Surviving tax season: a small business owner’s guide
Tax season is upon us, and with it come millions of small business owners worried about doing it the right way. But worry not, because we’re here to help you prepare to file your taxes correctly and on time.
Whether you work with an accountant or do it all yourself, there are things that can help you keep track of all your earnings and expenses and record them properly.
Let’s dive in.
Step 1: Collect
Before filling out your tax forms, you should have all of your records in front of you. These records include both incoming and outgoing payments made by your business. This would be much easier if you work with an online spreadsheet or software.
Step 2: Know your taxes
You always need to report all your income to the IRS but it’s also important to know which form you need to fill out. Depending on what type of business you’re registered as (LLC, S corp, sole proprietor, etc.), you’ll know which tax form to file.
Keep in mind there are federal taxes, collected by the federal government, and state taxes, collected by the state(s) where you live and earn income. In this blog post, we are focusing on the federal taxes requirements only.
Below are the five general types of federal taxes.
Income tax
All businesses have to file an annual income tax return and pay federal taxes on any income earned during the year. Two types of businesses have different requirements:
- If your business is a partnership, each partner needs to report their share of the profit or losses on their individual tax return. That’s because a partnership doesn’t pay tax on its income but “passes through” any profits or losses to its partners.
- Sole proprietors, meaning businesses that are operated by one person use one form to report both personal and business income.
Self-employment tax
This is comprised of Social Security and Medicare taxes for individuals who work for themselves.
Employer tax
If you have employees, there are federal tax requirements for what you must pay and the forms you have to file. Generally, employers must report wages, tips, and other compensation paid to employees.
Excise tax
Excise tax is usually imposed on the sale of things like fuel, airline tickets, heavy trucks and highway tractors, indoor tanning, tires, tobacco and other goods and services. Businesses who operate in industries required to pay excise tax would generally pass it on to consumers through higher prices.
Estimated tax
All freelancers, independent contractors, and small business owners who expect to owe at least $1,000 in taxes need to estimate and pay quarterly taxes, typically on the 15th of April, June, September, and January of the consecutive year.
Step 3: Fill out the right forms
Many small businesses are registered as Sole Proprietorships. In this case, there’s no separation between you and your business. You are entitled to all of the profits and hold responsibility for its losses and liabilities.
If you’re registered as a Sole Proprietorship, you need to report business income and expenses along with your personal income tax return (1040) on a Schedule C attachment.
Otherwise, you need to prepare a separate tax return. C-Corporations must file Form 1120 and S-Corporations must file Form 1120S. Multi-member LLCs are considered partnerships and typically file Form 1065.
We know this all may be confusing, but you’re not alone. To be sure you fill out the right forms, it’s advisable to hire an accountant to help you out during this important time of the year.
How to better prepare for tax season
Here are three tips to help you stay on top of your taxes so tax season won’t feel as intimidating.
1. Stay organized all year long
Running a business is not just a full-time job, it’s a 24/7 operation. And keeping your books in order takes a lot of time. Time you may not have. However, your financial health is crucial to the success of your business, and running an organized back office is a part of that.
The easiest way to do that is by using online tools. A digital accounting software helps you stay organized and keep track of all your transactions during the year. Use software that works with your accounts payable tool, so when you pay and accept payments, your books are automatically aligned.
Keeping your books in order all year helps you make sure you have accurate records of your business’s income and expenses. This makes filing a tax return and paying the right amount of tax a lot easier.
2. Pay attention to deadlines
Depending on the type of business you are, you’ll know when to file your taxes.
Partnerships, LLCs, and S Corporations: due March 15.
C Corporations and Sole Proprietors: due April 15.
If those deadlines fall on a weekend or holiday, the deadline shifts to the next business day.
3. Use digital tools
According to the National Society of Accountants, the average cost of preparing taxes for a small business by an accountant ranges from $184 to $826.
But there are several digital tools that help you keep track of your business expenses. These include QuickBooks, which allows businesses to categorize expenses and keep track of estimated taxes due, among other more advanced functionalities. It also syncs seamlessly with Melio.
If you’re already using Melio to make payments, you can categorize all of your expenses and export a .CSV file with the information required to file your annual 1099 forms directly from your dashboard.
Get ready to stay ready
While taxes are definitely not the most enjoyable part of owning a business, we hope you use our strategies and discover your own ways of reducing tax-related hassles and unexpected surprises come April.
*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.
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