As a proud owner of a local small business, there are many important matters you must oversee. Few, however, will be as crucial for the continued survival of your company as ensuring that your taxes are filed on time and properly.
Now, you’ve probably heard the famous idiom coined by Benjamin Franklin, “In this world nothing can be said to be certain, except death and taxes.” To help you navigate the latter and avoid the common ploys and pitfalls, this guide will act as your tax season survival guide.
How to File Small Business Taxes
Filing small business taxes for the first time can be complicated and overwhelming. This feeling is likely being magnified by the chaos surrounding the coronavirus (COVID-19) and the government imposed economic shutdown. Businesses not only have to worry about their taxes, but they also have to worry about things like developing a crisis communication plan for their employees and think of how to stay afloat during this challenging time. Naturally, you might have some serious concerns and questions about how to go about taxes in light of the crisis. So, let’s dive right in.
COVID-19’s Impact on Taxes
The Trump Administration and Congress have passed the CARES Act, which provides a trillion dollar stimulus package to American workers, families, and small businesses. This represents the largest relief bill in the history of the world. The near total shutdown of businesses nationwide has led to the most rapid economic slump ever, with business owners being brought to near panic over concerns about what they’ll do in regards to taxes. In response to these fears, the government has already taken action. Per the Wall Street Journal:
The U.S. government will postpone the April 15 tax-payment deadline for millions of individuals, giving Americans an additional 90 days to pay their 2019 income-tax bills in an unprecedented move intended to ease the economic pain inflicted by the coronavirus.
In addition, according to National Law Review, this,
Allows employers and self-employed individuals to defer payment of the employer share of the Social Security Tax. The provision requires that the deferred payroll tax be paid over the following two years.
As a result of this interest-free and penalty-free deferment, the federal tax filing deadline has been pushed back to July 15, 2020. And, while there may be further tax alleviations in the works, these won’t be known until the relief bill is passed.
There are additional tax relief programs for businesses, such as:
- The Paycheck Protection Program
- Expanded access to Small Business Administration Economic Injury Disaster Loans
- An emergency grant of $10,000 to SBA Economic Injury Disaster Loan applicants
Along with these federal programs, there are also resources available in various states and local areas.
Different Types of Taxes For Which You’re Responsible
Depending on your business, there are several different types of federal income taxes that your business may be required to pay to the IRS. Typically, there are six main business taxes you should be aware of:
- Income tax – Citizens are required to pay taxes on their wages, investments, and property sales gains. Similarly, corporations are expected to pay taxes on net income after subtracting business expenses. In addition, if you live in a state with income taxes, those must be accounted for as well.
- Property tax – You will be expected to pay city or county taxes on office space or commercial property.
- Self-employment tax – If you’re self-employed, you’ll be required to pay both Social Security and Medicare so long as you’re making more than $400 per year.
- Excise tax – Certain types of services, goods, or industries are mandated to pay an excise tax. For example, restaurants and bars must pay an excise tax on alcohol.
- Employment tax – If you have multiple employees, you will need to pay a payroll tax on wages, which includes Social Security, Medicare, federal and state unemployment, and federal income tax withholding. If you are just getting started, there are many small business payroll softwares to choose from.
- Sales tax – Because sales taxes vary on a state-by-state basis, it’s important that you look up the rules of the specific state you operate in.
Actionable Steps for Filing Taxes
In preparation for tax day, here are some helpful steps to put you on the right track:
Step 1: Collect Your Records
When it comes to taxes, your first task is to collect all of your records. This is especially important if you’re attempting to utilize the various small business tax breaks available to you. Papers you’ll need include your business earnings, expenses, and possible write-offs.
If you’re filing taxes on your own, you should be using accounting programs such as QuickBooks or Quicken, or tax preparation software like TurboTax or H&R Block. These can help you stay on top of your sales and expenditures throughout the year, making it much easier to fill out your tax return.
Step 2: Track Down the Right Form
To file your taxes, you need to select the correct IRS form. Finding the proper one will depend upon your business structure, which you determined while writing your business plan. For tax purposes, these break down as follows:
- C-Corps – If you’re the owner, you’ll need to pay a self-employment tax as well as a flat tax rate of 21%. If the corporation pays dividends, you may have to pay taxes on those with your personal tax returns. There are two types of dividends:
- Qualified – If the stock has been owned for more than 60 days, it gets taxed at long-term capital gain rates.
