How to Do Small Business Taxes: The Only Guide You Need to Read
There are two things in life that are certain: death and taxes. Your company’s ability to remain compliant can help you save thousands, sometimes millions, in tax penalties.
If you’re looking to learn how to do small business taxes, search no further. Here is a guide to understanding small business taxes based on the structure of your organization.
Sole Proprietor Tax Return
A sole proprietor is anyone who operates a business without setting up a business entity. The business is automatically treated as an additional stream of personal income and is included in your personal tax return.
Sole proprietorships are always owned and operated by one person. This makes filing fairly easy because you don’t need anyone else’s financial information to get your tax return completed.
Profits from your business are taxed at your personal income tax rate. Sole proprietors are responsible for paying self-employment taxes in addition to income tax.
Self-employment taxes cover the cost of your medicare and social security expenses. All business income for sole proprietors is reported on a Schedule C or Schedule C-EZ with Form 1040.
Many sole proprietors opt to pay quarterly estimated taxes if they aren’t using a payroll service to deduct these taxes with each paycheck. Use Form 1040-ES to figure out what you need to pay in self-employment taxes if you don’t use a service that can do the work for you.
Partnership Tax Return
Any business operated by two or more owners is called a partnership. The two common types of partnerships are general and limited.
Partnerships file Form 1065 that details business operation costs like income, deductions, gains, depreciation, and losses. Like sole proprietors, partners are responsible for both income taxes and self-employment taxes.
Partnerships enjoy pass-through taxation which means they are only taxed on their income and not subject to corporate taxes. This means each partner has to declare a share of the business on a Schedule K-1.
The amount of taxes you pay as a partner depends on your percentage of ownership. For example, if you own 50 percent of the business, you pay 50 percent of the taxes owed.
The same applies to things like depreciation, tax credits, and deductions. Each partner has access to the same percentage of tax write-offs as he owns in the business.
C-Corporation Tax Return
C-corporations are a separate legal entity from its owners. This type of small business is subject to double taxation which means paying corporate and personal taxes.
The C-corporation tax rate is 21 percent regardless of income or expenses. Shareholders are then taxed on their personal tax returns if they receive profits as dividends.
If your small business is a C-corporation, you file Form 1120. Any shareholder who contributes to the work of the corporation is considered an employee.
The employee’s salary is subject to self-employment taxes. Dividends would be taxed separately at its own tax rate.
It’s common for shareholders to save on self-employment taxes by paying themselves a reduced salary and increasing the amount paid in dividends.
S-Corporation Tax Returns
If your small business is an S-corporation, you file Form 1120S. S-corporations receive pass-through taxation just like partnerships.
Shareholders report business income as well as any losses on personal tax returns. Any business profits are then taxed at the same rate as personal income.
S-corporations don’t pay a corporate tax which means avoiding double taxation. But S-corporations still enjoy perks like dividing business income between salary and dividends.
Any salary you pay yourself with an S-corporation is subject to self-employment taxes excluding dividends. You can lower your income to reduce your tax burden as long as it makes sense for your job title and qualifications.
If you think you’ll owe more than $500 in business taxes for the year, you must pay taxes quarterly.
How to Do Small Business Taxes
IRS filing deadlines vary based on the type of business entity you own. Take the time to carefully prepare your financial documents well in advance of tax season.
Your success in completing an accurate business tax return before the deadline increases if you’re organized. Gather the following records to help the process go smoother:
- Past two year’s business tax returns
- Payroll reports
- Bank statements
- Business credit card statements
- Accounting reports and statements
- Partnership and operating agreements
- Depreciation schedules
These are the documents you’ll reference to complete your tax return documents. Together, they should present the IRS with the full picture of your profits and losses for the year.
Where to File
Small business tax returns are submitted to the IRS via mail or e-file. It is usually much easier to file online using accounting software or the e-file system provided by the IRS.
The biggest upside to filing electronically is finding errors or omissions automatically. With a paper return, you can forget important details and won’t know until weeks later after your return is processed by the IRS.
With an electronic return, the system prompts you if certain information is missing that might cause your return to be rejected. In some cases, the IRS requires businesses to file electronically.
If you’re filing a paper return, read the instructions carefully. Paper returns should be submitted to the address listed for your business entity.
When to Get Help
Knowing how to do small business taxes can help you save on professional fees each year. It’s important to stay updated on tax laws to avoid missing out on tax rate changes and cost-saving opportunities.
Tax consultants can help you determine whether your business entity makes the right sense for your tax situation. For more information or accounting tips, visit our blog for updates.