How to File Income Tax Return: Tax Filing Preparation Guide 2023

For e-commerce business owners, income tax filing season marks the start of a highly stressful time. Among the taxes that e-commerce businesses need to file, income tax is the most common one. 

To help you meet the income tax filing season fully armed and prepared, we have compiled a step-by-step guide. Read about what income tax filing method to choose, where to get the latest tax information, how to keep up with deadlines, and more.

Contents:

1. What is income tax?

• How does income tax work?
• Who needs to file an income tax return?

2. Types of income taxes

• State income taxes
• Business or individual income tax
• Local income taxes

3. Assessment tax return and short tax return

4. Income tax filing deadlines

5. Federal income tax brackets 2022 vs IRS income tax brackets 2023

• 2022 income tax brackets
• 2023 income tax brackets

6. How to file taxes: income tax returns filing in 5 steps

What is income tax?

Income tax is one of the most common kinds of taxes for business in the USA. However, many business owners still feel confused when faced with the avalanche of the legal income tax definition and requirements. 

Income tax is a tax that governments collect from the businesses’ and individuals’ money earned throughout the year. The amount of tax is determined by how much money the business or individual makes. 

📌 Note: The higher your taxable income, the more income tax you’ll pay.

The IRS collects the money and then uses it to fund public services such as education, transportation, medical research, etc. 

How does income tax work?

Your tax rate (the % of your income that you pay in taxes) is based on which income tax bracket you’re in. 

📌 Note: The important thing is that the United States income tax rates are marginal, which just means that each tax rate applies to only one part of your income. 

Income tax calculations are reflected in the business tax return. Investopedia determines a business tax return as a form filed with a tax authority that reports income, expenses, and other pertinent tax information. In the USA, the IRS or local tax agencies play the role of such authority. Usually, companies should file tax returns with income information annually.

📌 Note: After filling the income tax return, you’ll find out whether you still owe the government something or if you’ve overpaid. 

Taxpayers file the returns by filling in special forms. Generally, there are 3 sections: 

• general information;
• income;
• deductions/tax credits.

Who needs to file an income tax return?

If you’d like to find out whether you need to fill out a tax return or not, check the official IRS site. The IRS provides the following steps: 

• Look at your income to see if you made the minimum required to file a tax return.
• Decide which filing status is best for you.
• If you’re retired, find out if your retirement income is taxable.
• Find out if you qualify to claim certain credits and deductions to lower the amount of tax you owe.
• Use the Interactive Tax Assistant to see if you need to file.

Types of income taxes

One of the most challenging aspects of understanding taxes is that there are so many different types of income taxes and not just one universal income tax. There are three primary taxes: state income tax, business income tax and local income tax. 

Let’s take a closer look at each type of taxes individually to help you understand them better in the future!

State income taxes

State income taxes are business taxes a state collects to fund education, health care, transportation, public assistance, etc.

All states fall into one of three different categories, including states with progressive, flat income taxes, or no income taxes. So how you pay your income taxes depends on where you live, as simple as that.

1.  States with progressive income taxes

Out of all the 50 states, the vast majority, 32, share the progressive income tax structure. A progressive tax means a tax rate progresses (or increases) as taxable income increases. What is characteristic of this tax structure, each state sets its rates and tax brackets.

States with progressive income taxes include Alabama, Arizona, Arkansas, California, Connecticut, Delaware, Georgia,  Hawaii, Idaho, Iowa, Kansas, Louisiana, Maine, Maryland, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Vermont, Virginia, West Virginia, and Wisconsin.

Washington DC, being not a state but a district, also has a progressive income tax structure (while the state of Washington doesn’t have income taxes).

2. States with flat income taxes

Each business owner is taxed at the same rate as everyone else.

States with flat income tax: 

• Colorado
• Illinois
• Indiana
• Kentucky
• Massachusetts
• Michigan
• North Carolina
• Pennsylvania
• Utah

3. States that don’t have income tax

There’s no income tax in the following states:

• Alaska
• Florida
• New Hampshire*
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

* – doesn’t tax regular income, but does tax the money you make from investments’ interest and dividends.

📌 Note: Even though these are states with no income tax, they usually make up for lost revenue through the other types of taxes (sales taxes, property taxes, etc.). 

Business or individual income tax

Depending on how your business is set up, you might need to pay a separate business tax, or your business earnings might be included in your individual income tax. 

For example, a C corporation is usually seen as an entity separate from its owner, and this way, you, as a business owner, will pay your business income tax, which is a flat 21%, separate from your personal income tax.

Sole proprietorship/LLC/partnership businesses are not subject to corporate income tax; you’d fill out your personal tax return and pay the taxes on those profits at your individual income tax rate.

Local income taxes

Local income taxes make up an additional layer of income taxes in 5000 local jurisdictions across 17 states (particularly in the Midwest and Northwest).

Assessment tax return and short tax return 

A self-assessment tax return is a system used by HM Revenue and Customs (HMRC) to collect income tax. The assessment tax return bill includes wages, pensions and savings and is usually deducted automatically. 

