Back to Business Accounting

Small Business Taxes: Definitive Guide on When and How to File

Business Accounting
May 08 2019 • Author: Jacob Dayan
Out of all the headaches small business owners are faced with, taxes are usually the worst. From the many and complicated small business tax rates to the mandatory estimated tax deposits, and the less-than-obvious, money-saving deductions… the vast sea of information is enough to make your head spin. To make matters worse, many business owners feel pressured to save money and pad their company margins by opting out of professional tax assistance and choosing instead to learn small business tax preparation themselves. It can seem like quite the challenge, but we’re here to help. Click directly on a question below to jump to the answer you’re looking for, or read end to end for a full overview of how to file taxes for a small business owner.

How much does a small business pay in taxes?

According to a study published by the Small Business Administration (SBA), the effective small business tax rate is 19.8% on all income. (Note that “effective tax rate” just means the rate as a percentage of a business’s net profit or the amount of money made over the course of the year.) There are a couple problems with this finding, however:
  1. The 19.8% figure reflects the average effective tax rate paid by all small businesses, which differs by entity. The SBA study reports that, on average…
    • S-Corporations (S-corps) pay 26.9% (the majority of small businesses are S-corps)
    • Partnerships pay 23.6%
    • Small C-Corporations (C-corps) pay 17.5%
    • Sole proprietors pay 13.3%
  2. Small business tax deductions affect an entity’s tax liability. For example, even though the 2019 small business tax rate for a C-corp is a flat 21%, the effective tax rate averaged out to 17.5%.
  3. The study (2009) is outdated and based on an analysis of IRS data from 2004. Within the past decade, there has been a lot of tax reform and the passing of new laws which directly affect how much a small business pays in taxes. Namely, per the result of the Tax Cuts and Jobs Act, a pass-through entity can take a qualified business deduction (QBI) of up to 20%.
Before discussing how to file taxes as a small business owner, let’s take a look at the various federal tax obligations to give you a better picture of the tax rate you can expect to pay.

What taxes do small businesses pay?

One of the (many) reasons business taxes are so confusing, is because there are several different types of federal income taxes that businesses are required to pay to the IRS. Which one(s) you’re responsible for depends on how your business is structured, what services you offer, whether you have employees, the amount of your company’s income, its deductions, and its tax rate for a given year.

Small Business Tax Obligations

According to the IRS, there are five general types of business taxes, plus two additional state-specific taxes an organization might be subject to pay. The type of business you operate determines which taxes you have to pay and when you have to pay them.

1.Income Tax

All businesses must file an annual income tax return (except partnerships, which file an “information return”). The form you will use to file your taxes depends on how your organization is structured, so refer to the IRS Business Structures if you’re not certain. Small business income tax is a pay-as-you-go tax, which means that you’re required to pay taxes as you earn income throughout the year. Your employees will typically have their income tax withheld from their paychecks, but as a business owner, you will be responsible for your own withholdings. If you do not pay your tax through withholding or do not pay enough tax that way, you might be required to pay an estimated tax. Otherwise, you may pay any tax due at the time you file your return.

2.Estimated Tax

In most cases, organizations are required to pay business tax on income and self-employment with “estimated” payments throughout the year. Estimated taxes apply to individuals—including sole proprietors, partners, and S-corp shareholders—who expect to owe tax of $1,000 or more after filing their annual return. Corporations typically need to make estimated tax deposits if they expect to owe $500 or more after filing their return.

3.Self-Employment Tax

Self-Employment (SE) tax covers contributions to Social Security and Medicare. Individuals who work for themselves must pay SE tax if their net earnings from self-employment were $400 or more (there are special rules and exceptions for aliens, fishing crew members, notary public, church employees, state or local government employees, foreign government or international organization employees, etc.).

4.Employment Taxes

Once you hire employees, you’ll become responsible for additional small business employment taxes  including employees’ federal income tax withholding, their Social Security and Medicare taxes, as well as your federal unemployment tax.

1.Excise Tax

Depending on the operation of your business, which products you manufacture and/or sell, which kinds of equipment and products you use, and the payment you receive for certain services, you might be required to pay an additional excise tax.

2.Sales Tax

An accounting service can help you determine whether you are a taxable entity in your state (called a tax nexus). If so, you must register with your state’s taxing agency and collect information on which of your products and services are considered taxable, as well as the tax rate you must charge and any special requirements for online sales.

3.Property Tax

If your business owns property, you might be required to pay property tax on the value of your real estate (land and buildings) in the same way individuals are required to pay property tax on the value of their homes.

What affects the small business tax rate?

Unfortunately, figuring out your tax liability is not as simple as using a small business income tax calculator and multiplying your net earnings against your rate. There are several factors that could affect your final tax bill, and these variables make careful small business bookkeeping incredibly important.

