Your ultimate guide to paying and filing your small business tax
A lot of things in your life change when you become a business owner. You might have increased responsibilities, more long-term professional decisions, and more possibilities for professional growth. But one thing that doesn't change is the need to file a tax return. Just as you pay income tax, federal tax, and maybe state tax, you also need to pay a small business tax.
Your business will have to pay a small business tax and pay it correctly. To do this, it's important you understand small business tax. Here, we'll look at how much you can expect to pay and how to file your small business taxes.
What is a small business tax?
All for-profit small business owners pay taxes in one form or another. Even a sole proprietor pays taxes. But the amount that's paid can vary greatly depending on the business structure, business income, and more.
Below are the primary factors behind how much small business tax you'll pay:
- Federal income tax: If you have any employees, you need to take federal income tax out of their pay.
- Social Security: This is an amount you pay to cover Social Security benefits. The amount taken from each paycheck is a set percentage that can change from year to year. As of 2019, it was 12.4%. The employer pays 6.2%, and the employee pays the other half.
- Medicare tax: All employees need to pay a Medicare tax. For each employee, you must pay 1.45% from each of their paychecks, and the employee will cover the other 1.45%.
- Federal unemployment: You must pay a federal unemployment tax for each employee, which comes out to 6% of the first $7,000 your employee earned that year while working for you.
- State unemployment: State unemployment rates can vary, so be sure to check your state's rates.
Ultimately, small business tax is an umbrella term that encompasses numerous taxes your business must pay. Now, let's see what you can expect to pay.
How much small business tax will you pay?
It's impossible to determine exactly how much your business will pay the IRS in taxes, as that amount comes down to all of the aforementioned factors, your business structure, and what tax rate or tax bracket you fall into. However, there are some indicators regarding how much you'll pay that are hidden within your business structure.
- C Corporations: C-Corps are now taxed at a flat rate of 21% federal income rate, following the Tax Cuts and Jobs Act tax reform of 2017.
- S Corporations: S-Corps don't get the easy flat rate of C-Corps and instead have to pay revenue-based, federal income taxes and any state and local taxes. However, an S-Corp is a pass-through entity, which means its taxes are paid by the shareholders, not the corporation members. This makes S-Corp taxes more complicated and not as easy to label as "beneficial" from the outset.
- Limited Liability Company (LLC): An LLC is also a pass-through entity, meaning the LLC members all pay the taxes. This means you and any LLC members each pay your self-employment tax.
- Sole proprietor: A sole proprietor is taxed just like an independent contractor and must pay their self-employment tax — typically a 15.3% tax covering Medicare and Social Security. Sole proprietors also have to pay taxes on additional income streams and pay quarterly tax estimates to avoid fines.
Ultimately, you won't know exactly how much you owe in taxes until you speak with an accountant or tax professional. However, the above points can help you understand and prepare the process.
Now, let's discuss how to file small business taxes.
Filing your small business taxes correctly and on time at the end of the tax year is essential. Otherwise, you can be hit with fines and possibly jail time. It's also important you file in accordance with tax laws, which can change year after year. To help you file your small business taxes the right way, follow these steps. When in doubt, speak with a financial advisor or accountant.
1. Gather essential documents
There's a lot more to paying business tax than just gathering business expenses and receipts. In order to determine your taxable income, you will need numerous documents to ensure you're at the right income tax rate. Before you see a tax professional or call up your advisor, gather the following:
- Previous year's tax return (not applicable if your business just started operating this year)
- Social Security card and other proofs of your identity (or the identity of the person who is filing the taxes if you're in a multi-member LLC)
- Invoices sent and received
- Employer identification number (EIN)
- Earnings reports for the entire taxable year (if in doubt, include all receipts and other financial records)
- Rent paid for your work’s location or proof of taxes paid if you own the location (also applies if you operate a home office, in which case you should bring proof of property taxes or any other payment records)
- Records of equipment or office supplies purchased for your business
- Employee pay records
- Miscellaneous expenses such as outings, travel expenses, hotels, and so on
The above list is by no means exhaustive, as special cases may arise. If you're unsure about whether you should bring something to your tax professional, bring it. At worst, you'll be over-prepared. At best, you’ll make the filing process smooth and simple.
2. Choose the right tax filing form
There are a number of forms for filing IRS taxes, each one suitable for a different business structure. If you're going to a tax professional, you won't need to worry about this. Otherwise, look below to see which form you need:
- S-Corp: Form 1120-S
- Single-member LLC: Schedule C
- Multi-member LLC: Form 1065 and Schedule K-1
- Partnership: Form 1065 and Schedule K-1
- Sole proprietor: Schedule C
Once you know which IRS form(s) you need, double-check the various fields and make sure you have the right documents from the previous step. If you feel you may be missing something, contact your financial advisor or the IRS.
3. Complete and file your taxes
With the right form chosen, you're ready to complete and file your taxes. If you file these without the help of software, fill out the forms online so you can submit them through IRS.gov. This will ensure the forms are received by the IRS more quickly and reduce the chances you miss a filing deadline.
You can also use filing software like TurboTax to make the process easier. Tax software will generally help you determine your business tax rate, corporate tax rate (if applicable), determine which tax form you need, and even sync with your bank account to more easily pay taxes or receive your tax refund.
It's also worth noting that a tax software (and especially a tax professional) will help you catch any tax deductions you may otherwise miss. This will help you get the biggest income tax return possible and ensure you don't miss out on any money.
Your small business deserves the biggest tax return possible, so take your time when filling. And if you can spare the expense, consult with a tax professional. Incorrectly filing your taxes or filing them late can result in hefty fines and make your life as a small business owner even more stressful. Get things done right and early, even if it means bringing in a tax software or a professional. It’ll be worth it in the end.
Just as with your personal taxes, know that you’ll get more and more comfortable with small business tax each year. It won't be long before you're a small business tax pro.