If you’re wondering if you’ll need to file taxes for your small business, the answer is almost always “yes.”
But where do you start? What forms do you need to file? How do you figure out how much you’ll owe? Consider this your complete guide to filing taxes as a small business.
Gather your business records
Before you start anything, make sure you have all your relevant business records on hand. Depending on your type of business entity, you’ll need different things, but start by gathering the following:
- last year’s tax returns
- your Employer Identification Number
- your SSN
- financial statements (balance sheet and income statement)
- receipts and expenses
Get your bookkeeping up to date
Accurate and up-to-date bookkeeping is possibly the most important ingredient for a stress-free tax season. If your books are a mess right now, that’s okay. You can hire Bench to get you caught up, fast.
Or, you can do it yourself by following these steps:
1. Record and categorize every business transaction from your tax filing year
This is the hardest part, and it will take you a long time. But starting from the first day of the tax year, going back to January 1, you’ll need to record and categorize every single business transaction. You can use accounting software, or an Excel template. The important thing is that you record the amount, what category it falls under, the date, and a short description of what the transaction was for.
2. Reconcile your books with your bank accounts
If there are any discrepancies between your bank statements and your bookkeeping records, it’s best to catch these as soon as possible. Get in the habit of cross referencing transactions in your bank statements with transactions in your company records to ensure everything is accounted for. Reconciling helps you know for sure you’ve recorded every transaction properly. It’s best to do this with your bank statements and your credit card statements, making sure every transaction is accounted for on your books.
3. Produce financial statements
You’ll need to summarize all those transactions in the form of a balance sheet and income statement in order to file your taxes (particularly if you’re a corporation). Reason being, you need to know the total amount of income and expenses you’ve incurred. Those amounts will come up on your tax return. Bench customers, we’ll take care of this for you.
4. Gather your receipts and invoices
It’s essential that you keep a detailed account of how you spent money on your business. Some of the types of receipts, invoices, and records you’ll want to track include invoices you sent to customers, business expenses, records of any bad debt write-offs, and vendor accounts.
5. File tax forms for your contractors and employees
You’ll need to file tax forms to show record of anyone who your business employed. If you paid any contractors more than $600 in a year, have them submit a W-9 to you, which you’ll use to fill out and submit a Form 1099-MISC to the IRS. You’ll file W-2s on behalf of your own employees. Make sure you have all of the necessary information from your employees and contractors required to fill out and submit these forms.
Further reading: How to Catch Up On Your Bookkeeping.
It’s also worth keeping in mind that different small business entities will need to supply different information for their tax returns, so we created a handy small business tax checklist for you to make sure you’re prepared with what you need.
How much are small business taxes?
If your business is taxed as a corporation, your tax rate is a flat 21%.
If your business isn’t taxed as a corporation, that means your business itself won’t pay taxes, but you personally will. Which means you’ll need to consult the tax tables to figure out which tax bracket you fall under.
Set aside money to pay your taxes
When you run a business, it’s important to remember that you’ll be paying taxes based on your self-reported net profits. Keep in mind that in many types of small business structures—namely sole proprietorships, partnerships, and S corporations—you’ll generally need to make estimated quarterly tax payments if you expect you’ll owe more than $1,000 in taxes $1,000 in a calendar year.
This means it’s important that you always have enough money in the bank to make these payments in April, June, September, and January.
Saving about 25-30% of your net business income will make sure you’ve got the money required to pay your federal income taxes. We recommend keeping this money in a separate bank account from the one you use in your day-to-day business dealings, as a great way to keep you from dipping into this fund.
There are two great ways to save this money, depending on the structure of your business:
For businesses with a consistent stream of income: You can simply set up automatic bank transfers to regularly pull funds from your primary bank account into a secondary savings account.
For businesses with variable income: If you close large deals less frequently, get in the habit of making these transfers manually whenever you receive payment from a client.
With a bit of time and practice, this process will become streamlined and a part of your routine.
Claim your small business tax deductions
Here’s the great news about being a small business owner—in most cases, you qualify to take advantage of more tax deductions and tax credits than you would as a traditional employee with a W2.
Here’s a high-level overview of some of the most popular categories of tax deductible business expenses. Keep in mind this is just the tip of the iceberg—check out our article on small business tax deductions for more. Additionally, your tax professional can give you more specific, tailored advice on what expenses exist for your business.
If you have expenses that you incurred before you began running your business, you can deduct up to $5,000 of startup costs in the year your business opens. Any startup costs above that amount can be amortized over 15 years.
You can deduct the cost of the items you had to purchase to provide the goods and services you sell (e.g., purchasing bulk flour for your bakery or ink for your calligraphy business).
Small items for the office (e.g., pens, post-its and coffee) are covered, but larger items (e.g., desks and chairs) are not as these are instead considered capital goods.
The rent you pay for the space where you conduct your business (e.g., your office, a kitchen commissary space) is also tax-deductible.
Home office expense
If you have a dedicated space within your home for doing work (e.g., a second bedroom or solarium) instead of a traditional commercial office space, you can claim a portion of your rent/mortgage and other home expenses (e.g., heat, electricity, and insurance). The amount you claim should be in proportion to the size of the space. For example if your work room was 200 sq ft and your apartment was 1,000 sq ft in total, you could deduct 20% of your expenses.
You can deduct all types of ordinary commercial insurance premiums for buildings, machinery, and equipment you require to run your business.
Many types of business travel expenses are deductible, including: air fare, bus passes, hotel expenses, cost of local transportation between the airport and accommodations (e.g., taxis, Uber), and 50% of the cost of meals while you or an employee are on a business trip
Salaries and benefits
Salaries and benefits you pay to employees, such as performance bonuses and insurance premiums, can be deducted as well.
