Forms of Business Taxes
There are generally 3 levels of taxes your business must pay: federal, state, and local. Federal taxes apply to any business in the United States, whereas state and local taxes will vary based on the laws where your business operates. Regardless of what level the taxes are coming from, there will generally be 6 types of taxes you may be subject to: Income tax, which is tax you pay on the income earned by the business; Self-employment tax, which you pay if you are a self-employed business owner; Employment tax, which is also called Payroll tax, is the tax that you deduct from your employees paychecks that goes to things like social security and Medicare; Excise taxes, which are taxes for operating in specific types of goods or services, like airlines; Sales tax, which is the state level tax that you must collect from customers when they purchase goods and services; and property tax, which you pay for any property that your business owns.
Small Business Taxes Based on Entity Structure
Depending on the way you structure your business entity, you will pay your taxes differently. We break them down below:
A corporation owned and run by one individual is known as a sole proprietorship. For the owner of a sole proprietorship, filing taxes is reasonably simple.
As the single owner you can record corporate gains and expenses on your own income tax return instead of reporting your small business taxes on behalf of the company. Your business profits will be taxed as personal income at your normal personal income tax rate. Sole proprietors also pay self-employment taxes, which account for the owners Medicare and Social Security contributions. If you are a sole proprietor, you will file a Schedule C or a Schedule C-EZ with your Form 1040 and pay quarterly estimated taxes. These estimated taxes will account for any additional medicare and social security obligations you may have.
Partnerships are companies owned and run by two or more owners. There are several kinds of Partnerships that you can form, including General, Limited, and Limited Liability. Each have slightly different characteristics so you can choose the form that works best for your venture. . Company owners who are part of the Partnership must pay income taxes, self-employment taxes and quarterly estimated taxes, similar to the sole proprietorship.
Partnerships must file Form 1065, which is an annual report covering the details of the company’s revenue, deductions, gains, and losses, however, Partnerships does not pay any income tax as an entity. Partnerships are subject to “pass-through taxation” so the owners are taxed personally for the profits of the partnership. Therefore, in order to file small business taxes, owners of the partnership file their shares of income and losses on their personal tax returns. These amounts will be shown on a Schedule K-1 form.
If you operate a C-Corp, your company is a legally separate entity from you as the owner. C-corps are subject to what is referred to as “double taxation” the company is taxed for its profits and then when those profits are passed to the shareholders, those profits are taxed as income to the shareholder. Besides profits, other amounts are subject to taxation as well. For example employee salaries are taxed to cover social security and Medicare, and corporate dividends are taxed at a dividend-specific rate. Sometimes the owner can take a slightly lower salary and receive higher dividends to make up for it, though you should be careful with such a strategy, as the IRS requires your salary to be at least reasonable for your position.
S-Corporations are similar to C-corps in that they are legally separate entities from its shareholders. However, S-corps are taxed as pass-through entities, which allows them to avoid double-taxation. Each shareholder reports their share of the company’s profits and losses on their own tax returns and are taxed at regular personal income rates. The S-corp still has filing obligations to account for its financial state, but they do not actually pay anything along with that filing. As with C-corps, the shareholders and employees can strategically structure their profits and income in order to maximize tax benefits, within reason and subject to the regulations of the IRS.
Limited Liability Company (LLC)
LLC’s are a sort of hybrid between all of the entity structures already discussed. LLCs give their owners legal separation from the company, while also being subject to pass-through taxation like a sole proprietorship or S-corp.
When to pay
If you expect to owe more than $1,000 in income taxes for the year, you will have to pay quarterly estimated taxes, no matter what kind of entity you run. For a corporation, this threshold is lower–$500. While individuals pay taxes once a year, businesses must do so quarterly–4 times per year. This means paying more often, but also paying less each time you have to pay.
On top of that, if your business has employees, there are further obligations you must stay on top of. You must deposit federal income tax that is withheld in your employees’ paychecks, unemployment taxes, and social security and Medicare taxes on behalf of the employer and the employee. You can make these deposits on semi-weekly or monthly intervals.
