of goods sold (COGS). This form is part of Form 1040 and is submitted with your annual tax return due on April 15.
- Schedule SE: Schedule SE is used to calculate your self-employment tax. Because you are self-employed, you do not pay taxes on income as you do when you’re employed by a business. This is where the Schedule SE comes in. This form is used to calculate the amount of Social Security and Medicare taxes you must pay on the income you’ve earned. This form is filed along with your 1040 on or before April 15.
Many self-employed individuals are sole proprietors. If you operate a business, sole proprietorship is the default entity. There are no expensive fees or difficult steps to become a sole proprietor, although in some cases you may be required to obtain applicable business licenses and permits.
Sole proprietors aren’t required to file separate tax returns. They must simply add the required forms with their personal tax returns. These forms include:
- 1099-MISC: Many sole proprietors will receive 1099s from their clients with Box 7, Nonemployee Compensation, filled out. This income information will need to be included in the sole proprietor’s tax return due on April 15. If contract or freelance labor is used within the business, the sole proprietor will need to send out their own 1099s by January 31.
- Schedule C: Schedule C is filed with an individual income return to show the profit or loss of the business. This form is submitted with the tax return due on April 15.
- Schedule SE: Schedule SE is used to calculate the Social Security and Medicare taxes owed by the sole proprietor. This form is included with the individual income tax return due on April 15.
- Form 1040-ES: If you owe the IRS, you may be subject to paying quarterly taxes. Form 1040-ES, Estimated Taxes for Individuals, is a form that is used to calculate estimated taxes owed. This form is completed and submitted each quarter, along with the estimated payment. Due dates remain roughly the same each year: April 15, June 15, September 15, and January 15 (of the following year). Dates may change if they fall on a weekend or holiday.
A partnership is a business structure that involves two or more parties. As an entity, a partnership may need to file the following tax forms:
- Form 1065: Form 1065 U.S. Return Of Partnership Income (also known as a Schedule K) must be filed by a general partnership each year that it is in business. This is an informational return that must be completed and signed by at least one partner. Partnerships operating on a calendar year must submit this form to the IRS by March 15 (or the next business day if March 15 falls on a weekend or holiday). Partnerships with a tax year must complete and submit the form 15th day of the third month after the tax year-end date.
- Schedule K-1: A Schedule K-1 must be filed with the IRS for each partner. This form breaks down the income, credits, and deductions of each partner. All partners should receive a copy of their Schedule K-1. Copies must also be sent to the IRS along with Form 1065.
- Form 941: If the partnership has employees, Form 941 Employer’s Quarterly Federal Tax Return, will need to be filed. This form is used to report income taxes, Social Security taxes, and/or Medicare taxes withheld from an employee’s pay. It is also used for paying the employer portion of Social Security and Medicare taxes. This form is filed quarterly and per the IRS is “generally due by the last day of the month following the end of the quarter.”
- Form 940: Partnerships with employees will also be required to file Form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return. This form is used to report annual Federal Unemployment Tax Act taxes. This form must be filed on or prior to January 31.
While these forms should be filed by the partnership, each partner will also need to complete an individual income tax return. In addition to filing a 1040, you may also be required to file:
- Schedule E: Schedule E Supplemental Income & Loss is a form that is filed to report income or loss from a partnership. It is also used to report income or loss from royalties, rental real estate, trusts, and S corporations. This form is filed with an annual tax return due on or before April 15.
- Schedule SE: A Schedule SE that calculates taxes due on net earnings by self-employed individuals should also be filed with an individual’s income tax return. This form is due on or before April 15.
Corporations are the most complicated business structure, so it should come as no surprise that filing taxes can be a bit more difficult, too. There are two different types of corporations: S corporations and C corporations.
S corporations have a limitation on the number of shareholders it has. Shareholders pay taxes on the profits received from the corporation. A C corporation has no limitations on shareholders. However, the business pays corporate taxes, and the shareholder also pays taxes on the income they’ve received.
The forms that may be required for filing taxes for a corporation include:
- Form 1120: Form 1120 U.S. Corporation Income Tax Return is used to file and pay corporate taxes for C corporations. Per the IRS, “a corporation must file its income tax return by the 15th day of the 4th month after the end of its tax year.”
- Form 1120-S: Form 1120-S U.S. Income Tax Return for an S Corporation is used to report income, gains, losses, credits, and deductions of an S corporation. This must be filed on or before March 15.
- Schedule K-1: A Schedule K-1 for each shareholder must accompany Form 1120-S. This form shows the shareholder’s share of income, deductions, and credits. A copy is provided to each shareholder and is also filed with the 1120-S on or before March 15.
- Form 1120-W: Form 1120-W Estimated Tax for Corporations is used to estimate and pay a corporation’s tax liability. These forms are filed quarterly on April 15, June 15, September 15, and January 15 (of the next year).
- Form 941: Form 941 Employer’s Quarterly Federal Tax Return will need to be filed. This form is used to report income taxes, Social Security taxes, and/or Medicare taxes withheld from an employee’s pay. It is also used for paying the employer portion of Social Security and Medicare taxes. This form is filed quarterly and per the IRS is “generally due by the last day of the month following the end of the quarter.”
- Form 940: Corporations will also be required to file Form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return. This form is used to report annual Federal Unemployment Tax Act taxes. This form must be filed on or prior to January 31.
Corporation shareholders must file their individual income tax returns. In addition to Form 1040, shareholders also need to file:
- Schedule E: This form is used to report income or loss from an S corporation.
- Form 1040-ES: This form is used to estimate and pay quarterly taxes. It is filed quarterly on April 15, June 15, September 15, and January 15 (of the following year).
A limited liability company (LLC) is a business structure that offers personal liability protection to its owners (also known as members).
A single-member LLC is not treated as a corporation when it comes to filing taxes; it is treated similarly to a sole proprietorship. The activities of the business are reported on the owner’s personal tax return. In addition to filing a Form 1040, the owner will also need to file:
- Schedule C: This reflects the profit or loss of the business and should be filed with the tax return due on April 15.
- Schedule SE: This calculates taxes due on income earned by self-employed individuals. This is filed with the tax return due on April 15.
Some LLCs are partnerships. In this case, partnership tax rules apply. Other LLCs are corporations and are treated as such in terms of filing and paying taxes.
Choose The Right Accounting Method
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 Accounting: Which Is Better For Your Business?
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’s perfect for beginners. Start your search by checking out our picks for the best easy-to-use accounting software.
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!
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
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.
Best Of Luck Filing Your Taxes!
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. Start off by finding accounting software you love, getting acquainted with the various IRS tax forms you’ll need, and keeping your records organized. And don’t forget to reach out to an accountant if you need a professional to step in. Good luck!