Small Business Taxes 101: Getting Started with Taxes for Your Business
Starting your own business can be overwhelming for many reasons. Unfortunately, many business owners only stop to think about taxes when their return must be filed. That kind of approach often ends up resulting in a large tax bill in April.
Instead, understanding some of your basic tax obligations now can help you save thousands of dollars that you can invest back in your company instead of giving to Uncle Sam.
What Taxes are Businesses Expected to Pay?
No matter what kind of business you operate, whether it is a department store or a fruit stand, or a small mom and pop or a large corporation, you will be required to report your income to the IRS and pay taxes on it. There is no way to escape it, so you might as well address this issue head-on and learn about tax rules and regulations that you can use to your advantage. That process starts with understanding what kind of taxes businesses are expected to pay.
How you must file and pay your taxes will depend on the legal structure of your company. If you have not filed any formal paperwork with the State to create your company, then you are likely operating under a sole proprietorship model. That means that your business is really just an extension of you.
As a sole proprietor, filing your taxes only involves putting together an additional form on your individual tax return. Partnerships and S corps operate in a similar way. If you set up a corporation, your tax return will look very different, however.
Regardless of how your return looks, businesses are generally expected to pay several types of taxes, including:
- Income Taxes. An income tax is a percentage-based tax that applies to every dollar that comes in the door. This is perhaps the first type of tax that comes to mind when you think about filing taxes because individuals pay these taxes as well.
- Self-employment or Employment Taxes. If you worked for a company, they would take out taxes for Social Security and Medicare (and you should take these out for your employees in most situations, too!). If you are self-employed, then you must pay out these taxes as part of your income tax return. As long as your self-employment earnings are over $400, you will need to pay something to address this additional tax.
- State and Local Taxes. In addition to the taxes that the federal government imposes, you may also need to pay state and local taxes as well. In some cases, there may also be county or city taxes, or particular industries may be required to pay additional taxes, too.
Keeping up with your tax obligations is critically important. If you fall behind, that can result in fines, interest, and an array of other problems.
The Importance of Keeping Good Records
Unlike individuals, businesses are only taxed on the income that they keep—their net income. That means that you can offset your income dollars with your expense dollars. Keeping accurate records about every expense that your business has will help you decrease your tax obligations, sometimes significantly.
Below are a few “best practices” that you should consider to help with record keeping.
- Always open a separate bank account for your company.
- Use a professional, software, or another method that works for you to track expenses on an ongoing basis.
- Do not let accounting tasks pile up. Pick a designated time to input information regularly. Dividing up the year will decrease the likelihood that you miss expenses and save you hours of work at tax time.
- Keep receipts or other records of every purchase, either in paper or electronically.
Keeping up with recordkeeping and tracking will not only help you know where your company is going, how your cash flow for your business is doing, and whether you are making a profit, but it will also help you save time and money when you are ready to do your taxes.
Getting to Know Estimated Taxes
Most business owners will be required to make quarterly estimated taxes. Instead of having one large tax bill in April every year, the IRS requires that you make regular payments if your tax obligation will reach a certain threshold. If you fail to make those payments on time, you will likely have to pay penalties and other fees on top of your tax obligations.
Estimated taxes are generally required for:
- Sole proprietorships
- S Corporation shareholders
- LLC members
- Corporations (not necessarily individual owners of the corporation)
Most individuals do not have to pay estimated taxes because their employer pays those taxes on a regular basis for them. Because you do not have anyone withholding taxes from your business earnings, you need to make those payments yourself.
Predicting what your tax obligation will be can be difficult, but the IRS provides resources that you can use to get a good start on this process. Having a professional help you determine what this number may be can be useful, too.
Knowing the basics of business taxes will help set your company up for success. Take some time to review what your responsibilities will be every year as a business owner.
With Tax Sentinel’s years of experience in tax and business services, we use our expertise to make your life easier so you can focus on building your business. Ever changing rules require a team who knows you, your business and the tax implications. Our tax professionals meet your needs while helping you manage tax risk, control costs and reap maximum benefit. Additional resources can be found at TaxSentinel.com or if you’re ready to get started, CLICK HERE to schedule a free strategy session with one of our specialists today.