Everything You Need to Know About Small Business Taxes
Taxes are something small businesses have to deal with, but cumbersome paperwork and all the different tax forms can be overwhelming. This blog post covers everything you need to know about small business taxes in one place.
The first thing that needs to be understood is that there are two types of businesses for tax purposes, sole proprietorships, and corporations. You don’t need an attorney or accountant to make this determination; you can easily go online and research your state’s website for information on registering a business to see if it will be classified as a sole proprietorship or corporation.
Once you’ve determined which type of business entity yours falls under, read below for the dos and don’ts of filing income tax reports.
Sole Proprietorships or Partnership: This is the simplest tax reporting structure for small businesses. The business itself doesn’t pay taxes on its income, only the individual owner pays taxes on earnings. However, any income that a partner or spouse has from a sole proprietorship will be reported on their own tax return and maybe taxed twice by the federal government. That is why it’s often recommended to have a corporation set up if there are multiple owners involved in your business. In order to avoid paying taxes twice, make sure each partner or spouse earns less than $10,500 from the business annually (in 2013). If someone makes more than this amount from your business, you will need to file an informational Income Tax Return (Form 1065) with your state and the IRS each year.
Corporations: A corporation is taxed separately from the owners. This structure can be complicated to set up, but there are benefits for filing as a corporation rather than a partnership or sole proprietorship. For example, with an S corp you can “pass through” income without paying additional taxes since they are taxed at the individual level only once (instead of twice like in a sole proprietorship). Plus, corporations get certain tax deductions and credits that aren’t available to other business entities.
If your business earns over $50,000 per year, then you will need to obtain an EIN (Employer Identification Number) from the IRS. You should obtain this number by filling out and filing form SS-4 with the IRS. Once you have your EIN, you can apply for a business checking account at most banks and credit unions across the country.
If you are an S corp or C corp, then filing quarterly estimated taxes with the state is required. This means that depending on how much money your company makes in any three month period, at the end of each quarter (March 31st, June 30th, September 30th, and December 31st), you will need to pay 25% of the following year’s federal income tax bill (estimated tax). If your business has employees, make sure to withhold taxes from their paycheck throughout the year; this also applies if your company is making more than500,000 per year in gross receipts.
As a small business owner, it’s important to be aware of any deductions you can take when filing your taxes. These deductions will lower your tax liability and ultimately the amount of income tax that you must pay Uncle Sam.
The main types of deductions are:
1) Home Office Deduction – This is one way that self-employed people can get tax breaks for their home expenses. You can write off 5%-15% of all expenditures from home office supplies, parking fees, and dues, utilities, etc., but only if the area is exclusively used for work purposes (i.e., no bedroom). The key is to make sure this deduction doesn’t cause a loss in the equity value of your home. A home office deduction can also be taken for any equipment or software that is necessary to do your job, but it’s unclear whether the cost of these items will fall under business use depreciation.
2) Vehicle Expenses – If you use your car for work purposes, then you’re able to write off expenses like gas and repairs on your taxes. You can even save on tolls or parking fees if they are required in order to get to a client’s location. However, keep in mind that mileage deductions are only available if you are using the standard method instead of the actual expense method.
3) Travel Expenses – Deductible travel expenses include airfare and hotel costs when traveling overnight for work (for example conferences and meetings). Keep in mind that if you have a home office deduction, your travel expenses can’t outweigh it at tax time.
4) Insurance Expenses – Another way to lower taxes is by writing off business-related insurance premiums on your taxes. You can deduct any kind of insurance purchased for your business from legal fees and bond premiums to medical coverage for employees.
5) Retirement Plans – If you want a deduction that will actually result in a refund come tax season, then contribute to an IRA (Individual Retirement Account). This money is deducted from your taxable income, providing instant savings. Keep in mind there are limits as to how many deductible contributions you can make per year ($5600 if filing as single), so consult with a financial advisor first before making any decisions.
6) Charitable Contributions – If you are planning on donating any goods or money to charity, then keep a record of it. You can write off certain items for a tax deduction, but only if you have a receipt from the organization that confirms exactly what has been donated. Any material objects will need to meet certain standards before being written off as a tax deduction so check with your CPA first before making deductions.
7) Home Office Deduction – This applies if you own a home and use part of it as an office for your business. In order to do this, there must be no other area in your house used exclusively for work purposes (i.e., no bedroom). The percentage allotted from home expenses is determined by your home’s size. For example, if it’s a small studio apartment, you are allowed to use up to 50% of expenses for work purposes. The key is to make sure this deduction doesn’t cause a loss in the equity value of your home.
The federal income tax deadline is April 15th which many people often forget about because they usually receive their refunds long before then. If you are expecting money back from Uncle Sam and owe nothing, then you can request an extension up until October 15th (this also applies if you’re not working on April 16th due to a holiday or some other reason). Keep in mind that if you don’t file for an extension and you end up owing more than expected come tax
Tax reporting for corporations is more complex because the business itself must file an informational return with both the federal government and its state. However, owners are taxed only once on the money they receive from the company’s profits.
If you are having trouble filing your corporation’s tax paperwork or other tax reports, there are professionals who can help out. This may be worth it if you aren’t familiar with all of these different forms and rules; it might well save you time and money, in the long run, to hire someone to do your taxes for you, rather than trying to do them yourself.
Small businesses face many challenges when it comes to filing taxes, but it’s worth the effort to know that you’re complying with all of the tax regulations. You should also keep in mind that taxes are only one part of doing your business; if you need help with other small business issues, check out The Simple Dollar for helpful tips and tricks.
Taxes are something small businesses have to deal with, but cumbersome paperwork and all the different tax forms can be overwhelming. This blog post covers everything you need to know about small business taxes in one place. The first thing that needs to be understood is that there are two types of businesses for…