December 20, 2020

How to file taxes as a small business (a simple 4-step guide)

Business taxes can be tricky, especially for small business owners.

But filing your small business taxes for the first time doesn’t have to be a stressful affair. These days, there’s smart accounting software for small businesses that can help you keep track of your business records and receipts in real-time, monitoring your spend as you go. That way, you’re not buried under a pile of paperwork when tax season rolls around.

Want to make the most out of tax season and protect your assets, all while lowering your stress levels? This beginner’s guide to small business taxes will help you get started. 

Why you need to file taxes as a small business

Whether you’re a self-employed sole proprietor, have a limited liability company (LLC), are an independent contractor, or a business owner with multiple employees, the government expects you to pay taxes on money you made over the year. It might even surprise you to learn that small businesses are scrutinized more heavily by the IRS than their larger corporate counterparts, due to the assumption that they are more likely to misreport their business income.

For small business owners, the penalties associated with misreporting taxes depend on the extent of the mistake. Here are just a few of the ways improperly filing your business taxes (or not filing them at all) can sting:

  • You could lose your refund if you don’t file within three years of the deadline.
  • You could face stiff penalties for not filing at all or even criminal prosecution.
  • The small business audit process is inefficient, usually resulting in weeks or months of busywork and waiting for the results.
  • Managing an audit as a small business is also expensive, often forcing you to sink capital into CPAs, attorneys, or enrolled agents for assistance.

What taxes do small businesses have to pay?

Depending on your business activities and corporate structure, you may have a different tax rate at the local, state, and federal level as a small business owner.

Some of the primary types of taxes small businesses can expect include:

  • Federal income taxes for small businesses and corporations
  • Self-employment tax on owner’s share
  • Excise taxes on use and consumption
  • Dividend tax on shareholders
  • Sales tax on products and services (certain states)
  • Payroll/employment taxes
  • Property taxes
  • Gross receipts tax
  • State income tax

Of course, you’ll want to confirm exactly which taxes you have to pay and when—to find out your precise tax requirements, refer to the IRS and Small Business Administration websites. 

How to file small business taxes for the first time (in 4 simple steps)

Filing small business taxes for the first time doesn’t have to be an intimidating process. It can be broken down into four simple steps:

  1. Gathering your financial records
  2. Determining your tax deductions
  3. Filing the correct forms for your business structure
  4. Filing by the right deadline

Step 1: Gather your financial records

The first step to preparing yourself for the hustle and bustle of corporate tax season is to get your financial records in order. Organization is key. Try not to leave this step for a few days before the filing deadline. Instead, keep a record of the following in an organized fashion:

  • Your taxpayer identification number
  • Bank account statements
  • Credit card statements
  • Your business tax return from the year prior
  • Pertinent accounting records (collect these year-round to streamline the process)

If manual organization is not your MO, automated expense management software can help you keep track of yearly accounting records (detailed below).  

Step 2: Determine your tax deductions

Small business tax deductions can be a welcome relief to the hassle of tax season. With the right organization, awareness, and tax prep software, you can optimize your tax filings in order to recoup a maximum amount of deductions. 

The first step is to know what you can claim each tax year. Here are a few of the most common tax write offs to watch out for:

  • Rent on office spaces
  • Business insurance
  • Vehicle expenses
  • Business-related meals
  • Office supplies and machinery

While how much you can deduct depends heavily on your business size and sector, keep in mind that 9-in-10 businesses overpay on their taxes each year. If you aren’t hiring a tax professional to assist you during tax season, be sure to familiarize yourself with industry-specific deductions and the right tax software to decrease your tax bill.

Step 3: File the correct forms for your business structure

Depending on the business entity you’re registered with, your business tax forms may differ from the individual income tax form. However, some business structures simply attach an extra form with their individual tax form when filing their business income.

Refer to these basic tax laws when you’re filing your business taxes:

  • Sole Proprietorship or Single-Member LLC – You must attach a Schedule C form to your usual individual income tax return (Form 1040).
  • Multi-Member LLCs – LLCs offer a lot of flexibility when it comes to taxation purposes. You can file taxes as a corporation and use Form 1120, file as a partnership using Form 1065, or even file as an S corp using Form 1120-S. 
  • Partnerships – Partnerships must file taxes with IRS Form 1065, even though the partnership itself does not get taxed. This form is designed to report business-related profits and losses. You must also attach a Schedule K-1 form to your tax return.
  • C Corporations – C corporations must file taxes using IRS Form 1120. They also have to file Form 941 to report quarterly employment taxes, like Medicare, social security, and income tax withholdings. 
  • S Corporations – S corporations file with IRS Form 1120-S. However, C  corps and LLCs can also file taxes as S corps, depending on their situation. 

Step 4: File by the right deadline

The due date for tax filing differs depending on your business structure. Here’s the breakdown:

  • Single-member LLCs and sole proprietorships only have to file by the tax day we all know and love: April 15th
  • All other corporate entities, like S corps, C corps, partnerships, and multi-member LLCs, must file a month before: on March 15th
  • Partnerships and corporations are also required to file quarterly employment taxes. These deadlines are typically in mid-April, June, September, and January. 

If you don’t file an extension and miss this deadline, penalties can be stiff: the IRS will charge them approximately $200 per owner for every month their taxes haven’t been filed after the deadline. 

Which businesses need to file estimated tax payments?

