You didn’t get into business to worry about taxes, but collecting and filing tax is a very real part of your existence as an entrepreneur. So we’ve made it simple: this is your small business tax bible—everything you need to know about managing tax season as a small business owner, in one place.
If you’ve got 10–15 minutes, you can read the whole thing from start to finish, or you can use the table of contents to jump to the most relevant parts.
Heads up: This guide is relevant to your 2017 tax return only. The 2018 Tax Cuts and Jobs Act has introduced some significant changes that will affect how you manage your 2018 taxes. After the current tax filing season is over, this guide will be updated with all the relevant details and changes for your 2018 tax year.
How to calculate your taxes
While most small business owners have a CPA do their ultimate tax calculation, it’s worth understanding the mysteries behind finding that number. It helps you plan ahead, and avoid entering tax season blind. This is a quick guide to calculating federal tax. Use the state tax calculator to figure out what you owe closer to home.
Taxes if you run a C corporation
If your business is a C corp, it will be taxed twice: first at the corporate level, and again at the shareholder level when profits are distributed to owners as dividends. The tax rates for C corps for 2017 are as follows:
|Over||But not over||Tax is||Of amount over|
|50,000||75,000||$7,500 + 25%||50,000|
|75,000||100,000||13,750 + 34%||75,000|
|100,000||335,000||22,250 + 39%||100,000|
|335,000||10,000,000||113,900 + 34%||335,000|
|10,000,000||15,000,000||3,400,000 + 35%||10,000,000|
|15,000,000||18,333,333||5,150,000 + 38%||15,000,000|
(table courtesy of The Balance).
Taxes if you run a flow-through entity
If your business is not a C corporation, then it’s a flow-through entity. You pay taxes yourself as an individual, instead of the business paying them. Your tax rate will depend on the business’s taxable income and your tax filing status. Read the full article on calculating your taxes to learn more.
Employment taxes for C corps and flow-through entities
Your small business may also have to pay employment taxes on wages paid to employees and yourself, regardless of your entity type.
These taxes typically include:
- Social Security tax: 12.4% on wages paid up to $128,700 (for 2018). You will pay half of this for each employee and the other half will be deducted from their wages.
- Medicare tax: 2.9% of wages paid with no wage cap. Again, you will pay half of this for each employee.
- Federal unemployment tax (FUTA): This generally equals 6% of the first $7,000 of each employee’s wages. You may be able to reduce this to as little as 0.6% by paying into your state’s unemployment fund.
Note that if you’re a self-employed solo business owner, you will have to pay a self-employment tax. This is equal to the total amount of your Social Security and Medicare tax liabilities, since you don’t have a separate employer to pay half of the tax for you.
How to set aside taxes
It’s one thing to calculate what taxes you owe, but it’s another to have those funds at the ready when duty calls. To cover your federal taxes, saving 30% of your business income is a solid rule of thumb. You can set aside taxes three different ways, depending on how long your business has been around and how often you collect payment.
Set aside taxes per pay
If you haven’t been in business for long, or if your incoming funds are low-frequency but high-value, you can set aside tax each time you receive a payment. When your business is new, it can be difficult to estimate its total income (and therefore your total taxes owed) for the current year. If your business is affected by seasonality, predicting income is especially difficult. Setting aside 30% every time you receive a payment is a simple way to set aside tax, particularly if clients pay you for project work only a few times a month.
Set aside taxes monthly
Set aside taxes once each month if this is the first year your business has turned a profit or if your business income has changed so much that profits from previous years aren’t a good indicator of the income you expect this year.
Begin by calculating your average monthly income. Add up your business income from each month since the beginning of the financial year, then, divide it by the number of months that have passed. Then calculate 30% of that average monthly income each month, and put that amount aside.
Set aside taxes quarterly or annually
You can set aside taxes less frequently—quarterly or even annually, if your monthly business income hasn’t changed since last year. You’ll still need to pay taxes quarterly but you may only need to do the math once, for the entire year. Take last year’s business total income, and divide it by four. Then calculate 30% of that amount. The result is how much you need to save (and pay) for your quarterly estimated tax payments.
Set tax money aside in a separate business bank account (automatic bank transfers make this easy) to keep it removed from your day-to-day financial goings-on.
What tax records small business owners need to keep
Keeping records isn’t just helpful, it’s a legal requirement. The burden of proof is on you, the taxpayer, to back up every item on your tax return with supporting documentation, so our advice is very simple: keep everything for at least three years.
