When it’s your first year growing and building your first business, tax time can feel like one big pop quiz—only worse. Not only do you need to know all the material from the last year, but the quiz takes place on possibly dozens of different quiz forms, and you have to know which forms you need and which you don’t. Ah, filing business taxes.
Seasoned business owners may not fret so much, because they’ve grown accustomed to their seasonal filings or they’ve simply hired on an accountant or finance guru to help. On the other hand, perhaps they’ve enlisted an expert business tax prep company to manage everything for them.
But in either case, most business owners could use a little refresher.
As a full-service tax representation firm, we’ve spent two decades empowering business owners to make their taxes work for them—not the other way around. So we know that every business is different. However, we think helping you get the tax information you need to succeed on your own terms is a great start.
So everybody, to your desks! Let’s kick off our complete crash course to filing business taxes. We’ll answer the why, the how, and the what-the-heck of business taxes so that you can file a business tax return that will earn an ‘A+’ from the IRS.
(Full disclosure: The IRS does not give out letter grades for your taxes—it’s more of a pass/fail system. But who doesn’t love a nice A+?)
Your company’s success hinges on how well it manages costs, streamlines operations, and yes, how it files its returns. That’s where the big pop quiz metaphor comes back in: Mastering the material is one thing, but mastering it on a quiz helps you to get the A at the end of the semester.
That is to say, taxes make a difference. So two companies with essentially the same business model, sales, costs, and employees may have a ton of difference in their bottom lines simply from the way they process their books and prepare their business taxes.
And as much as we wish it weren’t the case, business taxes just aren’t the same beast as personal taxes. Consequently, it takes a whole new range of expertise to give the maximum benefit to your bottom line.
Ultimately, this reality applies to all businesses, whether you own a small consulting firm with modest income or a large corporation with millions in annual revenue. Nail your business taxes and reap the rewards.
Look, is vocabulary boring sometimes? Yes. But it’s an unavoidable part of our business taxes crash course.
And we’ll make it as brief and as painless as possible, deal? In other words, we’re not going to get into all the details that apply to, say, bookkeeping. So we’ll just share the need-to-know info to give a basic working knowledge of what you’re likely to run into as a business owner on your taxes. Of course, you can visit the IRS for more.
As a business owner, you can account for your company’s expenses and income a couple of ways. They mostly boil down to when you record an expense or any income. First, you can use accrual accounting, in which you record income and expenses when they’re earned—i.e. when you send or receive the invoice. Second, you can use cash accounting, in which you record the income or expense only when it’s been paid. So, rather than recording at the time of invoicing, you record when the check or charge is processed.
We all know what an audit is, so instead we’ll use this space to reassure you what an audit is not. An audit is not the IRS trying to levy a case against your business. Generally, audits occur when the IRS simply wants to double-check your records against the return to make sure things were prepared properly. You should always take a tax audit seriously, but you shouldn’t freak out about it.
You understand deductions already, so we won’t belabor the whole “they lower your taxable income” point. But as a business, typically you have access to a much wider array of tax deductions that the average taxpayer. For example, home office expenses, vehicle expenses, overhead and pens, and more typically all count as deductions.
If you’ve done much investing, you probably know the idea of appreciation and depreciation. When an investment goes up in value, it appreciates. When it goes down, it depreciates. Luckily, depreciation can offer you some serious savings from the IRS. For example, that delivery vehicle your flower shop owns is worth less now than it was worth five years ago. So, you can write off that loss in value.
Your Employer Identification Number, or EIN, is a unique ID your business uses for its dealings with the IRS. Think of it like a Social Security Number. If you run a sole proprietorship or LLC without employees, the IRS doesn’t require you have an EID. But it can help you organize your personal and business finances.
As an employee, your employer withholds your taxes each paycheck. But when you pay taxes as a business (with or without employees), you have to calculate and pay taxes for your business on a quarterly basis. Of course, the exact figure may not be quite what you end up calculating, as various expenses and other business income-related events may come up throughout the year. That’s why it’s called an estimated tax. To estimate your taxes, you’ll use Form 1040-ES.