Not every business entity is expected to make estimated tax payments. But if you’re a sole proprietor, partner, S corporation shareholder, or self-employed, you may be required to so long as both of the following conditions apply: 

  • You expect to owe $1,000 or more on taxes ($500 for corporations) after subtracting federal tax withholding and refundable credits. 
  • You expect federal withholding and refundable credits to be less than either: 90% of taxes shown on your current year’s tax return, or 100% of the tax shown on the previous year’s federal tax return (covering 12 months).  

In some cases, you may not have to pay estimated taxes for the current year. To qualify for that exemption you need to satisfy the following conditions: 

  • You had no tax liability for the prior year.
  • You were a U.S. citizen or resident for the whole year.
  • Your prior tax year covered a 12-month period.

3 benefits of filing estimated quarterly taxes

As a small business, filing quarterly estimated taxes poses 3 main benefits.

1. Avoiding penalties 

Depending on your business’ tax status, you may be legally expected to provide estimated taxes in lieu of withholding. Should you underpay, you could be subject to an estimated tax penalty. 

Those penalties can be pricey, especially if you dramatically underestimate. Per the IRS the penalties include:

  • Interest on money owed – “Generally, interest accrues on any unpaid tax from the due date of the return until the date of payment in full. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest compounds daily.”
  • Failure-to-pay penalties – “The failure-to-pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25%, of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full.” 

As a general rule, it’s better that you err on the side of overestimating your quarterly taxes by about 3 to 5%. This extra amount will be given back as a tax return if you do, in fact, end up overpaying.

2. Preventing an end of the year tax bill “bomb” 

Paying as you go helps with financial planning and allows you to avoid problems come tax time. For many, making four smaller payments doesn’t hurt your business bank account as much as a single lump sum payment. Plus, it makes it easier to budget and plan your spend.

3. Gauging cash flow 

Cash flow management is an important part of running any business. You need cash on hand to pay your employees, cover expenses, and also to pay your taxes. But budgeting for tax season can be tough. By breaking your tax payments up into four smaller quarterly payments, rather than one lump sum, it can be easier to gauge cash flow throughout the year and plan for seasonality. 

How to calculate estimated tax payments

The process for calculating estimated tax payments is relatively straightforward, but for the sake of clarity, we’ll run through the process. Here’s how John, a self-employed independent contractor, would calculate his estimated quarterly tax payment each month.

Step 1: Estimate the year’s taxable income

To calculate his estimated income tax, John will first need to determine how much money he’s likely to make. 

In this case, John expects to earn $100,000 this year. He also has $20,000 in deductible income. Subtracting his deductions ($20k) from expected income ($100k), John is left with a $80,000 adjusted gross income (AGI).

Step 2: Calculate the income tax

John then takes his adjusted gross income ($80k) and multiples it by his income bracket tax rate. According to that rate, he would have an estimated income tax of $14,759. 

Note: Tax brackets are subject to change on a yearly basis. So check to see that you’re using the most recent year’s numbers. 

Step 3: Calculate the self-employment tax

As mentioned, John is self-employed, which means he will also have to pay a self-employment tax. To determine this tax quarterly estimate, he needs to multiply his estimated total income ($100k) by 92.35%. That is $92,350.

Where does the 92.35% come from? According to the IRS

“Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment. You calculate net earnings by subtracting ordinary and necessary trade or business expenses from the gross income you derived from your trade or business.”

But that’s not the only tax that needs to be considered. There’s also the Social Security tax (12.4%) and Medicare tax (2.9%). Together, they represent the 15.3% “self-employment” tax number. 

So, John’s $92,350 needs to then be multiplied by 15.3%. That leaves him with a $14,129.55 estimated self-employment tax. 

By adding estimated self-employment tax ($14,129.55) with the income tax ($14,759) you get John’s estimated taxes total of $28,888.55. 

Step 4: Add it up and divide into quarters   

Take John’s estimated taxes total of $28,888.55 and divide it by 4 (four quarters in a year). That’s his number—a quarterly tax of $7,222.14. 

Note: Despite some tax quarters being shorter than others, it’s still recommended to treat each tax payment as a fourth of the total each quarter.

Filing small business taxes is a breeze with automated expense management

To make filing small business taxes as painless and accurate as possible, tax prep needs to occur year-round. And an automated expense management platform can help. 

Expense automation helps with tax prep by: 

  • Keeping all of your business expenses organized, searchable, and automated for easy access.
  • Automatically sorting your business expenses by category, department, or employee.
  • Continuously keeping tax documents up-to-date so you never left scrambling during tax season.

Not all automated expense platforms are the same, however. Ramp’s is the ideal tool for filing small business taxes because it helps keep your documents in order year-round, without the hassle of manual processes. It’s also the only one that’s connected directly to your corporate card. 

Here’s how Ramp makes small business expense management and tax prep easier than ever:

On top of making tax prep a breeze, Ramp’s automated expense management platform offers robust, real-time accounting that can help any small business stay on top of their company spend. 

Enjoy dynamic spending controls on each card, 1.5% cash back on all purchases, and high spending limits.

To explore how Ramp can help you elevate your business and take charge of your company finances, talk to an expert today.

The information provided in this article does not constitute legal or financial advice and is for general informational purposes only. Please check with an attorney or financial advisor to obtain advice with respect to the content of this article.

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How much does a small business have to make to file taxes?

All US businesses are legally required to file tax returns with the exception of partnerships, which need to file an information return.

What is the due date for small business taxes?

April 15th is the due date for businesses and individuals to file their taxes in the United States. Businesses can apply for an extension using form 7004. 

Do I have to file taxes my first year in business?

All businesses in the United States are required to file taxes, even in their first year. However there are different guidelines for filing based on your business structure and amount of income.

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