Records you’ll want to hang onto include:
- Bank and credit card statements
- Canceled checks
- Proof of payments
- Financial statements from Bench or your bookkeeper
- Previous tax returns
- W2 and 1099 forms
- Any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return
Exemptions: The $75 Rule
While “keep everything” is the best policy, documentary evidence is not needed if any of the following apply:
- The expense is less than $75 (Note: this rule does not apply to lodging expenses).
- The expense is for transportation, and a receipt is not readily available.
- You are reporting lodging or meal expenses while traveling for business, which you account to an employer under an accountable plan, and for which you receive a per diem allowance.
That said, any business deduction on your tax return can be called into question during an audit—even expenses under $75.
Keep meticulous records on each expense including:
- The amount of the expense.
- The date the expense was made.
- The place the expense was made.
- The essential character or purpose of the expense.
- For meals and entertainment expenses, you also need to list the people involved.
Your best bet is to be over-prepared—a small time investment up front can prevent a lot of hassle down the line.
How to file your tax return
From start to finish, here are the mission-critical steps to filing your taxes.
Get your records in order
Before you start anything, collect all your relevant business records, including:
- Personal information (SSN, address, DOB, etc.)
- Last year’s tax returns
- Employer Identification Number (find yours on the IRS website)
- Invoices you sent to clients
- Records of any goods sold to customers
- Sales records that note money coming into your business
- Rent receipts for your small business
- Office supplies
- Employee salaries
- Client lunch receipts
- Mileage records
Different small business entities will need to supply different information for their tax returns, so we created a small business tax checklist.
Find the right form for your business entity
With your records sorted, get your hands on the right tax form for the type of small business entity you operate.
Sole proprietorship or LLCs with one member
Filing deadline: April 17, 2018
If you own an unincorporated company by yourself or a Limited Liability Company with one member, file as a sole proprietor. You’ll report your business earnings and expenses through an extra form attached to your personal taxes—called a Schedule C—no need to file a separate return. Schedule C is only two pages, and the IRS has fairly detailed instructions to help you get it right.
When you’ve finished, just subtract your total expenses from your earnings to get your net profit or loss. Include this number in your personal tax return.
If your total income is below $66,000 you can use the IRS Free File software to file your taxes. If your income is higher than $66,000, you can still take advantage of the IRS free fillable forms.
If you’re going analog and filing a hard copy of your tax return with the IRS, find the address for your state. Make sure it’s postmarked on or before the deadline.
Partnerships or LLCs with multiple members
Filing deadline: March 15, 2018
Partnerships and LLCs with members that elect to file taxes as a partnership all file small business taxes in the same way.
You need to file Form 1065, and then each individual member will get a Schedule K-1 showing his or her share of the profit/loss for the year. This is reported on each partner’s personal tax return. No need to file a separate business return.
Read our guide to navigating Form 1065.
C corporations or LLCs that elect to be corporations
Filing deadline: April 17, 2018
If your small business is set up as a C corporation, or if you treat your LLC as one, prepare a separate tax return with Form 1120, in addition to personal taxes.
Form 1120 is similar to the Schedule C form, but more complex. The IRS has instructions for Form 1120, but most small business owners elect to hire a professional to complete these forms.
Filing deadline: March 15, 2018
An S corp is simply a C corp or LLC that has elected to file taxes as an S corp, which requires you to use a separate tax form, called Form 1120S. S corp shareholders need to report their share of profit or loss with a Schedule K-1 on their personal taxes, but the corporation still needs to file its own tax return.
Read our guide to navigating Form 1120S.
Any small business that pays contractors
Filing deadline: Sent to recipients by January 31, 2018
If your small business has paid $600 or more to a contractor or professional (i.e. someone who worked for you or provided you with a service but is not an employee), you’ll also need to file Form 1099 as part of your taxes (this article will tell you everything you need to know about filing a 1099). These forms need to be ordered from the IRS, so request them well in advance of the January 31 deadline.
How to reduce your tax bill and maximize your return
There are dozens of ways to reduce your tax bill as a small business owner—and some might surprise you.
Claim every common deduction you can
Your business is entitled to a long list of deductions. Here are the four most common ones.
Business meals and entertainment
Deduct 50% of the cost of food and beverages purchased during business-related meals. Confused about which meals are deductible? Read our guide to deducting food and drink.
Business use of a vehicle
If you use a vehicle solely for business purposes, you can deduct the costs involved in operating it or use the standard mileage rate to determine your deduction (53.5 cents per mile for tax year 2017).
You can deduct costs incurred during business-related travel away from the city or area where you conduct business, including airfare, cab and Uber fares, tolls, parking, lodging and meals, and gratuities.
