How to Do Taxes for Small Business

Taxes may not be the most exciting part of running a small business, but they’re an essential piece of the puzzle.
Understanding andmanaging your tax obligationsis key to maintaining your company's financial health as a small business owner.

Failing to file and pay taxes properly can lead to penalties, interest, and even legal consequences.
But here's the thing –once you know the basics, it’s easier than you think. In this article, we'll share practical steps to help you tackle your business taxes confidently.

What are Small Business Taxes?

Small business taxes refer to thevarious taxes that small business owners are required to pay to the government based on their business income, activities, and structure. 
These taxes vary significantly depending on the type of business you run, where you operate, and how much revenue you generate.

Common types of small business taxes include:

Income Tax: This is the tax on the business’s earnings, whether a sole proprietorship, partnership, LLC, or corporation. The structure of your business will determine how and when this tax is paid.
Self-Employment Tax: If you're self-employed, you'll be responsible for paying the employer and employee portions of Social Security and Medicare taxes.
Employment Taxes: If you have employees, you'll need to withhold and pay certain taxes on their wages, such as Social Security, Medicare, and federal income tax withholding.
Sales Tax: If your business sells taxable goods or services, you may need to collect sales tax from your customers and remit it to your state or local tax authority.
Excise Taxes: Depending on your industry, you might be subject to specific taxes, like those on fuel, tobacco, or certain manufacturing activities.

For example: Sole proprietorships report business income and expenses onSchedule Cof their personal tax return.
Partnerships andmulti-member LLCsfile an informational return and pass through profits and losses to partners/members to report on their individual returns.

C-corporations file a separate corporate tax return and pay corporate income tax- S-corporations pass-through profits and losses to shareholders to report on their individual returns.

In addition to federal taxes, your business may owe state and local taxes. These vary by jurisdiction but can include:

State income tax
Sales tax on goods and services
Property tax on business assets
Franchise tax for the privilege of doing business in the state
Unemployment tax

Why is it Important to Properly File Small Business Taxes?

Properly filingsmall business taxeshelps you:

Avoid penalties and interest: Late or inaccurate tax filings can result in penalties and interest charges from the IRS and state tax agencies. These additional costs can add up quickly and strain your business finances.
Maintain good standing: Consistently filing and paying taxes on time demonstrates that your business is compliant with tax laws and regulations. This can be important when seeking loans, investors, or business partnerships.
Make informed business decisions: Accurate tax filings clearly show your business's financial health. This information is essential for making strategic growth, investments, and budgeting decisions.
Claim eligible deductions and credits: By properly tracking and reporting your income and expenses, you can take advantage of tax deductions and credits that reduce your tax liability and save your business money.
Plan for the future: Understanding your tax obligations allows you to better plan for the future. You can set aside funds for estimated tax payments, anticipate cash flow needs, and make tax-efficient business decisions.
Avoid legal consequences: Failing to file or pay taxes can lead to serious legal consequences, including fines, penalties, and even criminal charges in severe cases. Properly filing your taxes helps protect your business and personal assets.

How to Do Taxes for Small Business

As a small business owner, you must pay:

Income Tax
Self-Employment Tax
Payroll Tax
Sales Tax
Property Tax

Your business structure determines your federal tax obligations.

To properly manage these taxes, you need to:

Understand your tax obligations
Keep accurate financial records
Calculate and pay estimated taxes quarterly if required
File necessary returns and pay taxes owed by the deadline
Claim eligible deductions and credits
Stay current with changing tax laws and regulations

1. Determine Your Business Structure and Tax Obligations

Your business structure dictates your federal tax obligations. Sole proprietorships, partnerships, LLCs, and corporations have different tax requirements.

Sole proprietorships are the simplest structure.

You report business income and expenses on Schedule Cof your personal tax return (Form 1040). You're also responsible for self-employment tax on your business profits.

Partnerships and multi-member LLCsfile an informational return (Form 1065) and issue Schedule K-1sto each partner/member. The individual partners/members then report their share of the business's profits or losses on their personal tax returns.

Corporations are separate tax entities.C-corporations file a corporate tax return(Form 1120) and pay corporate income tax on profits.S-corporations file an informational return(Form 1120-S) and pass profits and losses through to shareholders to report on their individual tax returns.

