Paying business taxes is an important component of running a compliant small business. Here is information about the types of taxes, how to file correctly online with the IRS, and best practices.
Types of Business Taxes
According to the IRS, businesses can incur four basic kinds of federal taxes. In addition to these taxes, each state requires that businesses pay certain taxes. They include the following:
- Income Tax
- Estimated tax
- Self-Employment Tax
- Employment Taxes
- Social security and Medicare taxes
- Federal income tax withholding
- Federal unemployment (FUTA) tax
- Excise Tax (for certain types of businesses)
For a detailed breakdown of each type of tax, visit the IRS website: Business Taxes.
Business Structure and Taxes
Here are the 6 most common business entities and taxes you might be responsible for. Every business is unique so consult with a tax professional before you file to avoid fines or other penalties.
The main difference between reporting income from your sole proprietorship and reporting income from a job is that you list business income and losses on Schedule C. Submit this form to the IRS along with Form 1040.
General partnerships do not pay income tax. However, the owners or partners of a general partnership do. Partnerships are pass-through tax entities meaning profits and losses of a partnership trickle down to the business' owners. Those profits and losses must be declared on their share of the business' income on their personal tax returns. This avoids tax issues like double taxation of income. The business needs to file Form 1065. General partnerships do not have to pay an annual tax like limited partnerships.
Limited partnerships have a tax advantage over general partnerships. Partners in a limited partnership have limited personal liability for debts of fellow partners, as long as they are not directly involved in management. In certain states, like California, limited partnerships are responsible for an annual tax of $800.
Limited liability company (LLC)
The Rocket Lawyer blog describes an LLC as “a type of legal business entity that was developed to provide business owners with a lower level of liability. According to the IRS, LLC owners face significantly lower caps on company actions and debts”. Legally, your business can be an LLC but have the option to be taxed as an S-corporation or C-corporation. You have pass-through taxation, like a partnership, so you won’t be double taxed like you would if you own a corporation. You must make quarterly tax payments on your personal income tax forms and submit Form 1065 each year for informational purposes.
If you operate as a C-Corporation, you have some advantages that the other business types don’t. A corporation operates as a separate entity. That means all debts, obligations, and liabilities are its own. Shareholders' losses are limited to the amount invested in the business. C-Corporations are subject to a flat income tax rate and shareholders are taxed on their personal tax returns when profits are awarded as dividends. Form 1120 is the primary tax form for this type of entity.
Turbo Tax reports that “S-Corporations must always file its annual tax return by the 15th day of the third month following the end of the tax year, generally March 15. The business is responsible for reporting all financial activity on Form 1120S and attaching a Schedule K-1 for each shareholder”.
Business Tax Deadlines
Note: Tax Deadline Changed for 2019
The deadlines to file and pay 2019 federal income taxes are postponed to July 15, 2020. You can get more time to file, but you must pay taxes you owe by July 15.
Due to the coronavirus pandemic, the IRS is offering tax help for taxpayers, businesses, tax-exempt organizations and others – including health plans – affected by coronavirus (COVID-19). Learn more on the IRS website.
Business Tax Deductions
Deductible business expenses help entrepreneurs lower the costs of running a business. Here are some of the most common tax deductions available for business owners.
Gas, repairs, parking, and mileage add up. You can take advantage of the standard mileage rate or deduct your actual expenses. Make sure to keep detailed records and avoid mixing personal expenses with business ones.
The home office tax deduction can be complex, visit the SmartBiz Blog for detailed information: How to Take the Home Office Tax Deduction.
If you hire outside professionals (like a social media specialist or an attorney), the fees and overall expense you pay for their services are deductible.
Salaries and Wages
Sole proprietors or those running an LLC may not be able to deduct income you take from your business. However, salaries and wages that you pay to part-time and full-time employees, payments like bonuses, meals, lodging, per diem, and some employer-paid taxes are eligible.
Office Supplies, Expenses, Furniture, and Equipment
You can deduct the above, as long as they are used within the year they’re purchased. You might also be able to deduct the cost of postage, shipping, and delivery services. Keep those receipts! There are various guidelines for depreciation so look this one up or discuss with your tax professional before claiming.
Client and Employee Entertainment
Make sure the entertainment occurs in a business setting and for business purposes.
The benefits that businesses like yours offer to employees do more than attract high-quality talent to your team. They also have tax benefits. Keep track of all contributions you make to your employees’ health plans, life insurance, pensions, profit-sharing, education reimbursement programs, and more. They’re all tax-deductible.
Computer software costs or subscriptions, used for business only, are deductible. You are also able write off the cost of your internet provider fees.
Business Location Rent
Rent is any amount you pay for the use of property you do not own. It’s deductible.
You may be able to deduct up to $5,000 in start-up costs and expenses that you incurred before you open for business. Expenses that are deductible include marketing and advertising costs, travel, and employee pay for training.
