The Beginner’s Tax Guide For Small Business

Most small businesses are pass-through entities, meaning business income passes through to the owners’ personal tax returns rather than being taxed at the business level. C corporations are generally taxed separately from their owners.

Federal individual income tax rates currently range from 10% to 37%, depending on your taxable income and filing status.

The U.S. uses a marginal tax system, meaning different portions of your income may be taxed at different rates.

Corporations pay a flat rate of 21%. 

In addition to a federal return, you must file a state return (in states where income taxes are collected).

Individuals, sole proprietors, S corp shareholders, and partnerships generally must make quarterly estimated tax payments when they expect to owe $1,000 or more when filing income tax returns. Corporations are required to make estimated payments if they expect to owe $500 or more in income taxes. Employees who do not have enough taxes withheld by their employers also must pay estimated taxes.

Estimated taxes that are paid each quarter are applied to income tax and other taxes, including the self-employment tax. Estimated taxes are calculated on IRS Form 1040-ES.

If you have employees, you will be required to pay employment taxes (also known as payroll taxes). These include:

• Federal Income Tax: The federal income is withheld from employee wages at a marginal rate ranging from 10%-37%. The amount withheld is determined by using the employee’s W-4 and the IRS withholding tables.
• Federal Insurance Contributions Act (FICA) Taxes: FICA taxes are Social Security taxes and Medicare taxes. Social Security tax is 6.2% up to the annual wage base, while Medicare tax is 1.45% with no wage limit. High earners may also owe an additional 0.9% Medicare tax. Employers match the standard Social Security and Medicare taxes but do not match the additional Medicare tax.
• Federal Unemployment Tax (FUTA): This tax is only paid by the employer and is not withheld from an employee’s paycheck. The FUTA tax rate is 6% of the first $7,000 earned by an employee.
• State Income Tax: If your state is one of the 41 that levies an income tax, you’ll be required to withhold and pay those as well. These rates vary, and may also include local taxes.
• Bonuses: Bonuses are generally treated as supplemental wages and may be taxed differently than regular wages.

Withholdings are then deposited by the employer as outlined in IRS Publication 15 Employer’s Tax Guide.

All self-employed individuals must pay the self-employment tax if one of these two conditions applies:

• Self-employment net earnings were $400 or more
• Earnings from a church or church-controlled organization were $108.28 or more

Self-employment tax helps fund Social Security and Medicare.

If you are subject to paying self-employment taxes, you will file a Schedule SE with your 1040 when filing your federal tax return.

Excise taxes apply to certain goods, services, and activities, such as fuel, indoor tanning, and certain transportation equipment. Depending on the product or service, the tax may be a fixed amount or a percentage of the sale price.

These are just a few of the products and services subject to excise taxes. The IRS offers additional information about which products and services require excise taxes and instructions on how to pay them. Excise taxes are paid every quarter.

Small businesses that own real estate property may be subject to property taxes on the property’s assessed value. Small business property taxes will vary depending on where the property is located.

Depending on state and local laws, businesses may also owe taxes on tangible personal property, such as equipment, machinery, furniture, and other business assets.

Under current federal law, C corporations pay a flat federal income tax rate of 21%. LLCs that elect to be taxed as C corporations are generally subject to the same rate.

If your business is a C-corporation, corporate taxes will be taken from the business’s taxable income. The taxable income of a C-corp is calculated by subtracting operating expenses from revenue. This income is then taxed at the corporate rate of 21%. Corporations are required to file IRS Form 1120 – U.S. Corporation Income Tax Return. This form is used to report income, gains, losses, credits, and deductions.

If the corporation distributes dividends, shareholders generally report those dividends on their individual tax returns and pay any applicable tax.

The current tax rates for pass-through entities range from 10% to 37% and are based on taxable income. Some business owners may qualify for the Qualified Business Income (QBI) deduction that was established through the Tax Cuts and Jobs Act, which may allow eligible business owners to deduct up to 20% of qualified business income, subject to IRS rules and limitations.

For pass-through businesses, business income is generally reported on the owners’ individual tax returns. To estimate your federal income tax, start with your business income, subtract eligible business expenses and other applicable deductions, then apply the current federal income tax rates based on your filing status and taxable income. Because the U.S. uses a marginal tax system, different portions of your income may be taxed at different rates.