In addition to federal taxes, you must also understand your state and local tax obligations. These vary by jurisdiction but may include income, sales, property, and unemployment taxes.

Consult with a tax professional or use theIRS's "Business Structures" guideto determine your specific tax requirements based on your business structure and location.

2. Obtain Necessary Tax ID Numbers

Most businesses need an Employer Identification Number (EIN) from the IRS. An EIN is like a Social Security number for your business. It's required to:

File business tax returns
Open a business bank account
Hire employees

You can apply for an EIN online through theIRS websitein just a few minutes. The process is free, and you'll receive your EIN immediately.

Sole proprietors with no employees may use their Social Security number instead of an EIN. However,obtaining an EIN can help protect against identity theft.

In addition to a federal EIN,you may need to register for state and local tax ID numbers. The requirements vary by jurisdiction. Check with your state's department of revenue and local government agencies to determine what tax ID numbers you need.

Common state and local tax registrations include:

State income tax withholding
Sales tax
Unemployment insurance tax

Failing to obtain the necessary tax ID numbers can result in penalties and complicate your tax filing process. Registering for these IDs also puts you on the radar of tax agencies, which can help you stay compliant with tax laws and regulations.

3. Keep Accurate Financial Records Throughout the Year

Accurate financial records make tax time much easier.Track your income, expenses,payroll, and other financial data consistently.

Use accounting software like QuickBooks, Xero, or FreshBooks to streamline your record-keeping. Connect your business bank accounts and credit cards to import transactions automatically. Digitize receipts by snapping photos with your phone.

Categorize transactions as you go to save time later. Most accounting software will suggest categories based on past transactions.Create rules to categorize recurring expenses automatically.

Review your financial reports regularly to catch errors or discrepancies. Reconcile your accounts monthly to ensure your records match your bank statements.

If bookkeeping isn't your strong suit,hire abookkeeper.

They can manage your day-to-day transactions and prepare financial reports. Look for a bookkeeper who specializes in your industry and is familiar with small business tax requirements.

Keep your business and personal finances separate.Use a dedicated business bank account and credit card.This will simplify record keeping and make it easier to claim business expenses on your tax return.

If you use a vehicle for business,maintain a mileage log. The IRS requires detailed records of the date, destination, purpose, and miles drivenfor each trip. Apps like MileIQ or TripLog can automate mileage tracking.

Hold onto receipts, invoices, bank statements, and other supporting documents. If the IRS audits your return, you'll need these records to substantiate your income and expenses.

The more organized your records are throughout the year, the smoother tax season will be. You'll have the information to accurately prepare your return and capitalize on money-saving deductions.

4. Calculate Your Business Income and Expenses

Calculating your taxable business income is a key step in preparing your small business tax return.Taxable income is your total revenue minus deductible business expenses.

Review your financial records to determine your total revenue for the year. This includes income from sales, services, and any other sources. If you use accounting software,generate a profit and loss statement for the tax year.

Next, identify your tax-deductible business expenses. These are ordinary and necessary costs of running your business, such as:

Rent or mortgage interest for your business property
Utilities, phone, and internet
Office supplies and equipment
Inventory or materials
Marketing and advertising
Business insurance
Professional fees (e.g., legal or accounting services)
Travel and meals (subject to limitations)
Vehicle expenses (if you use a car for business)
Depreciation of business assets
Home office expenses (if you qualify)

Keep detailed records and receipts for all business expenses. If your return is audited, theIRS may require proofof these costs.

Some expenses areonly partially deductible. For example, you can deduct 50% of business meals and entertainment. You can only deduct the business portion of your vehicle expenses if you use a vehicle for business and personal purposes.
Consult IRSPublication 535, Business Expensesfor a full list of deductible expenses and rules. Claiming all eligible deductions reduces your taxable income and lowers your tax bill.

Subtract your total deductible expenses from your total revenue to calculate your net profit or loss.This is your taxable business income. You'll report this amount on your business tax return.

If your expenses exceed your revenue, you have a net loss. You may be able to deduct this loss from other income on your tax return, subject to IRS rules.