Keep the details straight on your business expenses
In order to claim an expense with the IRS, you’ll need to have the following info on hand for every expense:
- the amount
- the date the purchase was made
- where you purchased the expense
- what form of payment you used
- the reason for the expense (i.e., its connection to your business)
- for meals and entertainment expenses, it’s also important that you make a note of who was involved (this includes both your employees and any clients present)
You can record this information in a spreadsheet, in a note on the side of the receipt itself before you photograph it, whatever works best. In the case of an audit, the IRS can ask for all of this information to make sure the expense falls within their guidelines.
How to file small business taxes
Each type of small business files taxes a bit differently, so the forms you’ll need to fill out for your business depends on the way your business is structured.
The main business structures are:
- Sole proprietorship
- Partnership (includes both limited and limited liability)
- Limited liability company (commonly known as an LLC)
- C corporation
- S corporation
We’ll break down how each type of small business files their taxes. That way, you can quickly jump straight to the information you need.
Further reading: Filing Business Taxes (A Simple Guide)
Filing taxes as a sole proprietor
Sole proprietorship is exactly what it sounds like—it’s a fancy way of saying an unincorporated business that has only one owner. In businesses slotted into this category, there is no legal distinction between the owner and the business entity.
If you run your own company with no partners, filing taxes is incredibly simple. All you have to do is fill out a Schedule C when you file your annual personal tax return. The IRS Schedule C is a form that you attach to your main individual tax return on Form 1040. Essentially, it just gives you a way to tell the IRS about the profit or loss from your business.
Filing taxes as a partnership
Partnerships file Form 1065, and then each individual member will include a Schedule K-1 showing their individual share of the profits/losses for the year when filing their personal tax returns. Form 1065 gives the IRS an overview of the company’s profits/losses for the year, but the K-1 is where each partner actually reports and pays taxes on their shares of income from the business that year.
Filing taxes as a limited liability corporation (LLC)
If you are the only member of your LLC, it’s really simple—just follow the same rules a sole proprietor would and fill out a Schedule C when you file your annual personal tax return.
If your LLC has two members or more, it’s only a hair more complicated than that. In this case, you’ll file more like a partnership does. This means you file Form 1065, and then each individual member will get a Schedule K-1 that displays their share of the profits/losses of the business for the year. This number is then reported on each partner’s personal tax return.
Further reading: LLC Taxes (A Simple Guide)
Filing taxes as a C corporation
If your small business functions as a C corporation, or if you treat your LLC as one, you’ll need to prepare and file a separate corporate tax return with Form 1120, in addition to preparing your personal tax return. The IRS has instructions for filling out Form 1120.
While it can be helpful to have a read-through to make sure you understand the fundamentals, most small business owners choose to hire a professional to complete these forms.
Filing taxes as an S corporation
If your business is an S corporation, or an LLC that has elected S corporation status, shareholders will need to report their share of profit or loss using a Schedule K-1 on their personal taxes. In addition, the corporation also needs to file a corporate tax return using Form 1120S. The IRS has instructions for filling out Form 1120S, but again most small business owners choose to have a CPA handle these forms.
Further reading: S Corp Taxes (A Simple Guide)
Filing taxes as a nonprofit
Nonprofits are taxed differently than for-profit companies. In most cases, nonprofits can apply to the IRS to become exempt from federal taxes, under Section 501. Learn more about the specifics when it comes to your relationship with taxes as a nonprofit here.
Most self-employed folks will operate either as a sole proprietorship (including independent contractors), limited liability company, partnership, or S corporation. All these structures are considered pass-through entities, meaning your earnings are reported as part of your personal income.
Since you’re your own boss, you’ll need to pay self-employment taxes, which comprises of social security and Medicare taxes. The total self-employment tax rate is 15.3% of your income.
Further reading: Self-Employment Taxes (A Simple Guide)
Sales tax is a state tax that you’re required to collect from customers and remit to the government.
Even if you’re an ecommerce store without a physical presence in any state, you’re still on the hook for sales tax.
Depending on the state, you might have to file a sales tax return monthly, quarterly, or annually.
Further reading: What is Sales Tax?
As an employer, you’re responsible for a few payroll-related taxes:
- FUTA Federal Unemployment Tax (effectively a 0.6% tax)
- FICA (7.5% tax for social security and Medicare)
- Collecting and remitting employee income tax
- State and local tax (different depending on where you are)
You can calculate how much federal payroll tax to withhold using IRS Publication 15.
Further reading: Payroll Tax (What It Is and How to Calculate It)
How has the Tax Cuts and Jobs Act changed small business tax?
President Trump’s tax reform came into effect on January 1, 2018.
The highlights of how this affects U.S. small businesses:
- The corporate tax rate was reduced to a flat 21%
- All other entities were offered a 20% tax deduction called the QBI deduction (if you qualify for it)
- Entertaining clients is no longer tax deductible
- Office snacks and meals are now 50% deductible (they used to be 100%)
- The amount of car depreciation you can write off was almost doubled
To learn more, check out our guide to the Tax Cuts and Jobs Act.
How to pay small business taxes
Most small businesses are required to pay estimated taxes quarterly, rather than annually.
Submitting your payment to the IRS is a breeze: just fill out form 1040-ES and mail it along with a check to the IRS office closest to you.
You can also pay estimated taxes online online or by phone via the IRS Payments Gateway.
For corporations, payments must be filed through the Electronic Federal Tax Payment System.
Further reading: How to Pay Small Business Taxes (Complete Guide)
If you’ve found this “small business taxes for dummies” guide useful, you might find it helpful to download our Small Business Tax Checklist for staying organized.