Small business tax filing is simple with the right preparation. Learn what qualifies as small business tax deductions and what you need to get started.
Small business taxes are an important part of being a business owner. There's a lot to remember to make sure you file taxes for yourself and your business correctly.
But don't worry! We're here to help explain how small business taxes work so you can focus on what's most important, your business.
With small business resources like this small business tax filing guide, you can keep better track of everything you need to do and all the taxes you need to pay as an entrepreneur.
Whether you're starting a business for the first time or you've been working at it for ages, it never hurts to brush up on everything you should be doing as a business owner.
Owning and operating a personal business is already stressful enough without adding taxes on top of everything. That’s why many businesses, even small businesses, invest in professional tax preparation services.
That way, you can focus on the ins and outs of your business rather than filling out endless tax forms every year.
Even very small businesses like freelancers and independent contractors can benefit from taking advantage of professional tax filing services for their business.
Understanding how business taxes work is an essential first step to knowing how to handle your small business taxes.
As a small business owner, you need to understand all of your federal, state, and local tax requirements, tax obligations, and tax liability.
Having a full understanding of what is required of you will keep you from making mistakes and missing anything important.
Make sure you don’t miss anything important by going over the following small business tax terminology and the things you'll need to file your small business taxes.
Employer Identification Number (EIN)
An Employer Identification Number or EIN is an identification number given by the IRS to a business for tax filing purposes.
Rather than having a social security number, a business would have an employer identification number to use when filing taxes.
Every taxpayer has a social security number that functions as a type of government ID or tax ID when filing taxes. Businesses also need this tax ID number.
Income tax is a tax applied to any income a business or individual earned. Just like how individuals have to file your taxes each year, businesses also need to file individual tax returns and pay income tax.
Almost every state requires that businesses pay income tax on any income the business earned or received that year.
Self-employment tax is a tax applied to self-employment income, which is the income earned by self-employed workers.
Depending on what kind of business owner you are and the structure of your business, you may also need to file self-employment taxes.
This will help you be covered by Social Security or Medicare as a self-employed business owner.
Does your small business have employees aside from yourself? If yes, then your business will need to pay employment tax.
Employment tax is a tax paid by both employees and employers, depending on whether you have 1099 vs W2 employees.
You'll need to file payroll taxes for your employees including Social Security taxes, Medicare taxes, federal income tax withholdings, and federal unemployment tax (FUTA).
Excise taxes are taxes imposed during manufacturing, sale, or use to a specific good or service. These goods and services could include things like tobacco, gasoline, or alcohol.
If your small business sells or manufactures certain products or uses certain types of equipment, facilities, or products, then your business could be subject to something called excise tax.
Property tax is a tax applied to the value of real estate or other property paid by property owners. If your business owns property, then that property could be subject to property taxes.
For instance, if you own an office building for your business, then your business might need to pay property taxes on that building.
Sales and Use Tax
Sales and use tax is a tax applied to the sale or use of goods and services that customers pay upon purchase.
Depending in the state your business operates in, your business may need to pay taxes on the sale of the goods and services you offer your customers.
This can also depend on what goods or services your business sells.
How to File Small Business Taxes
If you own a small business, then when tax season comes around at the beginning of each year, you need to remember not only to file your personal taxes, but your small business taxes as well.
But don't worry! We'll help you understand each of the simple steps to filing small business taxes this year.
Step 1: Gather Small Business Tax Forms
Gather together all the small business tax forms that relate to your business. You'll need all of these tax documents in order to file your small business tax return.
Examples of these tax documents include:
This form is your business's application for an Employer Identification Number (EIN). This number will act as your business's tax ID number.
Form 1040 Schedule C
This form will report to the IRS all of your business's annual income and loss, much like how the 1040 Tax Form reports income for individuals.
Depending on the size and type of business you have, you might also need to fill out a different 1040 Tax Form Schedule like Form 1040 Schedule C-EZ, Form 1040-ES, Form 1040-SE, or 1040 Schedule F Tax Form if you're a farmer.
This form reports the annual income, profit, loss, deductions, and tax credits specifically for an S corporation.
This means that your business has elected to be taxed under Subchapter S of Chapter 1 in the Internal Revenue Code.
If you are a shareholder of an S corporation, then you'll also need the 1120S Schedule K-1 Tax Form when you file taxes.
These are some of the basic small business tax forms you should be aware of, but there are many others that might also apply to your small business:
- Form 1045
- Form 720
- Form 4562
- Form 8829
- Form 5329
- Form 8283
- Form 8606
- Form 8903
- Form 7004
Step 2: Find the Right Tax Return Filing Form
Which tax return form your business should use depends on what kind of business you operate.
Schedule C Tax Form
The Schedule C tax form is used by sole proprietorships, freelancers, and independent contractors to report their business income and expenses to the IRS.
Sole proprietors are where the business owner is responsible for paying income taxes on the profits of the business.
This form is filed as part of the individual's personal income tax return and is used to calculate the net profit or loss of the business.
The Schedule C asks for information such as income, cost of goods sold, and various expenses such as rent, utilities, supplies, and advertising.
The net profit or loss from the Schedule C is then carried over to the individual's tax return form.
1120 Tax Form
The 1120 tax form is used by corporations to report their income, expenses, and taxes to the IRS. A 1120-S Tax Form is used if your business is an S corporation.
This form is filed separately from the individual income tax return and is due by the 15th day of the third month after the end of the corporation's tax year (which is December 31st).
The 1120 form asks for information such as the corporation's name, address, and EIN, as well as its income, deductions, and credits.
The form is used to calculate the corporation's taxable income and the amount of tax owed to the IRS. The tax rate for corporations varies depending on the amount of taxable income.
Step 3: Fill Out and File Your Business Tax Return
Once you have all your small business tax documents gathered and you know which business tax return, you're supposed to use, you can get to work on filling out the Schedule C or 1120 Tax Form.
Small Business Federal Tax Payments
Small business federal tax payments refer to the taxes a small business pays to the federal government. Paying federal taxes is one of the primary small business laws you'll need to know for tax season.
These taxes can include things like income tax, self-employment tax, employment tax, excise tax, and more.
Small businesses are required to make tax payments throughout the year, usually on a quarterly basis. These payments cover income taxes, Social Security and Medicare taxes, and additional taxes like self-employment tax.
The payment amounts are based on the estimated amount of taxes owed for the year. Small businesses can use IRS Form 1040-ES to estimate and make these payments. Filing late or paying late can result in penalties and interest charges.
Small Business Tax Deductions
Tax deductions for small businesses can really help cut down expenses each year. After all, owning and operating a business, no matter the size, can be a lot of work.
Thankfully there are small business deductions that you might qualify for like the following:
Energy Tax Incentives
Some states will offer tax incentives for making your business more energy efficient.
Not only can this help make your business and the planet better, but you can potentially get some great tax incentives for your efforts.
Disaster Tax Relief
If your business has been the victim of a major disaster, natural disaster, or emergency, then your business might be eligible for special disaster tax relief.
Deductions for Charity Donations
Does your business donate to charities? Does your business have nonprofit operations or charity efforts? Charitable efforts like donations are often eligible for deductions, so long as they meet the IRS's requirements.