Opening and running a small business comes with a host of financial obligations large and small. One of the most important things you’ll do as a small business owner is meeting your tax obligations, including withholding taxes from employees’ paychecks, paying estimated taxes, and filing your taxes on time.
At Select Funding, we assist small business owners with the financial aspects of their businesses and that includes helping them secure funding to ensure they can meet their tax obligations. Since business taxes are different and more complex than individual taxes, we’ve created this tax guide on how to file taxes for a small business. Here’s what you need to know.
How Much Does a Small Business Have to Make to File Taxes?
If your business is just getting started, you’re self-employed, or your business hasn’t earned much income, do you still need to file and pay taxes?
The short answer is yes. According to the IRS, self-employed individuals whose net earnings from self-employment total $400 or more must file a tax return.
As of 2021, there are limits for individual income taxes, something that may be important if your business is a sole proprietorship, partnership, or a single-member Limited Liability Company (LLC). If you are single and earned less than $12,550, you are not required to file an individual income tax return. ($12,550 is the standard tax deduction for 2021.)
If you own an LLC or partnership that’s taxed as a corporation, or you own a corporation, then you must file and pay taxes.
When Do You Need to File a Separate Tax Return for Your Business?
The structure of your business is the determining factor of whether you are required to file a business tax return separate from your personal tax return.
Businesses that are organized as sole proprietorships, partnerships, some LLCs, and some S corporations, may be classified as pass-through organizations. What that means is that any income from the organization is passed through to its owners as personal income and taxed accordingly. However, that doesn’t mean you won’t need to file a tax return.
According to the IRS, any company must file a separate tax return unless it is a partnership. For the purposes of taxation, any LLC with two or more members is considered a partnership unless its owners opt to be taxed as a corporation.
There are additional tax filing requirements for corporations. We’ll explain those in the next section.
What Kinds of Taxes Do Businesses Need to Pay?
The types of tax you are required to pay as a business owner are dependent upon your business structure as well as a variety of other factors. Here are some taxes you may need to pay if you own a small business. Let’s start with federal taxes:
- Income Tax. Federal income tax is a “pay as you go” tax, which means that if you are not withholding taxes, you must pay them ahead of time on a quarterly basis.
- Estimated Tax. Estimated taxes are paid on a quarterly basis and apply to businesses and the self-employed.
- Self-Employment Tax. The self-employment tax is the employee’s portion of Social Security and Medicare taxes and must be paid by individuals who are self-employed.
- Employment Tax. Any business with employees must withhold employment taxes, including Medicare, Social Security, federal income tax withholding, and federal unemployment tax.
- Excise Tax. Excise taxes apply to some companies who sell certain types of products and may include environmental taxes, gas & fuel taxes, communications tax, and other taxes.
It’s your responsibility as a business owner to ensure that you pay all applicable taxes in a timely manner.
On the state level, tax law varies depending on where you live and do business. Here are some of the taxes you may need to pay in the state where your operations are based:
- Income tax
- Employment tax
- Sales tax
Sales tax percentages vary by state and if you sell products in more than one state, you may need to file and pay sales taxes in multiple states.
How Do You Prepare Taxes for Your Small Business?
The steps to prepare and file taxes for your small business are straightforward but can seem complicated if you wait until the last minute to do what you need to do. It’s for that reason that many small business owners choose to hire a tax professional to work with them all year long to ensure that they maintain appropriate records, pay all estimated taxes on time, and properly file all state and federal taxes.
Here are five broad steps to help you prepare your taxes.
#1: Gather Your Documents
The first step is to gather any and all documents related to your taxes. These include the following:
- Financial documents, including your Profit & Loss Statement and your bank records
- Tax documents related to your bank, including 1099-INT, which reflects interest paid on your business checking or savings accounts
- Gross receipts for your company’s sales
- Sales records for accrual-based taxpayers
- Receipts for all business expenses
- Payroll records, including expenses related to employee benefits
- Depreciation records
The specific documents required may vary depending upon where your business is located and your business structure, which is why we suggest working with a tax professional instead of trying to file your taxes without assistance.
#2: Gather the Necessary Tax Forms
The next step is to collect the tax forms you need to complete your tax filings. Here again, there are many forms and not all will apply to your business. Here are some of the most common forms that you are likely to need:
- Schedule C (for sole proprietors and single-member LLCs)
- Form 1120 or 1120S (for C and S Corporations, respectively)
- Form 1065 (for LLCs and Partnerships)
- Form 940 (Federal Unemployment Tax)
- Form 941 (employee withholding)
- Form W-2 (employee taxes)
- Form 1099 (independent contractors)
- Schedule SE (self-employment tax)
- Form 1040 (individual income tax)
- Form 720 (quarterly excise tax reporting)
- Form 4562 (depreciation & amortization)
You may require additional forms, including state income tax and state tax forms. You should check with your state taxing authority to ensure you have all the necessary forms.
#3: Check Filing Deadlines
Throughout the year, it’s essential for every small business to know which filing deadlines apply to which forms and to file and pay their taxes accordingly. Some tax forms are required to be filed monthly or quarterly while others require only an annual filing.
For example, Form 1120-F is used to estimate business taxes and must be filed once each quarter. According to the IRS, this form and any taxes associated with it are due by the “15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day.”
Employee payroll taxes must be paid and filed by the 15th day of the month following the payment. In other words, payroll taxes for August must be paid by September 15th, payroll taxes for September must be paid by October 15th, and so on.
#4: Complete and File Your Forms
The fourth step is to complete all forms, attach any necessary documents, and file them with either the Internal Revenue Service or your state taxing agency.
Your accountant or tax professional will help you complete IRS forms, some of which may be complex or confusing. Remember that every tax form comes with published instructions, all of which are available from the IRS or your state taxing authority.
#5: Maintain Thorough Records
The final step is to maintain thorough tax records. While it’s unlikely that you will be the subject of an audit, keeping complete records is the best way to ensure a smooth audit process.
Any documents related to your taxes, including documents that you used to calculate tax deductions and credits, should be stored with your tax documents. At a minimum, you should maintain these records for seven years from the tax year of your return. The IRS has the right to audit within that period.
Tips to Help You Minimize What You Owe
We’ll close with a few tips to help you minimize the amount of tax you owe while still meeting your obligations:
- Work with an experienced tax professional. Hiring a pro will ensure that you get your taxes right without paying more than necessary.
- Take advantage of all tax credits and deductions available to you. Many small businesses pay more than they need to because they miss tax incentives and deductions.
- Take advantage of capitalization and depreciation rules. You may be able to offset some of your taxes by deducting expenses for tangible property or equipment. This tip includes timing the purchase of equipment to maximize your deductions.
- Fund a qualified retirement plan. Employer contributions to some retirement plans are tax deductible.
- Write off bad debts. If you can’t collect an invoice, writing it off toward the end of the year can help you save on your taxes.
These are just some of the ways you can reduce your business tax. Your accountant can help you identify other areas where you can save.
Stay on Top of Your Business Tax Obligations
As a small business owner, it’s your responsibility to make sure that you file all necessary tax forms and make on-time payments to both the IRS and your state taxing agency. To do so, you’ll need money on hand to make estimated tax payments.
Are you in need of small business financing to help you meet your tax obligations? Select Funding is here to help you! Click here to learn about our small business financing options and apply today.