- Unqualified – Ordinary dividends are taxed at your income tax rate.
As a C-Corp, you’ll need to fill out a Form 1120.
- Pass-through entities – Pass-through entities pay a tax rate that’s the same as their personal income tax rate, which, according to the IRS, looks like:
- 37% for incomes over $518,400 ($622,050 for married couples filing jointly)
- 35% for incomes over $207,350 ($414,700 for married couples filing jointly)
- 32% for incomes over $163,300 ($326,600 for married couples filing jointly)
- 24% for incomes over $85,525 ($171,050 for married couples filing jointly)
- 22% for incomes over $40,125 ($80,250 for married couples filing jointly)
- 12% for incomes over $9,875 ($19,750 for married couples filing jointly)
These pass-through entities include:
- Sole Proprietorship – Sole proprietors must report their income and losses alongside their personal income taxes, but the two must be kept separate. You are required to submit a 1040 Form and expected to pay an estimated self-employment tax on a quarterly basis.
- Partnerships – Partnerships with two or more employees need to pay personal income taxes, self-employment taxes, and submit their estimated income tax alongside a 1065 form.
- S-Corps – S-corps don’t pay income tax, but their revenue and business losses are deducted from shareholders' tax submissions, which is included on their 1120-S form.
Step 3: Fill Out Each Form to the Best of your Ability
Once you’ve determined the types of form your business structure requires, you’ll have to fill out the relevant documents. That said, be careful when you do! Businesses often make mistakes when completing their tax forms, which can lead to a whole host of other problems. Common business tax errors include:
- Underpaying estimated taxes – If you are self-employed, you’re required to pay quarterly estimated taxes on your business income as well as self-employment tax. Underpayment can result in penalties.
- Simple mistakes – There are common errors people accidentally make while doing their taxes. Some of these errors include:
- Misspelled name
- Math errors
- Not signing and dating the return
- Missing name or address
- Illegible name or address
- Lack of parentheses around negative amounts
- Not including relevant schedules
- Not making the check payable to the US Treasury
- Forgetting to add a postage stamp on the envelope
- Invalid or missing taxpayer ID numbers – The number must be filled out in the right spot and be the correct number for your business type.
- Failure to report all your business income – If your business receives a 1099-MISC form for received business payments, you’ll be required to report your income on your business tax returns so the IRS can compare 1099s submitted by both payers and payees.
Step 4: Don’t Forget About Your Small Business Tax Breaks
There are dozens of potential small business tax write-offs you can add to your form. As a business owner, these deductions can be on your overall taxes owed. Examples include:
- Vehicle expenses – You can either keep track of gasoline, maintenance, parking, and toll fees used for business, or simply apply the IRS mileage rate of 58¢ per mile.
- Home office – If you work from home, your home functions as your office. This figure depends upon the amount of your home that’s used for office space, which is calculated by dividing the total square footage of the home/square footage used as an office.
- Professional services – If you hire a lawyer, accountant, or other professional, the fees and expenses you pay for those services are deductible.
- Office supplies and expenses – Conventional business supplies and office expenses can be deducted so long as they’re used during the year that they were purchased.
- Rent on your commercial location – If you’re paying rent for office space, it can be deducted.
Find a Professional Accountant via Nextdoor
Although you can handle taxes yourself, they’re often a time consuming and frustrating process. On top of that, you expose yourself to potential tax issues if you don’t fill them out properly. Because of this, it may be wise to hire a professional tax accountant to help ensure that everything’s filled out correctly, especially since they can help you find avenues of tax savings that you might not otherwise know about.
But how do you find a trustworthy accountant near you?
That’s where Nextdoor comes in. It’s the neighborhood hub that connects people in your area to local businesses via personal recommendations. If you are a business owner and want to find a tax preparer in your area, you can search directly for tax accountants.
Additionally, if you haven’t already set up your Business Page, you can do so for free and start building connections with your neighborhood just like the local accountants.
If you are a local business, claim your free Business Page to get started on Nextdoor. Resources on how to use Nextdoor to stay connected with your local customers during coronavirus, pertinent news affecting businesses, and more, are available in our Small Business Guide for Coronavirus Relief.