The Complete Tax Guide For Small Businesses
Need to know how to calculate and file small business taxes? This easy-to-follow small business tax guide will answer all of your tax questions.
Tax season is the time of the year that can strike fear in the hearts of even the most prepared and organized small business owners. Fortunately, we have your back with this complete tax guide for small business.
This guide will help take the stress out of forms, deductions, and taxes you’ve never even heard of before, even if you’re brand new to filing small business taxes. From the different types of business taxes to filing your return, we’ll cover it all so you can go into tax season with confidence.
Table of Contents
What Are Small Business Taxes?
Becoming a small business owner results in a lot of changes, including changes in the type of taxes you pay. In addition to income taxes, you may also be subject to additional taxes, such as estimated quarterly taxes and self-employment taxes. Tax funds are then used by federal, state, and local governments to pay for programs such as Medicare and Medicaid, social security, and public schools.
What Types Of Taxes Does My Small Business Have To Pay?
If you’re new to business taxes, you may not know where to begin. Start off right here by familiarizing yourself with the different types of business taxes you may have to pay. These taxes include:
- Income Taxes
- Estimated Quarterly Taxes
- Federal Income Taxes
- Social Security& Medicare Taxes
- Federal Unemployment Taxes
- Self-Employment Taxes
- Excise Taxes
Anyone who has ever held a job likely has some experience with income tax. Each year, individuals who have earned any form of income — whether it’s through working as a 1099 contractor or as a W-2 employee — file an income tax return for income from the previous year. If no taxes were withheld (as in the case of someone that receives a 1099-MISC) or not enough was withheld, the individual must pay additional taxes to the IRS. Failure to do so can lead to penalties, interest, and even liens and wage garnishment. These tax funds are used to fund federal programs, including law enforcement, national defense, and national debt interest.
Just like employees and contractors, small business owners are responsible for reporting the income they earned for the year. By filing a tax return, the business owner 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: 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, if you made $39,950 for the year and are filing as single, the first $9,950 is taxed at 10%. The remaining $30,000 is taxed at the 12% rate.
In addition to a federal return, small business owners also file a state return (in states where income taxes are collected). This is similar to paying federal income taxes, only the funds go back to the state in which income was earned to fund things including state healthcare programs, state law enforcement, and public schools.
Income tax returns must be submitted on or before April 15. If April 15 falls on a holiday or weekend, the due date is extended to the next business day.
For those that need a little extra time, the IRS offers a six-month extension. Taxpayers must apply for the extension. Receiving an extension does not stop the IRS from assessing late-filing penalties. Therefore, an extension should only be used when absolutely necessary, like needing additional time to gather documentation, dealing with an unexpected event such as illness, or other circumstances. Need an extension? Check out how to file an extension for your small business tax return.
If you expect to owe the IRS at least $1,000 when you file your return, you will need to pay quarterly estimated taxes. As an employee, you don’t have to worry about this in most cases, as money is withheld from your earnings. However, if you are self-employed, an independent contractor, or a small business owner, these taxes are not withheld automatically. Therefore, as you earn money through your business, you will need to pay estimated taxes each quarter. Employees that do not have enough taxes withheld by their employers also must pay estimated taxes.
Corporations that will owe at least $500 at the time of filing a return must also pay estimated quarterly 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. Your payment is also made when the form is submitted. Failure to make quarterly payments — or even paying them after the deadline — will result in penalties and interest.
Estimated taxes are generally due on the same dates each year. If the date falls on a holiday or weekend, the due date is shifted to the next business day. For 2022, the quarterly tax deadlines are as follows:
- April 18, 2022
- June 15, 2022
- September 15, 2022
- January 15, 2023
If your business has employees, add employment taxes to your list of business taxes. There are several different types of employment taxes. Those include:
- Federal Income Tax: Federal income tax isn’t paid out of your pocket, but is taken from the wages of the employee. The amount withheld is determined by using the employee’s W-4 and the IRS withholding tables. Withholdings are then deposited by the employer — you — as outlined in IRS Publication 15 Employer’s Tax Guide.
- Social Security & Medicare Taxes: A portion of the employee’s earnings are withheld and deposited for social security and medicare taxes. You are responsible for paying a matching amount. The amount withheld is based on the employee’s W-4 and can be determined by using IRS Publication 15.
- Federal Unemployment Tax (FUTA): This tax is only paid by the employer and is not withheld from an employee’s paycheck. IRS Publication 15 offers more information about reporting and paying FUTA tax.
