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A Quick Guide to Small Business Taxes for Beginners

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There are plenty of perks that come with owning your own business. You are answerable to no one but yourself and you get to do things your way. You could also make more than you would in a desk job. However, being a small business owner also comes with many responsibilities, chief of which are your taxes.

However, running a small business takes up a lot of time and effort, and issues like taxes may not be high on your list. It also doesn’t help that the tax code can be difficult to understand. But if you don’t stay on top of your taxes, you may incur fines from the IRS or worse.

We will walk you through everything you need to know about reducing small business taxes.

Small Business Taxes for Beginners

As a small business owner, you will be on the hook for a variety of local, state, and federal taxes. The business taxes you pay depend on many factors, including the industry you are in, the structure of your business, and where your business is based. These are some of the most common taxes you are likely to encounter.

Income tax

According to the IRS, all businesses (except partnerships) are required to file an annual federal income tax return. Partnerships file an information return to report their income, gains, losses, as well as any claimed deductions or credits.

The form you will use and your tax rate depends on the structure of the business. Businesses structured as a C corporation are taxed at the corporate rate of 21 percent,

Limited Liability Companies, Sole Proprietorships, Partnerships, and S corporations are considered flow-through entities. This means that all income is passed on to the owners, shareholders, or investors, and the individual rate applies.

Consult a tax professional if you have any questions about choosing a business structure between LLC and Sole Proprietorship.

Estimated Tax

Federal income taxes are paid as your business receives income during the year, through estimated tax payments.

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As a general rule, most types of businesses that expect a tax liability of at least $1,000 are required to pay quarterly taxes throughout the year. Corporations are also liable for estimated taxes if they expect to owe at least $500 in taxes.

For estimated taxes, the year is divided into four payment periods. The deadlines are as follows:

  • January 1 to March 31: April 15
  • April 1 to May 31: June 15
  • June 1 to August 31: September 15
  • September 1 to December 31: January 15 of the following year

Employment Taxes

If you have employees, you are required to report and deposit employment taxes, including federal income tax withholdings, Social Security and Medicare (FICA) taxes, and Federal Unemployment (FUTA) taxes.

Your employees’ federal income tax is withheld from their paychecks, and it’s your job to make sure the federal government gets it. You also need to pay half of your employees’ FICA taxes (6.2% for the employer and 6.2% for the employee, or 12.4% total).

State and Local Taxes

Depending on where your business is based, you may also be liable for state and local taxes.

Most states impose a state income tax. To date, 8 states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming) do not tax individual income, while 2 states (South Dakota and Wyoming) levy no corporate income tax.

You may also be required to pay property taxes, which are assessed at the local level. Businesses that sell products and services may also be required to collect sales taxes from every transaction.

How to File Small Business Taxes

There is no standard procedure that applies to all businesses, which is why it’s important that you familiarize yourself with the tax system to keep your business compliant. Here are a few guidelines to prepare you for tax time.

Maintain Accurate Records

Make sure to maintain accurate records of all earnings and expenses so you will have easy access to information when filling out tax forms. The IRS performs random audits and it’s vital that everything you report in your tax return is verifiable.

You also may want to invest in accounting software to keep your system organized. It’s best to record transactions on a daily or weekly basis to avoid any accidental omissions.

Use the Right Tax Form

Make sure to use the correct tax form when reporting your business income to the IRS. You are responsible for the content of your tax return and mistakes can lead to additional taxes and interest and even penalties.

For sole proprietorships and LLCs with one owner, use a Schedule C attachment to report business income and expenses. This form is attached to the individual’s income tax return.

Meanwhile, corporations and LLCs with corporation status use Form 1120, U.S. Corporation Income Tax Return. Please note that S corporations use Form 1120-S, U.S. Income Tax Return for an S Corporation.

Professional Help for Business Taxes

Taxes are the bane of every small business owner. You are expected to stay on top of your tax obligations while keeping your business afloat. A single mistake on your return can result in interest and penalties. If you want to make sure your business taxes are done correctly, your best option is to work with a professional tax service.

At TFX, we have been helping American entrepreneurs file accurate tax returns for over 25 years. Our expert tax team can give you the help you need to save time and money so you can focus on what you do best: growing your business.

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