Corporate tax for this year is expected to reach record amounts.
Most business owners’ cringe upon the thought of tax season but filing taxes is a legal requirement for every business. However, it is not as hectic as it seems. Most people run into trouble because of poor organization.
In this article, we shall take a look at some of the steps you should take when filing business taxes and how it works for various business setups.
Filing Taxes as a Sole Proprietor
A sole proprietorship is the simplest business structure under which you can operate a business. This is an enterprise owned and operated by one person. Filing taxes as a sole proprietor is relatively straightforward.
For this structure, you do not have business taxes on behalf of the business. Instead, all you have to do is pay del-employed taxes or tax based on your income.
Of course, filing self-employment tax will be on top of the income tax you have to file. Self-employment tax refers to Medicare and Social Security Taxes.
For this tax bracket, you will be required to pay estimates quarterly and file returns annually.
As such, you will need to familiarize yourself with estimated tax. This is the method that businesses use to pay Medicare and social security taxes along with income tax for their employees.
To know how much you need to pay in self-employment taxes, use form 1040-ES that deals with estimated tax for individuals.
When filing for annual tax as a sole proprietor, you have the option of either using Schedule C or Schedule C-EZ. These forms are used to report the profits or losses your business made.
Filing Taxes as a Partnership
These are businesses operated by two or more people. Though most partnerships are general partnerships, there are also limited partnerships or limited liability partnerships.
As a partnership, you will be required to file annual information returns to show your income, deductions, gains, and losses the business incurred.
However, the business is not liable to pay income tax. Partnerships are not subjected to corporate tax. Instead, only the owners are taxed. This system is referred to as pass-through taxation.
When filing taxes, all the shareholders of the partnership have to include their respective share of business’s profits and losses on their personal tax returns.
It is however also important to note that you will also be required to pay income, self-employment, and estimated tax as an individual.
Filing Taxes as a Corporation
Businesses structured as corporations are considered to be separate legal entities from their owners. Under corporations, there are S and C corporations, both of which have an almost identical tax burden.
Businesses under this structure are liable to double tax. This is because the corporation’s profits are taxed, and when profits are distributed to shareholders as dividends, you and your partners are still taxed.
All corporations, whether C or S, are liable to income tax, employment taxes, excise taxes, and an estimated tax.
Filing Taxes as a Limited Liability Company
These are business entities where owners are legally separate from the business’s debts or liabilities.
Under the LLC setup, you enjoy the protection from liabilities just like a corporation whilst enjoying the tax benefits of sole proprietorship or partnership.
Similar to partnerships, LLC’s are also subject to pass-through taxation. This means you won’t fall under the double tax bracket.
However, as the owner of the LLC, you are required to make quarterly tax payments on your personal income tax forms.
For informational purposes, you will also be required to submit form 1065 annually.
How Often Are You Required to Pay Taxes as a Small Business?
Small businesses are required to pay quarterly estimated taxes if they owe taxes of $1,000 or more. However, corporations are only required to pay quarterly estimates only if they expect to owe taxes that exceed $500 for the tax year.
Owning a business means you are required to pay taxes four times a year. The tax deadlines you should now be aware of are January, April, June, and September.
How to Calculate Your Quarterly Estimated Tax Dues
To begin, you must first estimate your expected adjusted gross income, deductions, taxable income, and tax credits for that year. You can also refer to the previous year’s taxes as a guide.
When you can attach figures to the estimates, you can use the IRS estimated tax worksheet to find out your quarterly small business tax.
Preparation for Paying Taxes
The secret to smooth tax filing is preparation. Ensure that all the business’s financial documents and records are well kept and prepared before tax season comes.
Waiting for till the deadline is only a few days to prepare your records is setting yourself up for stress.
You should always be preparing for the next tax season. Ensure you have the following:
• The previous year’s business tax return
• Bank and credit card statements
• Payroll documents
• Accounting documents
• Partnership agreements
• Depreciation schedules
A thorough accounting of the business’s income and expenses will be required. To make this process simple, ensure you always keep the following documents:
• Gross receipts
• Returns and allowances
• Checking and savings account interest
• Sales record
• Employees salaries
• Unclassified income
• Insurance premiums
• Professional fees
• Contractor payments
• Advertising costs
• Office equipment and supplies
• Office rent and a portion of your home rent or mortgage paid by the business
• Transport and travel expenses
Keeping these documents well will ensure the tax period is not hectic as well as ensure you file more accurate returns.
When starting out, filing taxes can be hectic. There, however, are institutions that offer tax preparation services. Learn more about how your business can benefit from such services by visiting our Finance section.
What Can You Deduct from Small Business Taxes?
There are several business expenses that you can deduct from your taxes to save you a significant amount of cash. Based on the structure of your business, you can deduct the expenses your business incurs for operations.
However, you have to prove that the deduction is a relevant deduction from your taxable income.
These deductions lower your taxable income, thus lowering the due tax amount. This can be very beneficial especially if you are operating on a shoestring budget.
How Preparing for Taxes Can Help Your Business in Other Areas
Preparing for business taxes is an all year job. It involves keeping proper financial records and ensuring all the documents pertaining to income and expenses.
As you do this, you will also be able to continually monitor how your business is doing. This will help you make adjustments where necessary which will boost the growth of your business.
Are you running a startup? Check out this article for insights on financial planning.