If you use a specific area of your home exclusively for business purposes, you may be able to claim the home office deduction.
Don’t ignore partially deductible expenses
Common partially deductible expenses—like your home office, phone, internet, and business travel—can add up. For each of these you can only claim a portion of the expense based on how much you’ve used for business purposes. For example, if you use your cell phone 50% of the time for business calls, you can claim 50% of your total phone bill cost.
Deduct the cost of your health insurance
If you’re self-employed, you can deduct the cost of your health insurance plan, as long as the plan is under your name. However, if you are covered by your spouse’s employer’s medical plan, you cannot deduct the cost of your health insurance—even if you opt out of their plan. Consult with your accountant before claiming it on your tax return.
Claim your retirement contributions
Based on your specific retirement savings plan, your Individual Retirement Account contributions are tax deductible. Note that there are limits on plan contributions depending on the type of plan you have.
Claim other lesser-known tax deductions for small businesses
Besides the usual meals, travel and office expenses, here’s a list of lesser-known deductions you can claim as a sole proprietor:
Defer business income until January
If you have enough cash on hand to meet your December expenses, you could cut your tax bill by waiting until January to collect some receivables.
Prepay next year’s expenses this year
If you use cash basis accounting you might be able to prepay your January mortgage or rent, as well as next year’s property taxes, insurance premiums, or advertising and interest expenses. If your business needs new fixed assets and equipment, purchase and place them in service before the end of the year so you can deduct them (up to $510,000). This could include heavy equipment, office furniture, computers, and business software.
Buying business services in bulk—including online bookkeeping services like Bench—also qualifies.
Write off bad debt
There is a silver lining to uncollected accounts receivable—what the IRS calls “bad debt.” If yours is an accrual-based business, you can write off bad debt provided you took reasonable steps to collect it. If you manage to collect it next year, simply count the money as revenue on your next tax return.
Contribute to your employees’ retirement accounts
You can deduct contributions your small business makes to your employees’ qualified retirement accounts, like SIMPLE 401(k)s and IRAs, Simplified Employee Pension (SEP) plans, and profit-sharing plans.
Claim targeted tax breaks
The tax code includes several tax breaks targeted to businesses that perform certain activities:
- Domestic Production Activities Deduction (DPAD) credit: Also known as the Section 199 deduction, this can be claimed by businesses that perform specific manufacturing activities in the U.S.—building and construction, film and video production, and architectural and engineering services.
- The Research and Development (or R&D) credit: You may be able to claim up to 9.1% of eligible research expenses even if you’re not in tech. The IRS has a four-part test you can use to see if your business qualifies.
- The Work Opportunity Tax Credit (or WOTC): If your business hires members of certain targeted groups—like veterans, food stamp recipients and ex-felons—you can claim a tax credit for 25–40% of these employees’ qualified wages, depending on how many hours they work.
How to navigate sales tax
No matter how small your business—be it a hobby, seasonal or just starting out—if you sell something in states with sales tax, you’ll need to file. Here’s your simple guide to doing it right:
Double-check your sales tax filing due date(s)
Sales tax is governed at the state level, and that means each state gets to set their own sales tax laws, rules, and guidelines. While a majority of states want sellers to file sales tax returns on the 20th of the month after the taxable period, due dates in many states can vary.
Verify your sales tax filing frequency
You might file monthly, quarterly, or annually or semi-annually. This frequency is subject to change if your sales volume within a state has increased or decreased over the previous year. The more revenue your business makes in a state, the more often that state wants you to pay sales tax. Your state’s taxing authority will alert you my mail if your sales tax filing frequency changes
File zero returns
If you didn’t collect a single penny of sales tax this year, you still need to file. This is sometimes referred to as a “zero return.” States consider filing a sales tax return to be a “check-in,” and they want to hear from you even if you didn’t make any sales over the taxable period.
Don’t discount sales tax discounts
Many states will allow you to keep a small percentage of the sales tax you collect as a reward for filing and pay your sales tax on time. It’s only 1–2% and it’s generally capped at a certain amount, but worth it. Here’s a list of states with sales tax discounts for on-time filers.
Read on for an in-depth sales tax refresher.
How to calculate and pay estimated quarterly taxes
Paying estimated taxes four times a year may seem like a chore. But if you project these payments correctly, it can actually soften your burden when tax season rolls around. Here’s what you need to know to do it right.
Who needs to pay estimated taxes?
If you will owe more than $1,000 in taxes and intend to file as a sole proprietor, a partnership, S corporation shareholder, and/or a self-employed individual, you generally need to make estimated quarterly tax payments. Businesses that file as a corporation generally need to make estimated tax payments if they expect to owe $500 or more in tax for the year.