Accurately calculating your income and expenses is critical for preparing your tax return and minimizing your tax liability. If you're unsure what expenses are deductible or how to calculate your taxable income,consult a tax professionalfor guidance.

5. Determine Estimated Tax Payments

If your business expects to owe $1,000 or more in taxes for the year,you must pay estimated taxes quarterly to avoid IRS penalties. 

Estimated tax payments are due April 15, June 15, September 15, and January 15 (of the following year).

To calculate your estimated taxes,estimate your taxable income for the year and multiply it by your effective tax rate.Divide the result by 4 to determine your quarterly payments.

UseForm 1040-ESto calculate and pay your estimated taxes. You can pay online through theElectronic Federal Tax Payment System (EFTPS), mail, or phone.

If you underpay your estimated taxes,you may owe penalties and interest when you file your annual return.However, you can avoid penalties if you pay at least 90% of your current year's tax liability or 100% of your prior year's liability (110% if your prior year's adjusted gross income was more than $150,000).

If your income or expenses change significantly throughout the year, adjust your estimated payments. This helpsensure you're not overpaying or underpaying your taxes.

Keeping accurate records and projecting your income are key to calculating accurate estimated tax payments. If you need help determining your estimated taxes, work with a tax professional.

6. Fill Out and File the Appropriate Tax Forms

The tax forms you need to file depend on your business structure.

Sole proprietorships report business income and expenses onSchedule C(Form 1040). This form calculates your net profit or loss from your business. Transfer this amount to your individual tax return (Form 1040).

Partnerships must fileForm 1065, U.S. Return of Partnership Income. This informational return reports the partnership's income, deductions, gains, and losses. The partnership also provides each partner with aSchedule K-1, whichreports their share of the partnership's profits or losses.Partners use this information to file their individual tax returns.

LLCs canchoose to be taxed as partnerships or corporations.If taxed as a partnership, the LLC files Form 1065 and provides each member with a Schedule K-1. If taxed as a corporation, the LLC filesForm 1120(for C-corporations) orForm 1120-S(for S-corporations).

C-corporations file Form 1120, U.S. Corporation Income Tax Return. This form reports the corporation's income, gains, losses, deductions, and credits. The corporation pays income tax on its profits.

S-corporations file Form 1120-S, U.S. Income Tax Return for an S Corporation. This informational return reports the corporation's income, deductions, gains, and losses. The S-corporation passes profits and losses to shareholders, who report this information on their individual tax returns (Form 1040).

In addition to these federal forms, you may need to file state and local tax returns. The specific forms vary by jurisdiction. Check with your state's department of revenue for requirements.

Most tax forms are due March 15 (for partnerships and S-corporations) or April 15 (for sole proprietorships, LLCs, and C-corporations). The deadline isthe next business day if the due date falls on a weekend or holiday.

You can file your tax forms electronically or by mail. TheIRS encourages electronic filing for faster processing and reduced errors.Many tax software programs allow you to prepare and e-file your forms.

Tip: Double-check your forms for accuracy before submitting them. Errors can delay processing or trigger an audit. If you're unsure how to complete a form, consult the instructions or seek guidance from a tax professional.

7. Pay Any Remaining Tax Liability

After filing your tax forms, pay any remaining taxes owed by the filing deadline to avoid penalties and interest.
The deadline is typically April 15 for sole proprietorships, LLCs, and C-corporations and March 15 for partnerships and S-corporations.

You can pay your taxes electronically through theElectronic Federal Tax Payment System (EFTPS)or by mailing a check or money order to the IRS. If you can't pay the full amount you owe, contact the IRS to discuss payment options, such as an installment agreement or offer in compromise.

Paying your taxes on time helps maintain good standing with the IRS and avoids costly penalties.

If you're unsure how much you owe or need help navigating your tax liability, consider working with a qualified tax professional specializing in small business taxes. They can ensure you take advantage of all available deductions and credits while complying with tax laws and regulations.

8. Keep Tax Records Organized and Accessible

Maintaining organized tax records is important for small business owners. The IRS recommends keeping tax records for at least three years from the date you filed your return in case of an audit.