Keep track of your electricity, phone, and other utilities. If you’re claiming the home office deduction, your landline must be dedicated to your business.
If you travel to trade shows or for other professional business, you can take a small business deduction for all your expenses.
Machinery and Equipment Rental
You can deduct rental expenses in the year they occur with no depreciation.
This isn’t a complete list of deductions you might be able to write off. Visit the IRS website for more information.
According to Investopedia, “Business tax credits are used to lessen the tax obligation that a business may incur. Ideally, a business will try and use all credits that they are qualified to use to reduce the amount of money they owe the federal government come tax time.” Here’s a partial list of credits available for business owners:
- Business Tax Credits for Energy Efficiency Making your business equipment more energy efficient can help you earn this tax credit. You might also be eligible for tax deductions for environmentally friendly upgrades made to your business facilities.
- Research and Development Tax Credit Tax Credit for Business Research Activities Depending on your products or services, you can claim this credit for traditional scientific research, product development, improving product quality, reliability, or function, improving business performance, and making payments to outside researchers or employees who do research.
- Access for Disabled Persons Tax Credit If you upgrade your location to accommodate employees and customers with disabilities, you may be eligible for disabled access tax credits. You’ll increase access and decrease your taxes.
- Alternative/Hybrid Vehicle Tax Credit You can take advantage of this credit if you buy a new (not used) hybrid, electric, or diesel fuel vehicle. This tax credit applies to new cars and trucks that are certified for the credit by the IRS. Your vehicle must meet certain fuel efficiency and mileage guidelines.
- Small Business Health Care Tax Credit The Patient Protection and Affordable Care Act includes a tax credit to encourage small employers to offer health insurance for the first time or maintain coverage they already have. Visit the IRS website for more information: Understanding the Small Business Health Care Tax Credit.
- Work Opportunity Tax Credit This credit allows employers to get a business tax credit for hiring new employees in categories that include veterans, food stamp recipients, ex-felons, and more. You must document the category, then complete IRS and Department of Labor forms. You then add the credit to your business tax return. Read more on the DOL’s website.
Where to File Your Business Taxes
Here are links to the IRS website where you can upload tax forms and pay your tax obligations.
A secure way to pay your Federal taxes.
There are electronic filing options available for many of the taxes and forms that small businesses are required to file, such as excise and employment taxes, Forms 1120, 7004, 1041 and various information returns.
An Employer Identification Number (EIN), also known as a federal tax identification number, is used to identify tax reports to the IRS.
The form of business you operate determines what taxes you must pay and how you pay them.
Federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. There are two ways to pay as you go: withholding and estimated taxes.
If you have employees, you are responsible for several federal, state, and local taxes. As an employer, you must withhold Federal income tax withholding, social security and Medicare taxes, and Federal Unemployment Tax Act (FUTA) taxes.
The self-employment tax is a social security and Medicare tax for individuals who work for themselves.
Your business may be required to file information returns to report certain types of payments made during the year.
Learn your options for e-filing form 940, 941 943, 944 or 945 for Small Businesses.
Before you decide not to file your tax return on time or not pay all of your taxes when they are due, consider this.
If you pay independent contractors, you may have to file Form 1099-MISC, Miscellaneous Income, to report payments for services performed for your trade or business.
Information to help you resolve the final tax issues of a deceased taxpayer and their estate.
Finding a Small Business Accountant
Unless you have a background in business bookkeeping or accounting, small business tax calculations can be daunting. Even more importantly, you might be losing money without a solid professional in place.
Hiring Best Practices
Here’s information that can help as you look for an accountant that’s the right fit for your business.
What are the responsibilities?
Take a look at all of the financial responsibilities of your business. Where do you need a professional to take the reins? Make a list and be sure to hire someone who checks all of the boxes you require.
Do they have small business experience?
Small businesses present unique situations and challenges. Make sure the accountant you bring on has experience in the areas where you need support – taxes, audits, financial records, bookkeeping, etc. If possible, find a professional who has worked with other businesses in your industry before. A restaurant owner might have different needs than someone running an e-commerce company.
What’s the cost?
You should always ask about fees upfront. Firms can charge by the hour or work on a monthly retainer. The same is true of an individual CPA. You shouldn’t base your decision on only cost – weigh experience as well.
Before you make your final decision, ask to speak with current and past clients, ideally in your industry. Reach out to gauge satisfaction with the accountant's services, fees and availability.
- Be aware of the new tax deadlines set for 2019 taxes due to the coronavirus pandemic.
- Take advantage of all applicable deductions and credits.
- Hiring an accountant or other tax professional is a good strategy as you grow and your finances become more complex.
- File an extension if you are unable to pay your taxes on time or in full.
For additional small business related tax information, review this article from SmartBiz University:
Identifying Potential Tax-Related Issues.
DISCLAIMER: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult a certified accountant or tax professional for further information.