The Beginner’s Tax Guide For Small Business

Excluding C corporations, most businesses are pass-through entities, in which business earnings aren’t taxed directly, but taxed as personal income tax once the funds are paid out. As a business owner, you are responsible for filing and paying your income taxes. You must report the income you earned for the year. By filing a tax return, you can determine what is owed to the IRS.

Your tax rate is based on the amount of income you earn. There are seven tax brackets for pass-through entities: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Rates are marginal, which simply means that your income may not be taxed under one rate. For example, an individual earning $40,000 in annual taxable income, the first $11,000 is taxed at 10%. The remaining $29,000 is taxed at the 12% rate.

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 are responsible for paying quarterly estimated taxes 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. Employees pay Medicare at a 1.45% rate with a $160,200 wage base limit. Employers must also match this 1.45% contribution. The Social Security tax rate is 6.2%, plus an additional 0.9% for earnings over $200,000. Employers must match the 6.2% rate but aren’t required to match the additional contribution.
• 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 considered supplemental wages and are taxed at a different rate than regular income. Employers can use the percentage method, which uses a flat rate of 22% and is easier to calculate. Employers may also opt to use the aggregate method, which uses tax brackets to calculate withholdings. This method is typically more accurate but is also time-consuming.

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 taxes are applied to your Social Security coverage, which provides you with disability benefits, retirement benefits, survivor benefits, and Medicare coverage.

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

An excise tax is a tax that is required for the sale of certain goods and services, including:

• Fuel
• Sport-fishing equipment
• Indoor tanning
• Semi-trailers

This is not something that the business owner pays out of pocket. Instead, this tax is added to the cost of the good or service and passed down to the consumer.

There are two different types of excise taxes: specific and ad valorem. Specific excise taxes are for a set amount. For example, let’s say you set a price of $10 for a product. The excise tax on this product is $2. You would then incorporate this tax into the cost and sell the product to consumers for $12.

Ad valorem excise taxes aren’t as common. Instead of a fixed amount, the tax is a percentage of the selling price. Using the same example, let’s say the $10 product has a 10% excise tax. You would add 10% of $10 (or $1) to the total cost, so you would then sell the product to consumers for $11.

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. As with real property taxes, business personal property tax rates vary based on location.

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.

Small business owners may also be required to pay taxes on business personal property, which includes any asset that can be moved to various locations.

The Tax Cuts and Jobs Act of 2017 made a permanent change by setting a flat rate of 21% for C-corporations and limited liability companies (LLCs) that have chosen to be taxed as corporations. Before 2017, the corporate tax rate was based on taxable income and ranged from 15% to 35%.

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 business distributes dividends, shareholders will be required to pay taxes on these funds. This is reported as income on Schedule D – Capital Gains and Losses.

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 Income Tax Deduction that was established through the Tax Cuts and Jobs Act, which could lower taxable income — and in turn, lower their tax liability. We’ll discuss this deduction more in the next section.

To calculate pass-through business taxes, each owner begins with their taxable income. Adjusted Gross Income is then calculated by subtracting expenses from gross income. Finally, deductions are applied. The final number is taxable income. This number, along with the taxpayer’s filing status, is used to determine the tax rate. The current year’s tax bracket is used to determine the tax rate. The IRS uses marginal tax rates, which means that different rates apply to different increments of taxable income.

Sound confusing? Let’s take a look at an example. A business owner has $50,000 in taxable income after calculating revenue, expenses, and deductions. The business owner is filing as a single taxpayer. Based on the marginal tax rates for the tax year 2023, the first $11,000 is taxed at 10%. Income over $11,000 to $44,725 is taxed at 12%. The remaining $5,275 is taxed in the next bracket at 22%.

Business income or losses for pass-through taxes are reported on a Schedule C that’s filed with the taxpayer’s 1040.

Tax Day is April 15 and is the deadline for filing your federal and state income tax returns. However, Tax Day isn’t the only date to be aware of, especially as a business owner.

Unfortunately, tax deadlines aren’t flexible. Failure to file and pay taxes on time can result in hefty penalties and additional interest. Even if you file an extension on your federal return, you’re still subject to interest and late-payment penalties.

If you’re unable to pay your tax bill, you shouldn’t avoid filing your taxes. Not only will you owe more in penalties and interest, but failing to pay or respond to the IRS could result in tax liens and wage garnishments. Your best course of action is to file on time, pay your tax debt as soon as possible, and keep communication open with the IRS.

One final thing to note is that if a deadline falls on a holiday or weekend, taxes must be filed and paid on the next business day.

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 expenses that may be written off or deducted from your business’s taxable income, which reduces your overall tax liability. 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 Tax Deduction.

This deduction allows small business owners to deduct up to 20% of their total income. Owners of certain types of businesses, including sole proprietorships, partnerships, and C-corporations, may qualify for this money-saving deduction.

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’ many resources surrounding the qualified business income tax deduction.

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

• Employee Retention Credit (ERC)
• 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.

With all of your documentation and information in hand, you’re now ready to start calculating your taxes and deductions. As previously mentioned, you’ll need to calculate your taxes based on your legal structure. Use your financial documents and other records to identify your revenues and expenses. Then, it’s time to tally up the deductions applicable to your business to lower your taxable income.

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, Amortization and Depreciation
• Schedule E, Supplemental Income and Loss

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.

Even if you plan to prepare and file your taxes yourself, it’s never a bad idea to have an accountant review your return. An accountant can spot errors in your return, helping you avoid paying IRS penalties. An accountant can also identify potential deductions and expenses that could lower your tax liability.

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.

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: Income and expenses are recorded only when the transaction is complete, and money has exchanged hands.
• Accrual Accounting: All transactions are recorded as soon as they occur. The transaction does not have to be complete before it is recorded.

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.

With accounting software, you can easily access transactions, separate business and personal expenses, and maintain accuracy when filing your tax return.

Many accounting programs also offer tax support, providing additional resources and help for tax time. Don’t have accounting software? Start your search by checking out our picks for the best accounting software for small businesses.

To apply for the WOTC credit, your business must provide new hires with Form 8850 to determine their eligibility as one of the ten targeted groups.

If they are eligible for the credit, you have 28 days from the employee’s start date to complete the employer’s section of Form 8850. Once eligibility has been determined, you must fill out Form 5884 or Form 3800 to apply for the credit.