The Complete Beginners Guide To Small Businesses Taxes
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.
Need help with small business taxes? If you’re filing tax returns for a small business, we’ve got you covered. Business taxes can include complex rules and significant penalties for errors, so it’s important to get corporate taxes right the first time around.
This guide will break down everything you need to know about small business taxes, including which taxes you have to pay, when they’re due, and how to use deductions.
Table of Contents
- What Are Small Business Taxes?
- How Much Do I Have To Make To File Taxes?
- What Types Of Taxes Does My Small Business Have To Pay?
- When Are Taxes Due?
- What Are Business Tax Deductions?
- Do I Need An Accountant To Do My Taxes?
- How To Calculate Small Business Taxes
- How To File Small Business Taxes
- What Are Corporate Tax Audits?
- The Bottom Line On Small Business Taxes
- Small Business Tax FAQs
What Are Small Business Taxes?
Small business taxes may include federal and state income taxes, payroll taxes, excise 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.
How Much Do I Have To Make To File Taxes?
Generally, small business owners must file tax returns when they earn $400 or more in self-employment wages. However, for most pass-through business entities, including sole proprietorships, S corporations, and partnerships, business earnings are taxed as personal income.
Whether you have to file personal income taxes depends on your filing status, income tax withholding, and gross earnings, as the filing thresholds differ based on these factors.
Learn more about how much you have to earn to file taxes.
What Types Of Taxes Does My Small Business Have To Pay?
Small businesses have to pay federal, state, and local level taxes related to the small business’s operations, including payroll taxes, income taxes, and property taxes when applicable. A full list of business taxes includes:
- Income Taxes
- Estimated Quarterly Taxes
- Federal Income Taxes
- Social Security & Medicare Taxes
- Federal Unemployment Taxes
- Self-Employment Taxes
- Excise Taxes
- Business Property Taxes
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 own income taxes, alongside withholding and paying income taxes from your employees’ paychecks.
Both W-2 employees and 1099 contractors must file an income tax return on income from the previous year. If no taxes were withheld (as in the case of someone that receives a 1099-NEC) 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, 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.
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.
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.
W-2 employees typically have the correct amount for taxes withheld from their earnings. However, these taxes are not automatically withheld, if you are self-employed, an independent contractor, or a small business owner. 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.
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 2023, the quarterly tax deadlines are as follows:
- April 17, 2023
- June 15, 2023
- September 15, 2023
- January 15, 2024
If your business has employees, add employment taxes to your list of business taxes. Employment taxes are also commonly referred to as payroll taxes.
There are several different types of employment taxes. Those 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.
- Social Security Tax: A portion of the employee’s earnings are withheld and deposited for social security at a 1.45% rate with a $160,200 wage base limit. Employers must also pay a 1.45% out-of-pocket to match this amount.
- Medicare Taxes: Medicare taxes are taxed at a 6.2% rate, plus an additional .9% for those earning over $200,000.
- 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.
Withholdings are then deposited by the employer — you — 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
If you’re self-employed, social security, medicare, FUTA, and federal and state income 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.
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 into 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.
Business Property Taxes
Small businesses that own real estate property may be subject to property taxes on the property’s assessed value. As property taxes are collected at the local level, 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. As with real property taxes, business personal property tax rates vary based on location.
When Are Taxes Due?
Annual personal income taxes are typically due by April 15th of the following tax year. 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|
What Are Business Tax Deductions?
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. It’s the money you have to put into your small business to keep things going.
For example, if your business requires you to travel, you may be able to deduct travel expenses, including gas, airfare, train fare, and more. Similarly, if you run your business from home and must maintain a separate home office space, you may deduct the cost of that office space from your taxes (though, it’s a little more complicated than that).
Fortunately, there are many small business tax deductions available to small business owners. If you use business tax deductions wisely (and legally) tax time won’t be as financially draining.
Learn more about small business tax deductions.
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.
How To Calculate Small Business Taxes
To calculate small business taxes, you’ll need to know your business structure and which taxes your business is liable to pay. 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. 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?
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. Prior to 2017, the corporate tax rate was based on taxable income and ranged from 15% to 35%.
How To Calculate C-Corporations Taxes With Form 1120
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 pass-through businesses, 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’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.
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
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 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.
First-time filer? Learn more about filing small businesses for the first time.
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
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 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.
Not sure what you need to bring? Check out our small business tax checklist.
What Are Corporate Tax Audits?
Corporate tax audits are IRS-led assessments of corporate tax returns and are used to verify the accuracy of corporate tax returns.
In many cases, the IRS will audit a business on a completely random basis as a part of their research efforts to generate tax return statistics from a broad selection.
In other cases, there’s something wrong with your business’s tax return or someone associated with your business filed a conflicting tax return that requires additional scrutiny.
How To Avoid Your Business Taxes Being Audited?
To avoid business tax audits, accurate filing and record-keeping are required. However, as some tax audits are conducted on a random basis, it’s impossible to completely avoid them. If your business tax returns are audited, the IRS will reach out to you via mail and will typically ask for documents that support the claims on your returns.
You should be able to produce supporting documentation if you have kept records for the recommended minimum of at least three years (though, in rare cases, the IRS may audit returns that are older than that).
Ideally, you and a tax professional should go over your returns to review for accuracy and completion before it is turned in. If not, there’s a chance that your business return may contain errors that trigger an audit. Accuracy is key.
Learn more about how to avoid a tax audit.
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.
Good luck, and happy filing!