The Ultimate Guide to Small Business Taxes and Small Business Deductions

October 1, 2019
Posted in: Taxes

Table of Contents

 

Whether you’re just starting your business or are a veteran entrepreneur, knowing the ins and outs of your tax obligations and deductions can save you money and headaches. But, a lot goes into filing small business taxes. Plenty of owners find themselves lost in the requirements and fine print of federal and state tax laws before tax season even starts.

Luckily, there’s much entrepreneurs can do to reduce or eliminate the stress. This ultimate guide to small business taxes and small business deductions shows you everything you need to know and do to stay on top of your tax game.

 

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The Link Between Business Structure and Taxes

When it comes to paying small business taxes, key questions to ask yourself are what types of small business taxes you have to pay and when, how much you need to pay, and how to make a payment.

The answers depend on your business’ structure because each kind of business entity has different tax implications. Here’s a brief overview of different business structures and what to be aware of tax-wise. 

 

Sole Proprietorships

Sole proprietorships are businesses owned and operated by one person. Filing your taxes as a sole proprietor is simple because you can report your business income and losses on your personal income tax return.

 

Tax Implications 

  • The IRS taxes your business profits at the same rate as your personal income tax rate.
  • When working as an employee, your boss withholds FICA taxes for you and pays the employer portion of your taxes. FICA covers social security and medicare obligations. As a self-employed individual, the equivalent is SECA (Self-employed Contributions Act) taxes. SECA taxes require you to pay both the employer and employee portions of FICA taxes. 
  • Employers send in quarterly taxes on your behalf. If you’re self-employed, you may have to do it yourself. 

 

Tax Forms

  • File a Form 1040 for your individualized income tax return.
  • Complete a Schedule C (Profit or Loss from Business). You may be eligible to file the more straightforward Schedule C-EZ  (Net Profit from Business) if you’ve had $5,000 or less in expenses for that tax year and made a profit. See Schedule C-EZ for a complete list of requirements. File your Schedule C or C-EZ together with your Form 1040.
  • Complete a Schedule SE (Self Employment Tax) to calculate how much you’ll need to pay in taxes and if you have to send your taxes quarterly. There are instructions for completing the form here. File together with your Form 1040.

 

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Partnership

Partnerships are business’ operating with two or more owners. Partnerships can be classified as a general partnership when owners have equal responsibilities or a limited partnership when an owner is only an investor. There can be both types of partnerships within the same company.

 

Tax Implications

  • Must pay income taxes, self-employment taxes and quarterly taxes. 
  • Partnerships have “pass-through taxation.” This means the business itself doesn’t pay taxes, unlike C corporations. Instead, the income is taxed through the individual owners who must state on their personal tax returns their partnership share, deductions and tax credits. 

 

Tax Forms

  • Complete Schedule K-1/Form 1065 (Partner’s Share of Income, Deductions, Credits, etc.). Instructions for the form are here. File it together with Form 1040. 
  • The business may also have to file a Form 940 (Employer’s Annual Federal Unemployment Tax Return). More information about who must submit a Form 940 is here.
  • For quarterly tax returns, file a Form 941 (Employer’s Quarterly Federal Tax Return). Instructions for the form are here.

 

C Corporations

In C corporations, businesses are legally separate from owners to protect their personal assets from the company’s debts and liabilities. This is a safer choice for business owners, but there’s more record-keeping, reporting and paperwork required. 

 

Tax Implications 

  • Receives “double taxation,” meaning C corporations are first charged a flat income tax rate of 21 percent. Then, shareholders are taxed once more on their personal income tax returns when they receive their dividends. 
  • Shareholders who actively participate in their corporation’s work are considered employees. Those who meet the criteria only pay self-employment taxes on their salary. Their dividends have a different tax rate.  
  • You must pay estimated taxes quarterly.

 

Tax Forms 

  • C corporations file a Form 1120. Instructions for filling out the form are here.
  • A Form 1099-DIV must also be completed by shareholders if the business pays them dividends. The company must order the forms and distribute them. Instructions on filling out the form are here.
  • The business may also have to file a Form 940 (Employer’s Annual Federal Unemployment Tax Return). More information about who must submit a Form 940 is found here.
  • For quarterly tax returns, file a Form 941 (Employer’s Quarterly Federal Tax Return). Instructions are here.

 

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S Corporations

S corporations are similar to C corporations, except there is no double taxation because it has the same “pass-through taxation” as partnerships and sole proprietorships. 

 

Tax Implications

  • You must report all profits and losses on personal income tax returns. Tax rates are the same as your personal income tax rate. 
  • The business itself doesn’t need to pay any taxes. 
  • Shareholders with employee salaries must pay self-employment taxes on their salary, but dividends aren’t taxed. 
  • You must pay estimated taxes quarterly.

 

Tax Forms

  • S Corporations file a Form 1120S, and instructions are here
  • Shareholders must complete a Schedule K-1/Form 1120S (Shareholder’s Share of Income, Deductions, Credits, etc.), and file it together with their Form 1040. Instructions are here.
  • The business may also have to file a Form 940 (Employer’s Annual Federal Unemployment Tax Return). More information about who must submit a Form 940 is found here.
  • For quarterly tax returns, file a Form 941 (Employer’s Quarterly Federal Tax Return). Instructions are here.

