How To File Your Small Business Taxes And Pay Them

Filing small business taxes doesn’t have to be complicated. You can use this guide to file your small business taxes this year, so no need to worry we got you covered.

 

Gather your business records

Make sure you have all of your relevant business documents on hand before you start anything. You’ll need different things depending on what you’re doing, but here’s what you’ll need to get started: 

• Last year’s tax returns 
• Your EIN (employer identification number) 
• Your SSN 
• Financial statements (balance sheet and income statement) 
• Receipts and Expenses

 

Keep Your Books Up to Date

Keeping your books accurate and up to date is probably the single most important component to having a stress-free tax season. If your books are a mess right now, that’s okay. You can hire us to come in and help you get caught up quickly. Or you can do it yourself with this step-by-step process:

 

1. Record and classify every business transaction from your tax year.

This is the hardest part and may take a long time. But you’ll need to record and categorize every single business transaction from the first day of your tax year back to January 1st. 

You can use accounting software or an Excel template. The important thing is to record the amount, category, date, and a brief description of what the transaction was for.

 

2. Compare your books with your bank accounts

It’s always best to catch any inconsistencies between your bank statements and your accounting records early. So get in the habit of matching transactions on your bank statements with transactions in your business records to make sure everything is accounted for. 

This will help you know that you’ve properly recorded each transaction. You’ll want to do this with your bank statements and credit card statements to make sure you’ve recorded every transaction in your records.

 

3. Create financial statements

For tax time (especially if you’re a corporation), you’ll need to put all these transactions together in the form of a balance sheet and income statement. The reason for this is that you need to know the total amount of income and expenses that you’ve incurred. These amounts will appear on your tax return.

 

4. Collect your receipts and bills

It’s important that you have a detailed record of your business expenses. Invoices sent to customers, business expenses, records of any bad debt write-offs, and vendor accounts are some of the types of receipts, invoices, and records you’ll want to keep track of.

 

5. Submit tax forms for your contractors and employees

You must file tax forms for each person your business employs. If you paid contractors more than $600 in a year, have them submit a W-9, which you’ll use to complete and file Form 1099-NEC with the IRS. You’ll file W-2s for each of your own employees through your payroll service provider. Make sure you have all of the necessary information from your employees and contractors required to fill out and submit these forms.

 

Keep track of your business expenses

To claim an expense with the IRS, you’ll need the following information for each expense:

• • The amount 

• • The date it you bought it 

• • Where you bought it 

• • How you paid for it  

• • The reason for the expense (how it relates to your business) for meals and entertainment expenses.

It is also important to record who attended (both your employees and customers).

Using a spreadsheet or writing on the receipt itself before photographing it, whichever one works better for you. If you get audited, the IRS may request all this information to ensure that the expenses are in compliance with its policies.

 

Securing the funds to pay your taxes

When you run a business, you need to remember that you pay taxes based on the net income you claim.

So if you expect to owe more than $1,000 in taxes in a calendar year, you’ll generally be required to make quarterly estimated tax payments for many types of small business structures-especially sole proprietorships, partnerships, and S corporations.

Make sure that in April, July, September, and January your bank account has enough money to make these payments.

Make sure you have the money to pay your federal income taxes, and one way to this is by saving approximately 25-30% of your net business income. You should keep this money in a separate bank account from the one you use for daily transactions.

 

Depending on your business structure, here are two ways to save this money:

1. For businesses with a consistent income stream: It is easy to create an automatic transfer from a primary bank account to a savings account for paying taxes.

2. For businesses with a fluctuating income stream: Get in the habit of making these transfers manually when you receive payment from a customer if you close big deals infrequently.

With just a little bit of practice, this process will become a streamlined part of your routine in no time.

 

Claim your small business tax deductions

The great news about being an entrepreneur is that you qualify to take advantage of more tax deductions and tax credits than you would as an employee.

Here’s a bird’s eye view of some of the most popular tax deductible business expenses. This is just the beginning or the tip of the iceberg as some would say—check out our article on small business tax deductions for more. 

And your accountant can give you more customized and specific advice on what tax deductible expenses you have in your business.

 

Raw materials

Deduct the cost of the items you had to buy in order to provide the goods and services you sell (e.g., purchasing bulk flour for your pizzeria or ink for your printing business).

Startup costs

Deduct up to $5,000 of startup costs in the first year of your business opening. So this includes any expenses you needed to make before you started running your business. And any startup costs above that amount can be written-off over a 15 year period.

Office/Business Rent

You can also deduct the rent you pay for the place where you do business, such as your office or a kitchen commissary.

Home office expenses

If, instead of a commercial office space, you have a dedicated space in your home where you conduct your business. You can claim part of your rent or mortgage and other expenses like heat, electricity, and insurance.

