A small business owner usually has a lot to deal with. From managing customers to marketing, to budgets – the list is almost infinite. Taxes add a big chunk to this plate. And as the tax season is looming, taxes become a real big deal for business owners, adding more stress to their busy lives. A recent study by NFIB names tax-related issues among the top small business problems and priorities. And though the Tax Cuts and Jobs Act of 2017 significantly lowered and simplified federal taxes for most small businesses, the complexity of tax compliance and frequent changes in tax laws remain the biggest concerns for business owners. Especially when it comes to federal and state business income taxes.
So there’s no wonder that the business tax season is a hot time for small business owners, just as it is for accountants. But is there a way to escape the tax season disturbance? The answer is yes if you approach the tax season preparation wisely.
The article below will try to cover some basic tax season preparation aspects for small businesses, in particular:
- What business taxes do you need to pay as an SMB?
- Small business taxes due dates
- Tax season preparation in 5 steps
1. What business taxes you do need to pay as an SMB?
It’s worth noticing that the taxes you need to pay as a business owner may differ and highly depend on the form of the business you operate. But generally, we speak about five types of taxes that apply to small businesses, such as income tax, self-employment tax, employment tax, excise tax, and estimated tax.
Income tax is the tax you pay on the net income that your business received during the year (it’s the total income minus expenses). In most cases, income tax is a federal tax. However, in some states, small businesses fall under local state income tax along with or in place of the federal tax. So if you are unsure about what works for your state, don’t hesitate to inquire with your state authorities to clarify the matter.
Usually, speaking of self-employment taxes, we mean taxes that sole proprietors, partners in a partnership, and LLC owners pay for Social Security and Medicare. Self-employment tax is based on the net income of the business. It’s an important tax, as with it, you contribute to your coverage under the social security system, including retirement benefits, disability benefits, survivor benefits, and hospital insurance benefits.
If you have employees working for your business, then employment taxes apply to you. As the employer, you need to file and pay employment taxes, including Social Security and Medicare taxes, federal income tax withholdings, and federal unemployment tax. Please bear in mind that it’s your responsibility as a business owner to withhold these taxes from employees’ paychecks. Please bear in mind that you need to withhold the federal tax income from your employees’ pay. Social Security and Medicare taxes are paid by both employees and employers. And the federal unemployment taxes are a business owner’s burden.
If your business comprises manufacturing or selling certain types of products, using various equipment, facilities, and goods (fuel, for example), or receiving payment for certain services, excise taxes apply to you. There are also excise taxes on activities, such as wagering or highway usage by trucks.
Estimated tax is the tax that you need to pay quarterly throughout a year as a business owner. The thing is, you don’t get paychecks, as your employees do, and still, you need to withhold income tax and self-employment tax from the money you get out of the business. Usually, the estimated tax form for business owners combines business and personal income and taxes. It’s critical to pay this tax on time, as failing to do so may result in penalties from the IRS (and that’s definitely not something you are up to).
This is not an extensive list of all the small business taxes, and I strongly encourage you to consult with the IRS official website for more information on business taxes that might apply to you.
2. Small business taxes due dates
Nobody loves late payments, and the IRS is no exception. Failing to file or pay your business taxes can lead you directly to penalties, which is no good for your business. So, when preparing for the tax season, you need to keep in mind the key due dates. Let’s take a closer look at them.
- April 15 is a big Tax Day – a general due date for the annual tax returns filing and making tax payments, including individual and C-corporation income taxes. Also, it’s a deadline for the first quarter estimated tax payment.
- March 15 is a tax filing due date for the Partnership and S-corporation returns.
- June 15 – a deadline for the second quarter estimated tax payment.
- September 15 – a deadline for the third quarter estimated tax payment.
- January 15 – a deadline for the last quarter of 2021 estimated tax payment.
There are more important dates to bear in mind, especially when it comes to local state taxes. So for more details on tax filing and payment due dates in 2021, it’s better to consult with the IRS, as well as the local tax office.
It’s also worth mentioning that you can use several options to file your business taxes, such as filing returns by mail or using E-File options. Various tax filing software available on the market can also help handle tax filing (and even payments).
3. Tax season preparation in 5 steps
But before filing or paying your business taxes, there’s a lot to do. Depending on how well you prepare your small business for the tax season, it can pass quite placidly or turn your life into total mayhem. Here are some tax season preparation steps that you can take to make all the tax calculations, filing, and payments loads easier for you and a tax professional that may be helping you.