You don’t need to pay estimated taxes if you’re an employee or if you meet all three IRS exemption conditions:
- You did not owe any taxes in the previous tax year, and did not have to file a tax return
- You were a U.S. citizen or resident for the entire year
- Your tax year was 12 months long
When to pay estimated quarterly taxes
Quarterly taxes are due in April, June, September, and January:
- For the period January 1 to March 31: April 15
- For the period April 1 to May 31: June 15
- For the period June 1 to August 31: September 15
- For the period September 1 to December 31: January 15 of the following year
How to calculate quarterly taxes
To calculate your estimated quarterly tax payments, first estimate your expected adjusted gross income, taxable income, deductions, and credits for the year. Use last year as a guide. Then apply a few simple calculations. Form 1040-ES for individuals or Form 1120-W for corporations, will guide you through these calculations line by line.
If you’re an individual, mail the form, along with a check, to the IRS office closest to you or pay online or by phone via the IRS Payments Gateway. Corporations must file payments through the Electronic Federal Tax Payment System.
2018 tax deadlines
Below is a list of tax filing dates and important deadlines for the tax year. Take a few minutes to save each relevant filing date to your calendar, and stay ahead of the IRS.
January 17, 2018
Estimated quarterly payments
Say a final goodbye to 2017. The fourth (and final) estimated quarterly tax payment for the previous tax year is due today.
January 31, 2018
Form W-2 filing deadline
Don’t let this deadline surprise you. It’s only been in place since the 2016 filing year.
If you have employees, you’ll need to fill out two copies of Form W-2 for each.
One W-2 must be submitted to the IRS. The other must be sent to the employee. by January 31.
Form 1099-MISC Copy A filing deadline
If you work with independent contractors, the new January 31 filing deadline also applies to certain types of 1099s. The IRS explains, but in short: If you are filing a Form 1099-MISC and reporting amounts in Box 7, this deadline applies to you.
Copy A must be filed with the IRS by this date. Copy B must be furnished to the contractor no later than February 15. If you don’t have amounts in Box 7 on your Form 1099, February 28 is the deadline for paper filing, or March 31 for electronic filing.
February 15, 2018
Form 1099-MISC Copy B filing deadline
If you are filing a 1099-MISC, regardless of whether Box 7 is filled, you must get Copy B to the contractor in question no later than February 15.
March 15, 2018
S corporation and partnership tax returns due
Today is the deadline to file your S corporation tax return (Form 1120S) or partnership return (Form 1065). Note that S corporations and partnerships do not pay taxes on their income. That tax is paid on the individual incomes of the shareholders or partners, respectively.
April 17, 2018
Estimated quarterly payments
Individual tax returns due
If you’re a Sole Proprietor filing Schedule C on your personal tax returns, the April 17 deadline applies to you too.
Corporation tax returns due
June 15, 2018
Estimated quarterly payments
Your second estimated quarterly tax payment is due today.
September 17, 2018
Estimated quarterly payments
Your third estimated quarterly tax payment is due today.
November 1, 2018
Start making tax moves
End of year tax moves can help grow your business and reduce your taxable income for the year. If you haven’t done so already, now’s the time to plan and take action.
December 31, 2018
Tax moves deadline
Today is the final day to make any tax moves for the 2018 tax year.
Set up a solo 401 (k)
If you are self-employed, today is the deadline to set up a solo 401 (k).
How (and why) to file for a tax extension
While an extension won’t get you out of paying your taxes by the regular tax deadline, it will give you more time to take advantage of the right tax deductions before you file.
Here are the steps to file for a tax extension.
Step 1: Download the form that corresponds to your business type
Partnerships: March 15 To qualify for an automatic six-month extension, use Form 7004.
S corporations: March 15 To qualify for an automatic six-month extension, use Form 7004.
Sole proprietors: April 17 To qualify for an automatic six-month extension, use Form 4868.
C corporations: April 17 To qualify for an automatic six-month extension, use Form 7004.
U.S. citizens and resident aliens based overseas
If you are a U.S. citizen or resident alien, and you are living/running your business from outside of the U.S. on the regular due date of your return, you may qualify for an automatic two-month extension. You can apply for the extension using Form 2350.
Step 2: Submit your tax extension to the IRS
The quickest way to submit your tax extension application is online but you can also apply by mail. Find the correct mailing address in the table, “Where to File,” in the form instructions document (links above).