If you’ve ever been employed and have received a paycheck stub or W-2, one of the first things you probably noticed was that your earnings were reduced due to taxes. In addition to federal and state taxes, you’ll also see deductions for social security and Medicare taxes.
However, if you’re self-employed, these taxes aren’t automatically taken from your earnings, which is why you must pay self-employment taxes. Self-employment taxes are applied to your social security coverage, which provides you with disability benefits, retirement benefits, survivor benefits, and Medicare coverage.
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
If you are subject to paying self-employment taxes, you will file a Schedule SE with your 1040 when filing your federal tax return. To learn more about self-employment taxes, check out our complete self-employment tax guide.
An excise tax is a tax that is required for the sale of certain goods and services. 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. The consumer is not aware of the amount of the excise tax as they are with sales tax. Instead, the excise tax is simply built-in to the total price of the product or service being purchased.
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 that 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 that 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.
Not every small business will be subject to excise taxes. Excise taxes are applied to products and services including:
- Sport-fishing equipment
- Indoor tanning
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 on a quarterly basis.
When Are Taxes Due?
If you don’t file and pay your taxes on time, you may be subject to interest and penalties, so it’s important to keep up with important tax filing dates. Most tax due dates are the same each year. However, if a date falls on a weekend or holiday, the date is pushed back to the next business day. Here are the important dates you need to mark in your calendar:
|4th Quarter Estimated Taxes (Previous Year)||January 15|
|Individual Income Tax Return||April 15|
|Individual Income Tax Return Extension||April 15|
|1st Quarter Estimated Taxes||April 15|
|2nd Quarter Estimated Taxes||June 15|
|3rd Quarter Estimated Taxes||September 15|
|Individual Income Tax Return (With Extension)||October 15|
Do I Need An Accountant To Do My Taxes?
While it is certainly possible to prepare and file your taxes yourself, there are several benefits to hiring a professional tax preparer or accountant.
Accountants and tax professionals are up-to-date on the latest tax laws, so you won’t have to worry about keeping up with changes in the tax code that could affect your return. Accountants and tax preparers are also experienced; they know what forms your business needs to file and are aware of important tax deadlines to help you avoid unnecessary penalties and interest.
It may be tempting to do your own taxes in order to save money. However, an accountant or tax pro can find deductions that can ultimately save you money. And if you’re already prepared for tax season by using accounting software, running your reports, and keeping up with important documentation, you’ll reduce the number of hours — and the money spent — having a professional prepare and file your taxes.
If you decide that hiring a professional is the best choice for your business, learn how to choose the right accountant.
How To Calculate Small Business Taxes
Now that you know about the different types of small business taxes, the next thing to cover is how to calculate taxes. Even if you plan to hire an accountant, it’s never a bad idea to have an understanding of what you owe and what factors contributed to your tax debt. The way you calculate your small business taxes is based on your legal structure. Let’s take a look at how to calculate taxes as a C-corporation or a pass-through business.
How Taxes Work For C-Corporations
C-corporations are unique in that taxes are first deducted at the corporate level. If dividends are paid, shareholders are required to pay taxes on these dividends. This is known as double taxation. However, this is not always the case. If the corporation does not distribute dividends, the C-corp will only be taxed as a separate business entity. The business must also be profitable for double taxation to occur.
What Is The Corporate Business Tax Rate?
Prior to 2017, the corporate tax rate was based on taxable income and ranged from 15% to 35%. 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.
How To Calculate C-Corporations Taxes
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 distributed dividends, shareholders will be required to pay taxes on these funds. This is reported as income on Schedule D – Capital Gains and Losses.
How Taxes Work For Sole Proprietors, Partnerships, & S-Corporations
Most small business owners have their companies set up as a pass-through business, such as a sole proprietorship, partnership, or S-Corporation. Some LLCs also qualify as pass-through businesses. A pass-through business does not pay corporate income tax. Instead, shares of the company’s profits are “passed through” to the owners of the business. These profits are reported as income and are taxed at the personal income tax rate. Pass-through businesses avoid the double taxation that often applies to C-corps.
What Is The Business Tax Rate For Pass-Through Entities?
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.
How To Calculate Pass-Through Taxes
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 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 2021, the first $9,950 is taxed at 10%. The income over $9,950 to $40,525 moves to the next bracket and is taxed at 12%. The remaining income 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.
