Running a small business is one of the most involved careers one can have. Most of the time, you are focused on the day-to-day concerns of running your business, but the financial aspect cannot be ignored. This financial aspect includes taxes. Taxes owed and small business tax deductions you qualify for can profoundly affect your business’s financial health.
First things first, the business structure you have chosen for your small business will significantly affect how you are taxed.
In a sole proprietorship, your personal and business liabilities and assets are not separated for tax-filing purposes. This is the default business classification.
A partnership is a simplified business structure that can be used for businesses run by two or more people.
Limited Liability Company (LLC)
A limited liability company (LLC) is a middle ground between a partnership and a corporation. Members of an LLC have to pay self-employment taxes for Medicare and Social Security.
If your business is structured as a corporation (C Corp), its activities are separate from shareholders. This protects from liability but requires corporations to pay income tax on their profits, usually at a higher rate. A corporate structure is recommended for larger scale, higher-risk businesses.
In an S corporation (S Corp), some profits and losses can be listed on your and other business owners’ personal income taxes. This allows for lower taxation. However, not all states allow this, and there are many other restrictions that apply to S Corps, such as having a maximum of 100 shareholders.
For tax purposes, an international business is one that is either foreign and conducts business activities within the U.S. or vice-versa. International businesses are required to operate within the Foreign Account Tax Compliance Act (FATCA).
Small Business Taxes
You are responsible for paying both federal and state taxes for your small business’s operations. Small business tax rates can vary from state to state, so it is essential to check with your state’s Department of Revenue. Typical small business taxes include:
Like personal income taxes, some small businesses pay taxes on the net income, with variations depending on business structure.
If you have employees, you are responsible for paying payroll taxes, which include:
- Federal Income Tax Withheld from Employees
- Federal & State Unemployment Taxes (FUTA & SUTA)
- Employer and Employee Social Security and Medicare Taxes
Unlike most taxes, the IRS requires small business owners to make deposited payments for these taxes at least once a month.
If you’re self-employed or a sole proprietorship, you will need self-employment taxes to contribute to your social security and Medicare benefits.
Your business may be required to pay excise taxes on specific activities, sales, or payments. For example, if your company uses truck tractors on public highways or sells lottery tickets, you may be required to pay excise taxes.
Your business may be obligated to collect and pay sales taxes for the goods or services you provide. In addition to federal sales taxes, you may also be required to pay state sales taxes, which can differ depending on th county or cityin which you operate.
If your business owns real property, fixed land, and buildings, you’ll have to pay property taxes. Taxes are paid on the assessed value, not the fair market value. The assessed value is determined by the local taxing authority, which will provide you with documentation and a tax bill based on their calculation. The amount you pay in property taxes largely depends on where your real estate is located.
Small Business Tax Deductions
Write-offs for Business Operation Costs
There are several costs that are tied to business operations that you can deduct:
- Employee Pay
- Retirement Savings Plans
- Insurance — Most businesses have general liability, property, and workers’ compensation insurance, but this can include any insurance necessary for your business, trade, or profession.
- Interest Expenses
- Certain Taxes — Federal, state, local, and foreign taxes paid as part of business operations.
Other Common Deductions
- Business use of your home (mortgage insurance, interest, utilities, repairs, and depreciation)
- Professional fees
- Pension and profit-sharing plans
- Business use of your car (depreciation or lease payments, gas and oil, tires, repairs, tune-ups, insurance, and registration fees)
- Legal fees
- Professional development and training fees
- Tools and software
- Travel ( necessary expenses such as transportation, baggage shipping, meals, lodging, etc.)
If you’re planning on claiming small business tax write-offs, make sure that you have the necessary documentation to back it up.
Partially Deductible Expenses
Not every expense is fully deductible, but you may be able to deduct other expenses partially. For example:
- Only up to $25 can be deducted for gifts per client or customer
- Up to 50% of the cost of meals and entertainment can be deducted
- Luxury water transportation can be deducted up to twice the highest federal per diem rate
Restrictions and Exceptions
Personal expenses cannot be deducted as business expenses, but in some cases, if you use something both personally and for your business, you may be able to write off a portion of the cost. The IRS also has strict guidelines on which business expenses and how much of each cost, you can write off. Keep in mind; you are not able to deduct expenses that are considered “lavish or extravagant.”
Filing Your Small Business Taxes
Depending on the type of business you operate, you may have different tax forms and filing deadlines.
Which Forms Do You File?
For your federal income taxes, you should file based on your business structure:
- Sole Proprietorship: Form 1040, report business income and losses on Schedule C
- Partnerships: Form 1065
- LLC: Form 1065, unless electing to be treated as a corporation, then Form 8832
- Corporations: Form 1120
- S Corporations: Form 1120S
Form 940 should be used for federal unemployment and Form 941 for quarterly employment taxes (Social Security and Medicare).
Small Business Tax Filing Deadlines
Corporations, sole proprietorships, and single-member LLCs adhere to the April 15th deadline. If you operate a partnership or an S corporation, you will need to file your taxes by March 15th instead. Since this is an entire month earlier than you’re used to, it can be easy to forget.
Paying Your Small Business Taxes
The first time you pay taxes for your small business, you will need to establish the tax year that you will operate under, even if you were not in operation for the entire year. Often, business owners choose to follow the calendar year for simplicity, but specific accounting needs might interfere. If necessary, you can change your tax year by filing Form 1128.
As a small business owner, you’ll need to make many tax payments throughout the month and year. Business owners are required to make estimated tax payments four times per year. You’ll also need to make frequent deposits for employment taxes.
Deposits for Employment Taxes
Small businesses are expected to deposit employment taxes from the following:
- Federal income tax withheld
- Social Security and Medicare taxes
- Additional Medicare taxes that exceed the threshold amount
- Federal unemployment taxes (FUTA)
- Self-employment taxes
Estimated Tax Payments
You will only need to make quarterly payments if your business owes $1,000 or more in income taxes. However, if your business is classified as a C or S Corp, you’ll need to make estimated payments if you’re expected to owe $500 or more in taxes.
Quarterly estimated taxes are due:
- April 15th
- June 15th
- September 15th
- January 15th (of the following tax year)
To calculate your estimated tax payment, use Form 1040-ES.
If you need help with your taxes, sign up now for a free consultation!