 

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6 Kinds of Taxes Small-Business Owners Might Pay

As a small-business owner, there are many different types of taxes to keep track of. Here are the most common ones to maintain at the top of your mind.

 

1. Self-Employment Tax

If you’ve never owned a business before, you may not know that companies pay 15.3 percent FICA tax to fund Social Security and Medicare. The tax burden falls equally on the employer and the employee so that each pays 7.65 percent. 

But when you’re self-employed, you’re essentially the employer and the employee. You’re responsible for paying the full 15.3 percent, which is known as self-employment tax. Thankfully, you may deduct up to half the self-employment tax on your personal tax return. 

Cloud accounting software—like QuickBooks Self-Employed, Wave Accounting or Freshbooks—can help keep your finances organized to ensure you’re saving enough for taxes throughout the year. 

 

2. Estimated Taxes

Estimated taxes combine self-employment and personal income taxes, and are a calculation of how much tax you’ll have to pay. The critical thing to remember is you must send them quarterly by certain dates. All business entities can use Form 1040-ES to help them figure out how much to send. 

If you use accounting software like QuickBooks Self-Employed Tax Bundle, you can estimate and file your quarterly taxes within the program. You can also pay your estimated taxes directly at eftps.gov

 

3. Payroll Tax

If your company has employees, you’re responsible for paying payroll taxes on their wages. Payroll taxes are comprised of federal income tax withholding, Medicare, and Social Security taxes.

For a fee, many companies take care of the entire payroll process for you or give you the platform you need to do it yourself. These include programs like QuickBooks Payroll, OnPay and Gusto. There are also free online payroll calculators available, like Paycheck Manager and eSmart Paycheck.

 

4. Sales Tax

Although there isn’t a federal sales tax on goods and services when you make a purchase, most states do charge a sales tax. As a business owner, it’s your job to collect and report sales taxes for your products or services. It’s best to understand your state and local sales tax rules to see how they apply to your business. You can search Google for “ [Your State] sales tax requirements” for more guidance.

 

5. Excise Tax

Certain products like cigarettes, gasoline and liquor have a special tax included in the price, known as an excise tax. If you sell these types of items, you’re responsible for collecting the taxes and paying them to the IRS. Form 720 (Quarterly Federal Excise Tax Return) is available for electronic filing. 

 

6. Property Tax

You must pay taxes to the city or county if you own the commercial property where your business is located. Commercial property tax is the same concept as paying residential property tax in the locality where you own your home. 

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Small Business Tax Deductions and Credits

Small business tax deductions and small business tax credits are two IRS allowances that can drastically lower the final amount of taxes you owe—potentially down to nothing. The differences between tax deductions and tax credits can be confusing, so it’s essential to define the two clearly. 

Tax deductions are amounts of money the IRS lets you deduct from your gross income to reduce how much of your earnings are taxed. If you’re self-employed, tax deductions can even lower your income tax bracket and save your hundreds or thousands of dollars more.   

Tax credits lower your tax liabilities dollar for dollar. If after applying all available deductions, you owe $1,000 to the IRS, using an eligible tax credit of $300 would lower your tax bill to $700. Personal income tax credits are either non-refundable or refundable. Non-refundable tax credits can only reduce your tax liability to $0. Refundable tax credits, on the other hand, allow for negative tax liability so that the government gives you a refund. While many refundable tax credits exist when filing personal returns, business tax credits are generally non-refundable. 

 

Common Small Business Tax Deductions

Below is a list of the most common tax deductions small-business owners have at their disposal. Be sure to save your receipts to take advantage of them!

 

1. Qualified Business Income

Under the 2018 tax reform bill, small-business owners with a “pass-through” business—like sole proprietorships, partnerships and S corporations—can deduct up to a whopping 20 percent of their qualified business income on their taxes. 

If for instance, your business makes $100,000 in profit for the 2019 year, you can deduct as much as $20,000 from your net income. As a result, only $80,000 would have regular income tax rates applied.

 

2. Business Startup Costs

All that money you spent setting up your business? You can deduct up to $5,000 if your total startup expense was less than $50,000.

 

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3. Office Supplies and Expenses

Every business needs office supplies, and it’s all deductible. Traditional supplies like printer ink, Post-it Notes, and reams of paper all qualify. You can also write off the entire expense of computers, laptops, smartphones and some software. 

 

4. Rent

The amount of rent you pay for your office space is fully deductible, whether it’s a cubicle or storefront. 

 

5. Home Office

Is your office a spare room in your home that’s used regularly and exclusively for your business? Go ahead and deduct $5 per square foot for the room’s size, up to 300 square feet. 

 

6. Repairs

Costs of repairs and regular maintenance to keep your business running smoothly can be written off as well. These include repainting walls, fixing toilets, and replacing loose floorboards. 

 

7. Utilities

All utility bills used for your business—like Internet, water, electricity, heat—are fully deductible. If you’re in a home office, deduct the percentage of space your home office takes up in your house. So, if your office takes up 10 percent of the home, you can deduct 10 percent of your utility bills. 