How To File Small Business Taxes
By this point, you should have a better grasp of small business taxes. The next step? File your tax return. The internet has made it easier than ever to e-file your taxes, access tax forms and resources, and even connect with tax professionals. Now, let’s take a look at the steps required for filing your small business taxes. Whether you’re doing your own taxes or using an accountant, read through this section so you can be prepared this tax season.
Step 1: Know When Your Taxes Are Due
Most of us think of tax day as April 15. While this is the deadline for filing your federal and state income tax returns, this 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 your taxes on time can result in hefty penalties and additional interest that takes more money away from your business … and out of your pocket. Even if you file an extension on your federal return, you’re still subject to interest and late-payment penalties.
One important thing to note is that even 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.
Now that you know why it’s important to do your taxes on time, take a look at the deadlines every business owner should know. Here is what a normal tax year looks like:
|Tax Type||Tax Deadline|
|Income Tax||April 15|
|Federal Income Tax Extension||April 15|
|Income Tax w/ Extension||October 15|
|Self-Employment Tax||April 15|
|Estimated Quarterly Taxes||April 15, June 15, September 15, January 15 (of the following year)|
|Excise Tax||April 30, July 31, October 31, January 31|
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.
Step 2: Gather Your Business Tax Information
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.
Even if you’re using an accountant, you still must provide your business tax information to have your taxes done accurately. Gathering this information in advance saves you time and makes tax season less stressful. 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 & Business Information: You’ll need to provide basic personal information such as your legal name, address, and social security number. If you operate under a separate business name, you’ll need to provide the name of your business, your business address, and your Employment Identification Number (EIN).
- Financial Reports: You’ll need a few basic financial reports that show your profit or loss, assets, and liabilities. At a minimum, gather your profit and loss report, statement of cash flows, and balance sheet. You can easily run these and other reports from your accounting software.
- Expense Records: If you have business expenses to write off on your taxes, you should have records backing up these expenses. Bank statements, receipts, and bills are just a few of the records that you or your accountant can use when filling out your tax return.
- Deduction Records: Deductions are critical to lowering your tax liability, so you or your accountant need records showing that you qualify for these deductions. This includes receipts for charitable donations, mileage logs, and information about your home office.
- Payroll Information: If you have employees or use contractors, make sure that you have your W-2s, W-3s, and 1099s on hand when filing your taxes.
This is the basic information you need when filing your business taxes. Of course, there may be additional documentation and information required based on your specific circumstances. Check out our post, What Information Does My Accountant Need To Prepare My Tax Return, so you can be prepared come tax time.
Step 3: Don’t Forget Tax Deductions
Saving money helps boost your profits. Think about it — you shop around for the best pricing for your equipment and supplies, and the lowest interest rates for loans and other financing. Why not try to save money on your taxes as well? You can lower your tax debt and keep more cash in your pocket by taking advantage of small business deductions.
There are a number of deductions that you can take advantage of, including:
- Home office deduction
- Mileage and car or truck expenses
- Employee salaries, wages, and benefits
- Startup expenses
- Travel expenses
These are just a few of the deductions that could help your business lower its tax liability. Check out The Complete List Of Small Business Tax Deductions and talk with your professional tax preparer or accountant.
In December of 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 in order 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.
Step 4: Calculate Your Business Taxes
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. Another perk of hiring an accountant is that they will take care of the math for you!
Step 5: File The Correct Small Business Tax Forms
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. 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.
Step 6: Check Everything With Your Accountant
Even if you plan to prepare and file your taxes yourself, it’s never a bad idea to have an accountant look over everything before you submit your return. An accountant can spot errors in your return, potentially saving you hundreds (or even thousands!) in IRS penalties. An accountant can also identify potential deductions and expenses that could lower your tax liability. Worried about the expense? Most accountants work hourly, so being prepared ahead of time and having everything in order is critical to keep your costs down.
The Bottom Line On Small Business Taxes
Small business taxes can be complicated, confusing, and stressful. Even the most organized business owner may feel a sense of dread when tax time is on the horizon. However, you can move into tax season with less stress by understanding small business taxes, familiarizing yourself with forms and requirements, and organizing your records and information ahead of time.
Of course, having an accountant in your corner can also give you more confidence when preparing, filing, and paying small business taxes. We are also in your corner and are here to help! Check out our top small business tax tips and our free downloadable small business tax checklist.
Good luck, and happy filing!