The amount of money you claim must be proportional to the size of the space you work in. So for example, you could deduct 20% of your expenses if your office is 200 square feet and your home is 1,000 square feet.

Office supplies

Small items for your office (for example coffee, printing paper, pens, etc.) are covered, but bigger items (computers, chairs, desks, etc.) are not because these are considered capital goods.

Business Travel

There are many types of business travel expenses that are deductible. These include airfare, bus passes, hotel costs, local transportation costs between the airport and lodging (such as taxi, Uber), and 50% of the cost of meals while you or an employee is traveling.

Insurance

Deduct any ordinary commercial insurance premiums for premises, machinery and equipment needed to run your business.

Salaries and benefits

You may also be able to deduct the salaries and benefits that you pay to your employees, such as incentive bonuses and insurance premiums.

 

How to file small business taxes

Every type of small business has different tax filing requirements, so the forms you must complete for your business will depend on how you set up your business structure.

The main business structures are:

1. 1. Sole proprietorship
   2. Partnership (includes both limited and general liability)
   3. Limited Liability Company (commonly known as LLC)
   4. S Corporation
   5. C Corporation

We’re going to break down how each of these types of small businesses file their taxes.

 

Filing taxes as a Sole Proprietor

A sole proprietorship is an unincorporated business that has only one owner.

In businesses that fall into this category, there is no legal distinction between the owner and the business entity.

If you are a sole proprietor with no partners, your tax filing is incredibly simple. When you file your annual personal tax return, all you need to do is fill out a Schedule C.

IRS Schedule C is attached to an individual’s 1040 tax return. Basically, it just lets you tell the IRS how much you made or lost.

 

Filing taxes as a Partnership

Partners file Form 1065, and then each member has to attach a Schedule K-1 to their personal tax return, reporting their individual share of the profit or loss for the year.

Form 1065 gives the IRS a summary of the partnership’s profit/loss for the year, but the K-1 is where each member reports and pays taxes on their share of the business income.

 

Filing taxes as an LLC

If you’re the only member of your LLC, then just follow the same rules as a sole proprietor would and fill out a Schedule C when you file your annual personal tax return.

If your LLC has two members or more, it’s only a little bit more complicated. So in this case, you’ll file more like a partnership does. So file Form 1065, then have each member in the partnership attach a Schedule K-1 that displays their share of the profits/losses of the business for the year. This number is then reported on each partner’s personal tax return.

 

Filing taxes as an S corporation

Shareholders must report their share of profits or losses on a Schedule K-1 on their personal taxes if your company is an S corporation or an LLC that has elected S corporation status. The corporation must also file a corporate tax return using Form 1120S. The IRS has instructions on how to fill out Form 1120S, but again, most small business owners will choose to have these forms prepared by a CPA.

 

Filing taxes as a C corporation

If your business structure is a C corporation, or you treat your LLC like one, then you’ll need to prepare and file a separate corporate tax return using the Form 1120, and also prepare your personal tax return. The IRS has instructions for filling out Form 1120.

It can be helpful to read through those instructions and make sure you understand the fundamentals, but most small business owners usually choose to hire a professional to complete the forms for them.

 

Self-employed taxes

The majority of people who work for themselves are either sole proprietors (including independent contractors), limited liability companies, partnerships or S-corporations. All are considered pass-through entities, so your earnings are reported as part of your income.

You must pay self-employment taxes, which include Social Security and Medicare taxes, because you’re your own boss. The overall self-employed tax rate is 15.3% of your income.

 

Payroll taxes

As an employer, you’ll be responsible for some payroll taxes:

• • FICA (7.5% Social Security and Medicare tax)

• • FUTA Federal Unemployment Tax (effectively a 0.6% tax)

• • Collection and remittance of employee income tax

• • State and local tax (varies depending on which state you are in)

Use IRS Publication 15 to calculate how much federal payroll tax you should withhold.

 

How to pay small business tax

Instead of paying tax annually, most small businesses must pay estimated tax quarterly. Simply complete the 1040-ES and send it, along with the cheque, to your local tax office. The IRS Payments Gateway also allows you to pay estimated taxes online or by phone.

Corporations are required to use the electronic federal tax payment.

 

How small business taxes changed under the TCJA

On 1 January 2018, President Trump’s tax reform came into force.

Here are the key changes for US small businesses:

• • The corporate tax rate was reduced to a flat rate of 21%.

• • A 20% tax deduction, known as the QBI deduction (if you qualify), has been offered to all other businesses.

• • The cost of entertaining clients is no longer tax deductible.

• • Office snacks and meals are now 50% deductible. They were 100% deductible.
  • There has been a near doubling in the amount of car depreciation you can write off.