Spring is nearly here, and with it comes tax season!
For small business owners, determining which taxes to file can be daunting – especially if it’s your first time navigating the business side of the IRS. Below, we break down the different business taxes to help you figure out what you need to file.
Like individuals, your small business is required to file an annual income tax return. Unlike most individuals, however, you are also required to pay taxes “as-you-go”, or in quarterly installments based on your estimated income. When you file your annual tax return, you will receive credit for your quarterly payments and will then be either required to pay the remaining balance or entitled to a tax return for overpayment.
For income tax, the actual return forms you file are based on your business structure.
As explained above, businesses are required to pay estimated taxes throughout the year. Payments are due quarterly, though the due date is different for businesses operating on the fiscal year as opposed to the calendar year. Sole proprietors can estimate their taxes using Form 1040-ES, while incorporated small businesses can use Form 1120-W. In either case, you should make the most accurate estimate possible – use your most recent year’s income as a jumping-off point.
Underestimating your tax liability will result in a tax liability when you file your annual tax return, while overestimating your tax liability will net you a return at the end of the year. If your small business’ income is variable or otherwise difficult to estimate, err on the side of overestimating.
Sole proprietors earning more than $400 in a tax year after expenses are required to pay self-employment tax that pays directly into social security and Medicare benefits. These taxes are typically paid with your quarterly estimated tax payments. Exceptions apply for special classes of workers, so consult the IRS for more guidance if you believe you may be exempt.
If you have at least one person who calls you “boss”, this section is critical. There are several different employment taxes for which your small business is responsible, and different rules exist for each type of tax. Employment taxes include:
- Federal income tax – This is not the same as your business income tax; rather, this is the amount of tax you are required to withhold from your employees’ paychecks each period. The amounts are based on their salary and withholding tables, and must be deposited.
- Social Security and Medicare taxes – Like income tax, you are required to withhold a portion of Social Security and Medicare taxes from your employees. However, you are also required to match the withholding amount. These taxes must also be deposited.
- Federal Unemployment tax – Unlike the previous two types of taxes, your company alone is responsible for paying unemployment tax for each employee. Unemployment tax is reported and paid using a separate form.
For more information about employment taxes and the payment deadlines for each, visit the IRS’ “Understanding Employment Taxes” page or consult your tax preparation professional.
Excise taxes cover a wide variety of special circumstances, such as the sale and manufacture of specific products or the use of certain equipment in the course of business. The trucking industry is particularly liable for excise taxes on motor fuel and the purchase and sale of carrier units, while the lottery and gambling industry is responsible for special excise taxes on wagers made.
While many excise taxes are included in the purchase price of affected products, you may still need to file excise tax forms to report your payments and qualify for any applicable tax credits.
For the best tax preparation results, you may want to invest in software that guides you through the preparation and filing process, such as Intuit’s TurboTax or QuickBooks, or consult a tax preparation professional with experience and up-to-date knowledge of current tax laws and credits available to small business owners. You may very well make up the cost of seeking help by getting deductions and credits you didn’t realize were there.
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