Factors Affecting Small Business Taxes

● Net Operating Losses

A company takes a net operating loss (NOL) when their allowable tax deductions are greater than its taxable income, which can generally be used to recover past tax payments. The government believes that businesses deserve some form of tax relief when they lose money, so they may apply the NOL to future income tax payments, thereby reducing the overall bill in the upcoming year(s).

● Tax Credits

Small business tax credits are usually better than tax deductions because they allow you to subtract the amount of taxes you owe on a dollar-for-dollar basis. Credits may also be refundable, meaning that you get a refund even if it’s more than what you owe.

● Tax Deductions

Whereas tax credits reduce your ultimate tax liability, tax deductions lower the overall portion of your business’s taxable income. They also help lower a business’s tax bill, even though the impact might be less significant.

How do small businesses pay less taxes?

Although an NOL can help lower your effective small business tax rate, it should never be your business’s goal to lose money. If you want to reduce the amount you pay in taxes, you should prioritize and pursue the various tax credits and tax deductions available to your organization.

Small Business Tax Credits and Deductions

Don’t leave money just sitting on the table—there are tons of tax credits and deductions you might be eligible for. If your small business uses a vehicle, the IRS standard mileage rate for use of a car, van, truck, or pickup is 58 cents per business mile driven. Additional business tax credits and deductible business expenses worth researching include:
  • General Business Credit
  • Investment Credit
  • Work Opportunity Credit
  • Disabled Access Credit
  • New Markets Credit
  • Costs of Goods Sold
  • Home Office or Rent Expense
  • Taxes
  • Insurance
  • Employees’ Pay

Do I file my personal taxes with my business taxes?

Yes, but how you do so depends on the structure of your business. Owners who have set up an S-corp, an LLC, or an unincorporated sole-proprietorship are considered “pass-through entities”. Under this structure, business profits are passed through to the owner’s individual tax return, where he or she would then pay tax on that income using the information provided on Schedule C included with the owner’s Form 1040. Business partnerships must first file IRS Form 1065, after which the profits will pass through to the independent partners via Form K-1 on their personal tax return. If you are a shareholder of a C-corp or an S-corp, you must file Form 1120 or Form 1120-S before reporting your share of personal business income using Form K1.

Can a small business get a tax refund?

Yes. Unlike employees, business owners do not have income tax withheld from their paychecks throughout the year. For that reason, they’re required to pay their income tax periodically during the year by making quarterly estimated tax payments. The amount and date due (April 15, June 15, September 15, and January 15 of the following year) are based on income earned from the past three months. It’s not advised to skip estimated tax payments and wait until tax time to pay what you owe, as the IRS can charge you fines and penalties for underpayment, and you might need to seek out tax settlement services to get out of hot water. It’s better to generously account for all of your small business taxes—including your self-employment taxes—in order to receive money back on a tax refund in April. Be cautious if you’re thinking about an aggressive, year-end tax strategy. Many owners will be frivolous with the amount of tax credits and deductions they claim in order to receive a large business tax refund, but you’d be playing with fire. Small business owners are 2.5 times more likely to be audited by the IRS, so if you’re claiming a tax credit or deduction, be sure to back it up with documented financial proof. Many people use business tax refunds as a form of forced savings, over-estimating their quarterly deposits with the hope of getting a hefty sum from the IRS in return. Keep in mind, though, that this essentially gives the government an interest-free loan for 12 months, during which time your business won’t have access to that money. This kind of business decision could prove to be problematic if you need to tap into savings in the event of an unplanned cost such as equipment replacement or loss recovery. Think of it like a fine balancing act: you don’t want to be penalized for paying too little, but you also don’t want to pay so much extra for a small business tax return that your company hurts without the funds throughout the year.

Can I file my own business taxes?

Yes, you can, but proceed with a note of caution. If you’re like 52% of small business owners who feel like they pay too much in taxes, chances are that you’re less than inclined to shell out more money for professional tax preparation. It is possible to file your own business taxes, but you need to be extremely meticulous when doing so. One error, one missed tax due date, one incorrectly-reported employee can lead to a whirlwind of devastating consequences. If you’re not careful filing your small business taxes, you might end up costing your company far more than what you could have saved by consulting the help of a tax professional. Community Tax is made up of a team of experts who can help you through every step of your small business tax preparation. From the most mundane tasks to the most complicated calculations, enlist the help of our pros and free up your time to pursue what matters most: running your business. We’ll leave no stone unturned in our efforts to find every possible business credit and tax deduction available to you, ensuring you pay the least amount of taxes and get the most money returned. Contact us to learn more about our small business tax preparation and the many ways we can help—the quote is always free!