Quarterly Estimated Small Business Taxes
To estimate your quarterly business tax payments, you will need to calculate four things: expected adjusted gross income; taxable income; deductions; and small business tax credits for the year. The easiest way to do this is to refer to your taxes from last year. If this is your first year filing for your business it is a good idea to seek out a tax professional to guide you through this process. After you have compiled these numbers, you simply fill out the IRS Form 1040-ES Estimated Tax Worksheet and file your taxes quarterly.
Depositing Small Business Taxes
As discussed, the various federal taxes you withhold to account for social security, medicare, and unemployment must be deposited regularly to the Government. When you do so, you must also fill out some tax forms including: Form 941 for federal income tax, social security, and Medicare; Form 944, if your employment taxes will not exceed $1,000 for the calendar year; and Form 940 for unemployment tax obligations.
The schedule of your deposits will be determined by your total tax liability indicated on your Form 941. You will deposit monthly if you report under $50,000 during the previous period, and semiweekly if you report over $50,000 during the previous period. Monthly deposits are due on the 15th of the month, whereas semiweekly deposits are due on Wednesdays and Fridays. You can make these deposits electronically through the federal government’s electronic filing system.
Preparing Your Business Tax Returns
If you take the time throughout the year to organize and prepare for your reporting deadlines you can save yourself a lot of time and stress once filing deadlines come around. If you are trying to pull things together a few days before the tax deadline, you are bound to make some mistakes and forget to include some things. Below is a list of documents that you will need in order to file your small business tax returns:
- Accounting documents
- Bank and credit card statements
- Depreciation schedules
- Partnership agreements
- Payroll documents
- Previous year’s tax returns
In addition, you should keep the following documents on record as they will help account for all of the income and expenses of the business. .
- Advertising costs
- Contractor payments
- Checking and savings account interest
- Employee salaries
- Gross receipts
- Insurance premiums
- Office rent (or portion of the rent or mortgage paid on your home)
- Office supplies and equipment
- Phones and other communication devices
- Professional fees
- Returns and allowances
- Sales records
- Transportation and travel expenses
- Unclassified income
Business Tax Deductions and Credits
Based on your business structure, you are entitled to subtract “ordinary and necessary” costs that your business incurs from simply operating. If you can show that the deduction is relevant, you can subtract the deduction from the taxable profits. Essentially, deducting expenses allows you to lower your income, and thus owe less taxes . On top of that, you may be eligible for tax credits as well. Credits are even more advantageous than deductions because the credit applies directly to the taxes you owe, rather than just reducing the taxable income. Not all deductions and credits will be applicable to your business, but it is worth familiarizing yourself with all of them so you don’t miss out on opportunities to reduce the amount of taxes you owe in the future.
Common Tax Deductions
The most common tax deductions you should be aware of are: Vehicle Expenses, such as a van or truck used for the business; Insurance, such as health and malpractice insurance; and Rent, including traditional real estate rent but also rent for equipment and machinery. Other common deductions include startup costs, inventory, and loan interest. Be sure to thoroughly research how these deductions work and consult a tax professional if necessary in order to protect yourself from and avoid an audit.
How to File Your Business Taxes
There are two ways to file your taxes: online or mail. Generally speaking, it is easier to file online, and may be required in some cases. But if you go the traditional mail route, be sure to carefully follow the instructions on the forms, they can be a bit tricky if you are doing it for the first time by yourself.
Business Taxes Accountant
Plenty of business owners undertake their taxes on their own, but there’s also no shame in seeking professional help. Hiring an accountant to help manage your finances can ensure they are handled properly as well as save the business owner a lot of time and energy. Bringing in an experienced accountant can make a huge difference in your company’s finances. They can provide you guidance and strategies to most efficiently run your business and take advantage of all of the benefits and loopholes that are scattered throughout the tax code that you may not have the time to find yourself.
Getting ready for tax season is a yearlong endeavor. Preparing in advance and staying on top of your obligations will save you a lot of time and hassle in the process. Remember to have systems in place to keep tax-relevant documents organized and safe. Keep an eye on deadlines and have a plan for getting everything filed and paid on time. The more robust your planning is, the less you will have to actually do when it comes time to file. Lastly, do not be afraid to seek the advice of a tax professional. You may be leaving money on the table if you try to handle taxes yourself without the proper experience. You may not be thrilled about paying an account to handle your taxes, but you could save yourself far more on the backend by doing so.