Step 3: Pay your taxes on time
When you apply for a tax extension, you’re asking the IRS for an extension of time to submit your tax return. It gives you extra time to file your paperwork, but not more time to pay the taxes you owe for the year. When you file for a tax extension, you’re required to estimate how much tax you owe for the year, and pay that amount to the IRS before the regular tax deadline passes.
Every IRS penalty you should know about
Taxes are serious. But they feel a lot less scary when you fully understand the possible penalties. Short of having criminal intentions, you probably won’t be thrown in jail or have your small business taken away.
Here are the IRS penalties for the most common, non-criminal offenses.
Penalties for missing a deadline
Filing your taxes late
You can always file for a tax extension, but if you file your taxes more than 60 days past the due date or extension date, the minimum penalty is $205—or 100% of your owed amount if it’s less than $205. After 60 days, your fine accumulates at a rate of 5% of unpaid tax per month that you don’t file.
Paying your taxes late
You will have to pay an additional 0.5 % of unpaid tax every month until you pay your original tax bill, up to a maximum 25% of your total tax bill.
Combined penalty for filing late and paying late
Thankfully, these two penalties don’t stack. If you are late to both, you will only pay the 5% per month interest fine.
Paying your taxes late, after an Issuance of Notice
If the IRS finds that you owe more in taxes than you originally calculated, they’ll send an Issuance of Notice to ask for the additional payment. After that, you have 21 calendar days to pay the additional amount, otherwise 0.5% interest per month will begin to accumulate.
Submitting a form late
If you’re late returning a W2 (for employees) or a 1099 (for contractors), the fine is a maximum of $50. If you’re late returning a 1065 form (for partnerships) or a 1120S form (for S corps), the fine is a maximum of $195 a month per partner.
Penalties for making a mistake
Calculating your owed taxes too low
If you substantially underestimate how much tax you owe, or the IRS finds you were negligent in an aspect of your taxes (ie. it wasn’t just a small mistake), the penalty is a 20–40% increase in taxes owed.
Calculating employee taxes incorrectly
There is a 100% penalty on all unpaid federal employee taxes. In other words, you’ll have to pay twice for the employee taxes you don’t pay the first time. The two common scenarios for this are not reporting employee wages through your payroll provider, and not reporting employee tip income.
What could trigger an audit?
IRS audits are triggered for one of three reasons:
- Random selection through the IRS system
- Computer screening returns that fall outside the IRS “norms” are flagged
- Related examinations if your tax return is connected to another taxpayer who is being audited, you may be audited just by association
Small business signals that could trigger an audit
- Failure to report income that has already been reported to the IRS (on W2s or 1099s)
- Taking suspiciously big deductions—for instance, deducting 100% of your personal car use
- Misclassifying your employees
- Failing to issue information returns—W2s, 1099s, etc.
How to avoid a tax audit
You can take certain measures to reduce your chances of showing up on the IRS radar.
Account for all of your income
If you own a small business, and you do some consulting on the side, make sure you accurately report all the money you bring in. The IRS uses the information on Forms W-2, 1098, and 1099 to compare the income and deductions you report on your return with information reported by others, such as employers, banks, and businesses. Any discrepancies are an obvious red flag for the IRS.
Double-check your return
Making a careless error on your tax return is an easy way to get a call from the IRS. In the event of any omission, miscalculation, or error on your return, the IRS is obligated to further investigate your case. Hire a bookkeeper to make sure your books are penny perfect.
Maintain organized records
In the event that you do get audited, keeping your small business records in order will make it quicker and easier to substantiate anything that the IRS decides to question.
Separate your personal and business expenses
The IRS is strict about business owners separating personal and business finances. Unless your business operates as a sole proprietorship, you are legally required to manage your business and personal expenses in separate accounts.
If your business and personal expenses are currently commingled in the same account, open a small business bank account and separate your expenses as soon as you can.
Stay consistent with your accounting method
As a business owner, you have the choice of two different accounting methods: cash basis or accrual accounting. If you bounce back and forth between the two methods, the IRS might interpret this as potentially deceitful, and it will likely incite further investigation.
Keep it straight—employee or contractor
When you work with hired help, it’s crucial that you properly classify workers as employees or independent contractors. The distinction determines which taxes need to be paid, when they are paid, and who pays them.
Generally, for an employee, you’re required to withhold income taxes and pay unemployment, social security, and Medicare taxes. With an independent contractor, you generally don’t need to withhold or pay taxes on their paychecks.
Taxes are nothing to trifle with but they also aren’t as scary as we sometimes make them out to be. As you prepare to file your taxes this year, use our 2018 Tax Checklist to stay ahead of deadlines and address every detail before you file.