Collect your accounting records
Keeping accurate records throughout the year is a cornerstone you can’t go without when planning and preparing your taxes. However, many small business owners don’t collect financial information regularly and often end up hectically bringing their business transactions data into accounting books at the beginning of the tax season. Though most businesses use accounting software to keep and manage books, importing and organizing records can become a real pain in the neck (literally). Even if you hire a bookkeeper or accountant to fulfill this task for you, you have to pay for the time they spend on it. And there is no need to say how much time it can take when done manually.
And here is where automation software can be of great help. With it, you can connect your Stripe account with QuickBooks accounting and collect your accounting records, eliminating manual data entry from the process. (Stripe is just an example, this can be any other source where you are handling your business transactions, like e-commerce platforms or other payment systems). The benefits for you as a business owner are quite obvious. You can save loads of your time, ensure accurate and correct records for tax planning purposes, and get rid of a huge part of the tax season mess and stress.
Carefully categorize your expenses
Properly collecting and categorizing your business expenses is critical for preparing your business for the tax season, as it can significantly reduce your tax load with applied tax deductions.
Simply put, tax deductions are the expenses that can be extracted from your taxable income if they comply with the IRS criteria for deductible expenses. We usually speak of ordinary and necessary expenses in this context, which means they are expenses usual, helpful, and appropriate for your trade or business.
The list of deductible expenses is quite broad and, depending on your business type, may include the following:
- Business travels,
- Business meals,
- Business insurance,
- Use of your car for business purposes,
- Home office expenses,
- Education costs,
- Independent contractor fees,
- Bank or payment processor fees, and many more.
Out of the tax context, expense categorization can prepare you for future growth and help more savvy financial management.
Ensure you have correct payroll records
As mentioned above, if you have employees working for your small business, it’s your responsibility as a business owner to withhold income taxes from your employees’ paychecks and take care of the Social Security and Medicare taxes part for your workers. Thus, it’s drastically important to keep accurate payroll records in your accounting for correct employment tax filing.
Today, there’s a wide choice of payroll solutions on the market that help automatically import employee records into accounting and provide you with up-to-date and accurate data for your tax preparation purposes.
Gather all the needed documents
Like many small business owners, you can decide to entrust preparing and filing your tax returns to a professional, be it a certified accountant or tax preparer, etc. A good rule of thumb here will be to plan ahead and get all the necessary documentation prepared before scheduling an appointment. Moreover, such a tactic will help you build better relations with your tax specialist, leaving aside significant time and cost savings.
Though the list of required documents may vary depending on the character of your business, the minimal set of documents can be as follows:
- Last year’s tax return
- Financial statement
- Capital-asset activity
- Vehicle use/Home office expenses
Choose a tax preparer
Finally, geared with the up-to-date accounting data and the necessary documents, it’s time to look for a tax professional to help you with preparing and filing your taxes. As you trust a preparer with your most sensitive information, and your tax payments depend on the accuracy of filing your returns, you need to approach choosing a tax preparer wisely. Here are some tips to consider:
- Ensure that the tax preparer has a preparer tax identification number (PTIN) issued by the IRS;
- Make sure that you are choosing a preparer with the necessary level of skills, education, and expertise;
- Check the Directory of Federal Tax Return Preparers to look through the IRS-recognised tax specialists;
- You can also search for a specialist that belongs to one of the national organizations for tax professionals.
Done with that, it’s time for calculating and filing your taxes.
In our upcoming articles, we’ll be breaking down filing the most common small business taxes. And though it’s your tax specialist who will be responsible for tax filing, please don’t hesitate to check for the updates if you are interested.
Ideally, a business owner needs to keep small business taxes in mind all year round. A wise and structured approach may help prepare business taxes much easier and make tax season less stressful for you. And usually, it comes down to keeping accurate accounting records throughout the year, making appropriate estimated tax payments, and finally, filing correct returns and making payments by the end of the business tax season. You don’t necessarily need to go through it alone – tax preparation is the time when you definitely need the help of an accountant or a tax advisor. However, a little advance preparation can’t hurt, on top of saving you time and money.
Sure, this is not a comprehensive tax preparation guide, but I hope it will give you a clearer idea of which steps to take before completing and submitting your tax returns.