A guide to preparing for tax season as a small business
Tax season can be stressful for anyone. The pressure is huge when you own or run a small business. We believe a concise checklist will help you accomplish small business tax preparation with finesse.
Most people are far from excited about tax season. The paperwork, the calculations, and the entire process in general triggers anxiety in some of us. However, a vital part of adulting is filing taxes. We do it for personal finances like everyone else! As a business owner, you also have to file taxes for your small business.
How do I prepare my taxes for my small business?
Business taxes aren’t quite like personal taxes as there are several other factors to consider. Our list of small business tax preparation tips aims to provide guidance and direction to small business owners. Let’s take a look:
Identify the type of business tax return you’re required to file
When preparing taxes, the first task on your agenda is knowing what type of taxes you need to file and what are the necessary forms.
There is no one-size-for-all type solution for small businesses. It comes down to your business structure.
For instance, if you’re a single owner (sole proprietor), you need to pick Schedule C and attach it to Form 1040. Schedule C reports the money you have earned or lost from your business in the concerned tax year. If you’re in a partnership, you need to file Partnership Income and attach it with Form 1065. If your business is a multi-member LLC, you need to use Form 1120. Here’s a full list:
|Sole Proprietor||Schedule C filed with Form 1040|
|C Corporation||Form 1120|
|Partnership||Form 1065, Schedule K-1,and Form 1040|
|S Corporation||Form 1065|
|Nonprofit Organization||Form 990|
|Limited Liability Company||Schedule C, & possibly Form 1120, 1120-S, or 1065|
Additional information regarding tax forms for various business structures can be found here.
Know the types of business taxes
To organize and prepare taxes for a small business, you need to know the different types of business taxes. There are five types of business taxes. They are:
- Income tax
- Self-employment tax
- Estimated taxes
- Employment taxes
- Excise tax
Let’s take a closer look to expand on each of these five common business taxes.
1. Income tax
This depends on the income earned by a business and is paid at the federal and state levels. Tax requirements vary by type of business entity or business structure. For example, C corporations pay a federal income tax rate of 21%. Also, state income tax differs from state to state. You need to find out your local tax rate and calculate accordingly.
2. Self-employment tax
Business owners are considered to be employed at their own business. Hence, when you make over $400 in your business, it is seen and should be reported as income. You are required to pay self-employment taxes on the same. The current rate is 15.3% which can be split into 12.4% for Social Security and 2.9% for Medicare.
3. Estimated taxes
These are quarterly payments that businesses are required to make. For C corporations, you owe estimated taxes if you’re expected to owe more than $500 in taxes. Other business structures must pay the estimated taxes if they owe over $1000. For more information, see this.
4. Employment taxes
Also known as payroll taxes, a few popular employment taxes are Social Security and Medicare taxes, state and federal tax withholding, federal unemployment taxes etc. Employers are responsible for deducting Social Security and Medicare from paychecks and paying a part of these taxes. Federal and state income tax withholding depends on the W-4 allowances claimed by an employee. As a business owner, you might have to pay federal and state unemployment taxes if applicable.
5. Excise tax
A business owes excise taxes if it performs functions like heavy trucks or trailer sales, liquor sales, cigarette sales, fuel sales, lottery tickets sale, communication services etc. For additional information, refer to what the IRS has to say about excise tax.
All the above are important considerations when conducting small business tax preparation.
A vital element in small business tax preparation is knowing the deadlines. We recommend penciling important tax deadlines in your calendar without fail. As a business owner, you need to be aware of due dates for your taxes. Deadlines depend on the business entity.
Just like personal tax returns, business entities like sole proprietorships, single-member LLCs, multi-member LLCs that are taxed as corporations, and corporations need to file by April 15.
Partnerships, S Corporations, and multi-member LLCs are required to file taxes by March 15. In case a deadline falls on a holiday or weekend, the next business day is considered as the last day to file.
Small business tax preparation checklist
Gather essential documents and necessary information like:
- TIN (Taxpayer Identification Number)
- SSN (Social Security Number) or Federal Employer Identification Number (FEIN)
- Income statements
- Expense receipts
- Bank statements
- Payroll records
- Previous years’ tax returns etc.
Possibly the most labor-intensive step of small business tax preparation is collecting all information and documentation in one place. It includes a lot of details and requires you to be meticulous.
- Step one: First of all, find your TIN (Taxpayer Identification Number).
You’ll need it to help the IRS identify your business. In some cases, you might be able to use your SSN (Social Security Number) or Federal Employer Identification Number (FEIN).
- Step two: You’ll need to ascertain your income from your income statement.
This shows income, expenses, and bottom line. Consult your balance sheet to see your assets, liabilities, and equity.
- Step three: Along with these financial documents, you also need to gather supporting documents.
Collect supporting documents like receipts, bank statements, payroll, previous year’s tax returns etc.
Figure out tax deductions and credits
Nobody likes to overpay their taxes. That’s why it is essential to seek out the deductions you can qualify for and lower your tax obligations. As a business, you can claim tax deductions for business expenses such as:
- Home office
- Office supplies
- Use of transportation
- Charitable contributions etc.
Some tax credits that businesses can qualify for are:
- Health insurance
- Work opportunity
- Retirement plan startup costs
- Research and Development
- Childcare etc.
Seek a professional accountant
At times, managing your finances may benefit from the expertise of a qualified professional. Once you’ve organized all your financial records and made decisions regarding credits and deductions, it could be advantageous to seek the counsel of an accountant. They can assist in validating the accuracy of your financial returns and may even uncover additional deductions and credits you might have overlooked.
While the prominent accounting firms in the United States, such as Deloitte, Ernst & Young, KPMG, and PwC, serve thousands of businesses annually, your company is likely smaller in scale. You may not have the vast number of employees and complex tax forms to navigate during tax season. Consequently, we’ve compiled a list of professional accounting service providers tailored to the needs of your small business:
- Accounting Center Inc.
- Dunning &Associates CPAs
- H&R Block
- Jackson Hewitt
- Larson &Company PA
- Tax Pros Inc.
- TurboTax Live
How to file taxes for small businesses
Once you’ve successfully executed the above steps, the only thing left to do is file those taxes. You have the option to e-File or paper file. It is to be noted that e-Filing is a speedy process compared to paper filing, and you receive quick confirmation when your filing goes through.
Paper-filing is easy-to-do and usually secure, but it is a time-consuming process. To paper file taxes, see this.
When you choose e-filing, you get greater accuracy and faster processing. The IRS website calls e-filing “the easiest way” to file taxes. You can visit their website or call their customer helpline to get started with e-filing.
We hope our small business tax preparation checklist serves as a quick reference when you get ready for tax season. Filing taxes isn’t an easy task for everyone, and we try to break down the process into simple steps. These easy-to-follow steps should serve the purpose of easing tax season for you.
Nobody knows your business the way you do. You’re aware of the ins and outs of your small business better than anyone else. Necessary information is included in our checklist, but we always recommend doing some research on your part. Let’s make filing taxes as effortless as possible. Happy filing!
Anna Reeve, MBA