Like deductions, exemptions can also reduce your taxable income. However, they differ from deductions because they don’t involve your business’s spending. Instead, they refer to a specific amount as stated by the government. For example, a state or local government may offer an exemption to renewable energy companies for setting up shop in their state.
Life doesn’t wait until after you’ve filed your taxes to throw a wrench into the works. As a result, you may find the need to file an extension for your taxes. Then, the IRS grants an extra six months to fill out and file your business taxes. (You still need to pay your taxes on time, though.)
When it comes down to the nitty-gritty of filing business taxes, the type of business you run—and its structure—will largely determine which tax forms you need. So rather than walking you through a long list of tax forms, we’ve instead organized these forms by business structure.
But we’ll start with the one that helps you get an EIN.
You won’t use Form SS-4 during tax season while filing taxes for your business. Instead, this form allows you to apply for an employer identification number, or EIN. This unique nine-digit number identifies your business with the IRS, and is also called a business tax ID number.
The IRS does not require EINs for sole proprietorships and single-person LLCs without employees. However, it remains a wise decision to file the SS-4, as it can help you better organize your small business taxes.
While you typically use this form to file your individual income tax return, as a sole proprietor of a small business you will use several 1040 schedules to file.
Use Schedule C to report the annual income—or loss—from your business. Then, this form will help you file your 1040.
As a self-employed person, you don’t just owe regular income taxes. You’ll also owe your portion of Medicare and Social Security taxes, which would normally be withheld by an employer. Use 1040-SE to calculate your self-employment tax liability and add it to your 1040.
Use this form to calculate and pay your estimated taxes. Because you don’t have an employer to withhold your taxes for you, you’ll need to pay these estimated taxes quarterly—and you’ll use this form to do that.
If your business is a partnership, you have multiple tax obligations. To clarify, you’re responsible for paying taxes on the partnership, as well as individually. So these are the major business tax terms you’ll need to familiarize yourself with regarding forms.
For your partnership, you’ll complete Form 1065 to report income, gains, losses, credits, and deductions.
Use Schedule K-1 along with Form 1065 to determine your share of both income and losses.
Depending on what type of corporation you run, your tax form needs will differ. Here’s a rundown of the basic business tax terms you’ll need to know.
Legally, C corporations exist as separate entities from their owners. So, this form serves as an annual report where you note business gains, losses, credits, and deductions. Ultimately, these figures determine how much your corporation will owe in taxes.
Use Form 1120S for S corporations. Similar to Form 1120, Form 1120S acts as an annual report of gains, losses, credits, and deductions. And it affects your personal tax return, much like Form 1040 Schedule-C. This primary difference here is that you file Form 1120S separately from your personal return.
All shareholders of your S corporation should fill out Schedule K-1. It works similarly as Schedule K-1 for business partnerships by calculating each shareholder’s share of the profit or loss of the business.
So your business doesn’t need to fill out the K-1. Instead shareholders will use it to complete their individual tax returns.
Both C corps and S corps may need to calculate and pay estimated quarterly taxes. You will use this form to do so.
Business tax forms get a little less straightforward than their S and C corp counterparts. That’s because the IRS consider LLCs as corporations, partnerships, or as part of an individual’s tax return. Based on which bucket your LLC falls into, you’ll need different forms—some of which we’ll outline below.
If the IRS considers your LLC as a part of your personal tax return, you’ll simply need to report the income and expenses via one of these Schedules, then you’ll continue filing the rest of your 1040.
If your LLC has at least two members, the IRS will consider it a partnership and you’ll need to file Form 1065 for the partnership, and each member will need to file Schedule K-1. Depending on your LLCs earnings, you may need to individually pay self-employment tax as well. You’ll add Form 1040-ES or 1040-SE to your personal tax return.
When it comes to filing business taxes, LLCs are a bit like the chameleons of the business world. And you can use that to your advantage as your business grows and changes over time.
For example, if you want to change how your LLC is classified for federal taxes, you’ll want to complete Form 8832. With this form, you can specify to the IRS how you’d like them to classify your LLC—as a sole proprietorship, partnership, or a C corporation.