Missing a tax deadline can result in penalties and interest, so it’s important to know when your returns and payments are due. If you need more time to file, you can request an extension, but any taxes owed are still generally due by the original filing deadline.

Once you know your deadlines, it’s important to prepare ahead of time so you’re not scrambling around at the last minute. Before you file, make sure to gather all relevant documentation.

If you’re hiring a professional to take care of your taxes, being prepared can cut down on this expense if you’re paying an hourly rate.

Some of the information you’ll need to have on hand to prepare your taxes includes:

• Personal and business information
• Financial reports
• Expense records
• Deduction records
• Payroll information

There may be additional documentation and information required based on your specific circumstances. Learn more about what information your accountant needs to prepare your taxes.

Business tax deductions are eligible business expenses that reduce your taxable income. In a broad sense, business tax deductions are the costs associated with running your business. Claiming eligible business deductions can help ease your tax burden, leaving more money in your pocket.

Several deductions may apply to your business. This includes:

• Home office
• Commercial vehicle
• Employee salaries, wages, and benefits
• Startup expenses
• Travel expenses
• Insurance
• Telephone & internet
• Advertising
• Legal fees
• Depreciation

In December 2017, Congress passed the Tax Cuts and Jobs Act (TJCA), which went into effect in 2018. This tax reform brought about big changes for small business owners, most notably the Qualified Business Income Deduction.

This deduction allows small business owners to deduct up to 20% of their qualified business income (QBI), subject to IRS rules and income limitations. Eligible sole proprietors, partnerships, S corporations, and some LLC owners may qualify.

There are specific requirements a taxpayer must meet to claim this deduction. An accountant or tax professional can help you determine if you qualify. You can also check out the IRS’s many resources regarding qualified business income tax deductions.

Make sure to take advantage of tax credits. Business tax credits worth looking into include:

• Research and development tax credits
• Work Opportunity Tax Credit (WOTC)
• Employer-provided childcare credits
• Clean vehicle credits
• Startup cost credits

Learn more about the small business tax credits that can help lower your income tax liability.

Using your financial records, calculate your business income, subtract eligible expenses and deductions, and determine your taxable income. How your taxes are calculated depends on your business structure.

When filing, reporting, or paying small business taxes, you have to use the correct tax forms. These forms are available at no cost from the IRS. But before you fire up your printer, know which small business tax forms you need. Some of the most common include:

• Form 1040, Individual Income Tax Return
• Schedule C, Profit or Loss From Business
• Form 1065, U.S. Return of Partnership Income
• Form 1120, U.S. Corporation Income Tax Return
• Schedule SE, Self-Employment Tax
• Form 4562, Depreciation and Amortization

These are some of the most common small business tax forms. Note that you may not necessarily need them all based on your legal structure, deductions, and other factors. If you’re unsure of which forms are relevant to your business, consult with an accountant.

If your tax situation is complex or you’re unsure about your return, consider having a CPA or qualified tax professional review it before filing. They may identify errors, overlooked deductions, or potential issues that could save you time and money.

Not sure what you need to bring? Check out our small business tax checklist.

Mixing personal and business expenses can cause confusion when it comes to filing your small business tax return — and errors can be costly. Make sure that you’re keeping your personal and business expenses separate and easy to sort by opening a small business bank account.

Your accounting method determines when you recognize income and expenses for tax purposes. Most small businesses use either the cash or accrual method.

• Cash-Basis Accounting: Income is recorded when payment is received, and expenses are recorded when they’re paid.
• Accrual Accounting: Income and expenses are recorded when they’re earned or incurred, regardless of when money changes hands.

Cash-basis accounting is often simpler and may delay taxes on unpaid invoices. Accrual accounting provides a more complete picture of your business’s financial performance and may be required for some businesses. The best method depends on your business’s size, operations, and IRS requirements.

Accounting software can help you track income and expenses, reconcile bank accounts, generate financial reports, and organize records for tax season. Many platforms also include tax-related reports or integrations that make preparing your return easier.

Don’t have accounting software? Start your search by checking out our picks for the best accounting software for small businesses.