5 small business tax tips.

Myranda Mondry, Senior Content Creator at Intuit

You, like most small business owners, started your business to follow your dreams, not because you know anything about accounting or taxes. In fact, you probably don’t feel very confident when it comes to things like filing business taxes—most small business owners don’t. There are an abundance of forms to fill out and numbers to keep track of. And did you know that you should be paying taxes on a quarterly basis? One wrong move and you could get hit with an IRS audit. In fact, in early 2021 the IRS announced it will increase audits of small businesses by 50%. What’s more, recent tax law changes and Covid-19 stimulus programs have made business taxes more complicated than ever. Even if you manage to dodge an audit, you could be paying way more in taxes than you should be.

If you’re feeling lost or overwhelmed, it’s always a good idea to invest in a tax professional. They can help you avoid unnecessary fees, maximize your deductions, and even represent your business in the event of an audit. But for new small businesses struggling with cash flow, hiring outside help may not be an option.

Whether you’re taking the leap in tandem or taking a DIY approach, there are some things you should understand when it comes to preparing and filing. Here are five important tax tips for small business owners. 

1. Your small business structure matters.

How you register your business impacts how you pay taxes. The most common business structures are sole proprietorship, limited liability company (LLC), S corporation, and C corporation. Each business structure has different tax implications.

A sole proprietorship is the most common business structure. As a sole proprietor, you use your own name to conduct business and you use your social security number as your tax ID number. Your business is not taxed separately. To pay taxes, you’ll file a Schedule C with your annual 1040 form claiming all revenue and business deductions on your personal tax return.

An LLC is the second most common business structure for small businesses. Single-member LLCs are taxed in the same way as a sole proprietorship. Multiple-member LLCs can choose to be taxed as a partnership (you report your share of the business income on your personal income tax return) or a C corporation.

A C corporation, or a traditional corporation, consists of shareholders, officers, directors, and employees. C corporations pay taxes on a company level. Additionally, shareholders pay personal taxes on any dividends received. This taxation of both the company and its shareholders is called “double taxation.”

S corporations avoid double taxation by passing income directly to shareholders. Shareholders report business income, expenses, losses, and deductions on their personal tax returns.

Some business structures enjoy more tax advantages than others. But it’s important to choose the business structure that best suits your business. If you’re not sure which to choose, a lawyer or business advisor can help.

2. Research small business tax deductions.

One of the most important small business tax tips anyone can give you is this: take advantage of a long list of deductions that can significantly lower your tax bill. Tax deductions reduce the overall total income that is subject to federal and state-imposed taxation. There are dozens of tax deductions you may be eligible for--the real challenge is figuring out which ones.

Things like business meals, marketing costs, rent, travel expenses, and other business expenses can be written off or deducted come tax time. But every deduction has its own eligibility rules. For example, business meals for a company-wide party are 100% deductible, but business meals for the purpose of entertaining clients are not. A CPA or tax professional can ensure you’ve deducted expenses correctly before you submit your return.

To maximize tax deductions, you’ll want to itemize your deductions on your tax return. Itemizing takes a bit more time than taking the standard deduction, and, more importantly, requires meticulous record keeping on your end. But the payoff for small businesses is well worth the extra effort.

3. Understand startup cost deductions.

Starting a business is exciting, but it’s also expensive. On top of recurring costs like rent, payroll, taxes, professional services, utilities, and marketing, starting a new business comes with a plethora of one-time startup costs like logo design, website design, down payments, permits, and licenses. Fortunately, many of these startup costs may be eligible for a tax deduction.

The IRS allows you to deduct $5,000 in business startup costs and $5,000 in organization costs, but only if your total startup costs are $50,000 or less. If your startup costs exceed $50,000 the amount of your allowable deduction will be reduced by the overage. If your startup costs exceed $55,000, the deduction is eliminated entirely.

To take advantage of this tax deduction, you’ll need to claim the startup deduction for the tax year that your business officially opened. If you missed it, you can file an amended return within six months of the return’s due date.

4. Keep up with quarterly tax payments.

Anyone who files federal income tax and excepts to owe more than $1,000 needs to pay quarterly estimated taxes. You’ve probably been making quarterly tax payments for a long time, you just didn’t know it. If you worked for an employer and filed Form W-4, your employer calculated your quarterly tax payments for you and automatically took them out of your paychecks. Now that you work for yourself, it’s up to you to calculate and make those payments.

If you have a year or two of tax payments under your belt, you can use your previous year’s income to estimate your tax payments. If you’re new to business, multiply your average monthly income by 12 to get a ballpark figure. These numbers may change, and that’s okay! They’re called quarterly estimated payments for a reason. That being said, you’ll need to pay at least 90% of the taxes you owe throughout the year or you may be penalized. Additionally, late payments will be charged a late fee.

The IRS has free resources to help you calculate your quarterly payments and pay them online. And, of course, a tax professional can calculate quarterly tax payments for you and ensure you meet quarterly due dates.

5. Keep up with additional taxes.

Beyond income tax, there are a few other taxes you may need to account for as a small business owner.

  • If you’re self-employed, you’re responsible for a 15.3% self-employment tax. However, you can deduct half of the self-employment tax on your personal tax return.

  • If you have employees, you’re responsible for paying payroll taxes on their wages. This includes federal income tax withholding, Social Security and Medicare taxes, and federal and state unemployment taxes.

  • If you sell products subject to excise taxes, like cigarettes, gasoline, or liquor, you’re responsible for collecting those taxes and sending them to the IRS.

  • If your state imposes a sales tax, you’re responsible for collecting and reporting sales taxes to your local and state governments.

  • If you own commercial property, like a storefront, you’ll have to pay taxes to the city or county where your business is located.

Even with these helpful small business tax tips, at the end of the day, taxes are, well, taxing. It can feel like the odds are stacked against you. But the system is actually set up to offset potentially high costs for small business owners come tax season. Maximizing tax deductions can limit your tax liability. And understanding when and how to pay taxes can help you avoid expensive late penalties.

As a new business owner, working with a tax professional can help you avoid common mistakes like underreporting business expenses or missing important tax payments. But investing in a quality small business tax software is a good place to start.

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