A short tax return is much simpler than a self-assessment return. The four-page 1040EZ form that you need to fill out  is a simplified version of the 1040 tax form with fewer questions. This form can only be used by people below age 65 with no dependents earning less than $100,000 per year.

Income tax filing deadlines

Usually, tax season in the US starts at the end of January. However, the exact date can change due to tax legislation changes or external factors. 

In the framework of tax season, there’s a list of important dates, which are fundamental for income tax filing season:

• The first week of March – the beginning of tax refunds of Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC). NOTE: tax refunds can be made only for taxpayers who filed their tax reports electronically with direct deposit and have no issues with them.
• April 15 (can be changed) – the last day for filing tax returns.

Learn more about the tax season deadlines in our blog – “How to get ready for tax season”. 

Find out the deadlines for your particular state with the IRS official website. 

Income tax extension: when is the last day to file income tax? [2023]

In case a taxpayer needs more time to prepare the tax return, the IRS provides an opportunity to extend the deadlines. So, the standard deadline to file a Federal Tax Return for the tax year 2022 is April 18, 2023 (for the US citizens living abroad the  deadline is extended to June 15, 2023.)

To extend income tax deadlines, a taxpayer should file a request no later than the last day of tax season. Businesses and corporations should fill in Form 7004 or Form 1138 and send it to the IRS in the form of an electronic request (e-file) or make an indication of the extension in the income tax payment.

📌 Note: Income tax extension of the time to file a tax return doesn’t apply to the deadline for paying taxes. It concerns only the documental part of the tax process. So, taxpayers have to pay all necessary taxes on time, following regular deadlines. 

Federal income tax brackets 2022 vs IRS income tax brackets 2023

Since the IRS has already presented the income tax brackets for 2022 and 2023, we suggest you compare the two years to see what’s changed and what to expect during the next tax season. 

2022 income tax brackets

2023 income tax brackets

Find out how to calculate tax revenue.

How to file taxes: income tax returns filing in 5 steps

Step 1: Collect accounting records

Correct and precise data is the basis of an income tax. To track the cash flow, e-commerce business owners need to collect payment information in their books. The biggest challenge here is to reconcile this data with reports from your checking bank account. This is when online accounting tools can really help.

For example, Synder is an accounting software that provides its users with the feature of fast and accurate import of current and historical data from payment processors (Stripe, Square, PayPal, Amazon, etc.) and flawless reconciliation.

Such software is extremely useful during tax season as it makes detailed reports for each transaction, separating data by tax, fee, location, discount, inventory, and so on. Synder undertakes all mechanical accounting work, reconciles the data, and helps to prepare a list of essential reports, so that you can concentrate only on tax optimization and a company development strategy.

If you feel you might want to know more about how Synder can help you get ready for tax filing or improve your business accounting, don’t hesitate to contact our team for a free demo or just sign up for a free trial.

Step 2: Consider possible tax deductions and credits

Many business owners don’t pay enough attention to tax deductions and tax credits. However, these accounting mechanisms will decrease your tax liability and save your money. In a nutshell, a business owner can deduct some business expenses from income, and as a result, the tax amount will decrease.

Well, how exactly does it work?

Let’s say you’ve made some payments to retirement savings plans or had rent and insurance expenses. Such spendings are deductible according to the United States income tax legislation, which means that as a business owner, you’ll be able to use these expenses to lower taxes. The same scheme applies to tax credits.

The list of expenses that can be used for tax deduction differs depending on the jurisdiction, so you need to check it out in your state income tax requirements.

Step 3: Choose your filing status

Depending on whether you’re married or not, the income tax rate can vary. When filling out this information, pay attention to this detail.

You can check the tables above once again just to make sure that everything is correct with your tax rates. 

Step 4: Find the right form

For income tax filing season, an e-commerce business owner needs to choose and fill out  special tax forms. Overall, tax forms differ depending on the business structure of a company. These forms are provided on the IRS website.

Some of the other most popular income tax forms are:

• Form 1040 (US Individual Income Tax Return)
• Form 1120 (U.S. Corporation Income Tax Return)
• Form 1065 (U.S. Return of Partnership Income)
• Form 1040-ES (Estimated Tax for Individuals)
• Form 941 (Employer’s Quarterly Federal Tax Return)
• Form W-2 (Wage and Tax Statement), etc.

Besides these, you should remember that for tax deductions and credits, there are special tax form requirements.

Step 5: File your tax return

The IRS suggests two tax filing options:

• E-filing
• Mailing addresses

The IRS recommends e-filing and suggests 4 options for how you can file your income taxes:

1. Use IRS Free File or Fillable Forms – if your adjusted gross income is $73,000 or less.
2. Use a Free Tax Return Preparation Site.
3. Use Commercial Software.
4. Find an Authorized e-file Provider.

Learn more about Post Tax Deduction!

Conclusion

Though it may seem complicated, income tax filing shouldn’t bring you tension or stress. Thorough and well-planned preparation will help you complete tax processes without issues. Hopefully, this step-by-step guide will give you a clearer picture of the income tax filing season. And geared with some smart online accounting software solutions, you’ll get through it more smoothly.