 

8. Car

If you use your vehicle for work, the most straightforward write-off is a standard mileage deduction of $.58 per mile. If you’re meticulous with your records, you can also add up car-related expenses and use that instead. 

 

9. Travel

Small-business owners can write-off most travel expenses from business trips for themselves and their employees. Keep a detailed record of your travels to claim this expense.

 

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10. Meals

You can deduct 50 percent of business lunches and dinners with business clients. Costs associated with offering meals to your employees, such as a holiday party, are also fully deductible. 

 

11. Advertising and Marketing

You have to spend money to get your business name out there and find clients. Anything you spend to promote your business can be written off in full. Even something as simple as business cards qualify

 

12. Insurance

Insurance premiums you need for your business—such as liability insurance or business owner’s policy—are deductible.

 

13. Employee Benefits and Salaries

Do you offer excellent salaries to your employees? What about hiring freelancers or contract workers? These are considered tax-deductible expenses. Any money you contribute to employee benefit programs like student loan repayment or 401k is also tax-deductible. 

 

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Common Small Business Tax Credits

Tax credits can be tricky, and often have limits, restrictions and eligibility criteria. The list below has common tax credits small-business owners can potentially pursue, and where they can find out more. Ultimately, a trusted tax professional will be able to tell if a particular tax credit is a good fit for your business. 

 

Tax Credits

 

How to Be Prepared for Tax Time

If you want to keep up with your small business taxes, you’ll need to prepare throughout the year. To have a stress-free tax season, there are also specific records you can gather to make filing your tax returns more pleasant. 

Documents to Save Throughout the Year

  • Gross receipts
  • Office rent 
  • Mortgage interest and real estate taxes
  • Office supplies and equipment receipts
  • Utility bills
  • Transportation and travel expenses
  • Professional and contractor fees
  • Insurance premiums
  • Unclassified income
  • Checking and saving account interest accruals
  • Gift expense receipts
  • Charitable donations
  • Sales records
  • Employee wages

Good accounting software can make it easy to upload and locate these documents when you need them. 

Documents to Gather for Tax Season

  • Last year’s small business tax return
  • Partnership agreements
  • Payroll records
  • Bank statements
  • Credit card statements
  • Accounting records
  • Record of taxes paid throughout the year, like estimated quarterly taxes
  • Depreciation schedules
  • Appropriate tax forms, including:
    • W-2 – Report of your wages and salary if you also earned wages as an employee
    • 1099 – Self-employed income report issued by companies who paid at least $600 for your services
    • 1040 – Individual income tax return
    • Schedule C – Used to state your business’ profits or losses
    • Schedule SE –  Used to calculate how much taxes you’ll need to pay on your net earnings from self-employment
    • 1098 – States how much mortgage interest you paid

 

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Answers to the Top 3 Questions Asked About Paying Small Business Taxes

Here are answers to the most commonly asked questions small-business owners have about paying their taxes, especially those who recently opened their business.

 

1. How Much Can a Small Business Make Before Paying Taxes?

You must pay self-employment taxes if your net income is greater than $400. If you are a sole proprietorship, you’ll file a Form 1040, a Schedule C and a Schedule SE. 

Even if your small business made no money, you must still file a tax return every year. 

 

2. How Much Should I Set Aside for Taxes? 

A standard rule is to put away 25 percent of your profits for your estimated quarterly tax payments. If you make more than $60,000 to $70,000 in profits, bump up the percentage to 30. This may seem like a lot, but as a business owner, the self-employment tax is 15.3 percent versus the 7.65 percent for employees. 

Thankfully, when it comes time to file your tax return, you’ll be able to deduct your business expenses from your taxable income. This will lower your tax liability, and you may find you get money back.  

A tax professional can help you decide the right amount you should save based on your business structure and income.

 

3. When Do I Need to Pay My Small Business Taxes?

If you anticipate owing more than $1,000 in taxes when you file, you’ll need to make quarterly tax payments on top of filing your tax return every year. You can see due dates for quarterly payments on www.irs.gov

If you miss a quarterly payment, you’ll have to pay an interest penalty. Currently, the IRS levies a six percent interest penalty on the difference between what you should have paid for each installment and what you paid (or didn’t pay). The interest accrues until you are up to date. 

States with income tax also have rules about estimated tax, due dates and who must pay. If you charge sales tax on goods and services, look into your state’s requirements. 

 

Small Business Taxes Can Be Complicated

Government rules and regulations aren’t known for being simple and easy to understand. While this guide provides a thorough overview of essential things you need to know when it comes to small business taxes and deductions, consulting with a qualified tax expert will help with tax nuances relating to your business. They can also help make sure you’re correctly fulfilling local and state tax obligations and point out relevant small business tax deductions you may be unaware of. 

Lorraine Roberte
Lorraine Roberte is a freelance writer for hire who offers blogging and article writing services. Her specialties include creating personal finance and digital marketing content for businesses and startups. She uses her expert knowledge, skills, and experience to draft content that gets attention on social media and visibility on search engines.
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