Retain copies of your tax returns, along with supporting documents such as:

Income statements (e.g., 1099 forms, sales receipts, cash register tapes)
Expense records (e.g., receipts, invoices, credit card statements)
Bank and credit card statements
Payroll records
Asset purchase documents
Depreciation schedules
Business permits and licenses

Create a filing system that works for you, whether physical folders or digital files. Label folders by year and category (e.g., "2023 Income" or "2023 Expenses") for easy reference.

Consider scanning paper documents and storing them electronically. This saves space and makes it easier to search for specific records. Use a secure cloud storage solution like Google Drive, Dropbox, or OneDrive to access your records from anywhere and protect against data loss.

If the IRS audits your return,having organized records helps you substantiate your income and expenses. It also allows you to respond to IRS inquiries quickly and accurately.

In addition to federal tax records, keep state and local tax records as required by your jurisdiction. Retention periods may vary, so check with your state's department of revenue for guidance.

Proper record-keeping takes time and effort but pays off in the long run. It prepares you for an audit and provides valuable insights into your business's financial health. Review your records regularly to identify areas for improvement and make informed decisions about your business's future.

Tips for Streamlining Small Business Tax Preparation

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Streamlining your small business tax preparation can save you time, stress, and money. Proper organization and proactive planning throughout the year can make tax season feel like just another part of your routine rather than a last-minute scramble.

Below are some practical tips to help you efficiently prepare and file your small business taxes.

1. Stay Organized Throughout the Year

Organizing your financial documents throughout the year simplifies tax preparation.Update your records regularlyto avoid a last-minute scramble. Keep receipts, invoices, and bank statements in a dedicated place.

2. Utilize Accounting and Tax Software

Accounting and tax software can automate many of your financial tasks. These tools help you track income and expenses, generate financial reports, and even calculate estimated taxes. Using software reduces errors and saves time.

3. Hire a Professional Bookkeeper or Accountant

Aprofessional bookkeeperor accountant can manage your financial records and ensure compliance with tax laws. They can provide valuable advice on deductions and credits, helping you minimize your tax liability.

4. Take Advantage of All Eligible Tax Deductions and Credits

Identify andclaim all eligible tax deductions and credits. Common deductions include business expenses, home office expenses, and depreciation. Credits like the Work Opportunity Tax Credit can also reduce your tax bill.

5. Plan and Set aside Funds for Tax Payments

Planning for tax payments avoids cash flow issues.Set aside a portion of your income for taxes each month. This ensures you have the funds to pay your taxes when they are due, avoiding penalties and interest.

6. Consult a Tax Professional for Major Business Changes

Significant changes to your business, like purchasing new assets, changing your business structure, or expanding to new locations, can have tax implications. A tax professional can help you understand and plan for these changes.

7. Stay Informed on Tax Law Changes

Tax laws always evolve, and some changes could impact your small business. Stayinformed about updates to deductions, credits, and tax regulations to ensure you’re fully compliant and taking advantage of all benefits available.

Final Thoughts

Preparing taxes for your small business doesn’t have to be overwhelming.With the right organization, tools, and regular financial review, you can make tax preparation easy and stress-free.

Staying proactive and informed about your financials will help you file accurately and give you insights into your business's health.

However, if managing your small business taxes feels like a burden or you're unsure about navigating deductions, credits, and compliance,don't hesitate to seek professional help.

AtSam's List, you can find trusted accountants, bookkeepers, CPAs, and tax professionals ready to assist you.
They specialize inhelping business owners streamline their tax processes and ensure everything is filed correctly.Search for the right expert on Sam's List and take the next step to simplify your tax preparation and let the professionals handle the rest.

How to Do Small Business Taxes: Frequently Asked Questions

What tax forms do I need to file for my small business?

The tax forms you need depend on your business structure. Sole proprietors use Schedule C, partnerships use Form 1065,
and corporations use Form 1120 or 1120-S.

When are small business tax returns due?

Tax return deadlines vary by business structure. Generally, sole proprietors and C-corporations file by April 15, while partnerships and S-corporations file by March 15.

How can I find a reliable accountant or tax strategist for my small business?

Finding a reliable accountant or tax strategist involves researching credentials, reading reviews, and seeking recommendations from other business owners. You can also get a reliable accountant onSam’s List.