For example, let’s say you’ve been going it alone with your business for a few years now, but you’ve recently met someone in your network who seems aligned with your mission. And you’d like to become a partnership. So assuming you’ve handled all the additional legal paperwork to make things official, you might want to file Form 8832 to let the IRS know your LLC functions as a partnership now.
This will free you both up to benefit from the LLC’s legal protections as owners, while ensuring the easiest tax path for you in the coming years.
Is this your first time filing a tax return for your business? Then here are five tips to help you avoid some of the most common mistakes first-time filers make. However, if it isn’t your first time filing, feel free to skip ahead.
(Or, did we throw in a couple fun facts you may not already know about business taxes? Guess you’ll have to read and find out!)
Sure, this is basic advice, but it bears repeating. Above all, the majority of tax audits, business or personal, stem from basic mistakes, math errors, and omitting certain information. However, with business tax returns, the amount of information you need to include is typically a lot more involved.
So, a “thorough review” of your business taxes should include answering any questions asked on the forms, all your accounts match your return accurately, and that your records are up to date. If you end up defending an audit, you’ll need to have everything in place and ready to go. (And the IRS doesn’t love the “a bunch of receipts in a shoebox” approach.)
If you recall from above, two accounting methods exist—and you can pick either one when filing your taxes. With a cash basis, you count your income only when you collect it and you count your expenses only when you pay them. With the accrual basis, you count income when you earn it, and you count expenses when you incur them.
Banks tend to like the accrual basis for lending purposes, but the IRS is basically fine with whatever, as long as it is accurate and can be supported as such. For example, a new business may use the accrual basis to file as a way of deducting expenses, which might outweigh its uncollected income.
You also need to pick the way you’ll record your depreciation. Specifically, the IRS allows for a first-year deduction (currently at up to just over $1million) for most equipment and furniture. However, if you have no—or little—income, you may prefer to write off the cost over five to seven years, which could give you an added benefit when your income has improved.
This should apply to all business owners, but we think it’s particularly important for those setting out on independent ventures such as freelance, speaking, consulting, or other startups, which all may require a lot of travel and work from home.
These types of businesses carry rich opportunities to deduct various expenses, but often business owners fail to properly track the expenses throughout the year. When it comes time to file, they have little more than a guesstimate and little documentation.
With automobile expenses, we recommend you track every mile you drive, not just the business-related ones. To clarify, note the date and location of the travel, who you saw, and the purpose of the trip. The benefit to this kind of detail, which is much easier these days with a plethora of tracking apps, is that you can also track hospital and doctor’s visits, as well as volunteer-related travel. Should you itemize your expenses, this will give you a leg up on your medical expenses and charitable contributions.
When you work for somebody else, your employer will deduct your taxes, which include Social Security and Medicare taxes. When you are self-employed, you may not realize that you owe these taxes on top of your income tax—and they do add up.
Instead you can prepare for the self-employment tax by regularly setting aside your estimated income and self-employment taxes in a separate savings or business account. That way, when it comes time to estimate and pay your quarterly taxes, the money will be ready to go. This is one way to avoid penalties or a big tax bill at tax time.
At the end of the year, you should always review all the compensation you paid—and that doesn’t just include your employees. Especially for first-time filers, you may have additional non-employee compensation you’ve paid. For example, this could apply to web designers or other contract workers who might help your business get up and running, but who don’t count officially as employees.
While your employees should receive a W-2 form for their income and withholding tax, contractors who make at least $600 should receive Form 1099-NEC, along with federal and state governments. Sadly, neglecting these forms will end up causing a hassle for both you and your contracted workers, so make sure to keep track of who you work with—and how much you pay them.
Now that you’ve completed the crash course, the next big test will be, well, actually filing taxes for your business.
So what should you do with this information to prepare for filing? We have a few ideas.
So give yourself a pat on the back! Most people don’t find business taxes the most riveting subject, but this is just the kind of research and hard work that will help you grow your business and help it reach new heights.
Isn’t that the goal?
Looking to level up your business with a new approach to business taxes? Give us a call at 1-800-410-8605 or send us a message today and we’ll get your tax filing process started.