As the saying goes, there are two constants in life: taxes and death. With any luck, the latter isn't on the table for a good long while, but the former happens every year like clockwork.
The thought of taxes sends shivers down your spine. Deductions. Credits. Tax rates. Phaseout thresholds. And the forms. Dozens and dozens of tax forms. As a small business owner, you don’t know where to start.
While you might have a tax professional prepare your taxes, you’ll need to do your part and get prepared.
Our goal with this checklist is to get your small business tax preparation in tip-top shape. That means getting you organized so your tax situation doesn't take away from running your business.
What are the different types of business taxes?
The fact is, ALL businesses have to pay federal taxes and, in most states, state taxes. It helps you in the long run to learn the different types you might encounter.
There are five types of business taxes for most situations.
Income taxes
Income taxes are those you pay on your company's profits. You pay both federal and state taxes unless you live where there's no state income tax requirement. In that case, lucky you.
Your tax obligations vary depending on your business type.
Federal income taxes
If you have a C corporation, your taxable income decides your taxes. The federal corporate income tax rate can change, but for the 2022 tax year, the rate is 21%.
Sole proprietorships, partnerships, limited liability companies (LLCs), and S corporations use pass-through taxation. That means income passes through the business to your personal finances, where you pay taxes based on your tax bracket.
State income taxes
State income taxes vary, and they sometimes include county taxes. As you might expect, states like New York, Massachusetts, and California have higher state taxes, so consider this when starting your business.
Also, keep in mind that if you do business in multiple states, you may have tax reporting requirements in each one. They can get a bit complicated, so using a tax pro can save you the headache of figuring it all out.
Self-employment taxes
Being self-employed doesn't mean you get to skip out on those FICA payroll taxes you paid as a W-2 employee.
If you own a sole proprietorship or an LLC, the IRS slaps you with self-employment taxes based on your business's taxable income.
The self-employment tax rate is a flat 15.3%, which breaks down to 12.4% for Social Security and 2.9% for Medicare. Some good news, though.
Social Security has a wage limit that changes each year. For 2022, the wage limit is $147,000, which means if your business’s taxable income is above this amount, you only pay Medicare tax on the overage.
More good news. Half of the self-employment tax is deductible on your tax return, so you only pay the "employee" portion of the tax –the same as you'd pay as a regular W-2 employee.
Employment taxes
If your business does well enough to support employees, congratulations. But it also means you have some employment taxes to take care of, and you need them to be correct.
Examples of employment taxes include:
- Social Security and Medicare taxes (FICA): Remember that 15.3% rate from above? It applies here as well, only now you pay half, and the employee pays half. Your part is 6.2% for Social Security and 1.45% for Medicare. And your employee will have identical amounts withheld from their paycheck.
- Federal and state income tax withholding: As part of payroll, you have to withhold federal income taxes for your employees based on their Form W-4 information. Most states have their version of a W-4, and you’ll use that to calculate their state income tax withholding.
- Federal and state unemployment tax: You have to pay federal and, in most cases, state unemployment taxes. The federal unemployment tax rate is 6% on the first $7,000 of each employee's wage every year. States vary, so check with yours for the rate.
Excise taxes
Excise taxes are imposed on certain goods and services, and not all businesses have to pay them. If you deal in any of the following, excise taxes may apply to you.
- Sale of fuel
- Sale of cigarettes
- Communication services
- Air transportation
You can find a complete list of excise taxes on the IRS website.
Sales tax
This is a state tax paid on selling certain goods and services. You’ll typically collect sales tax from a customer at the time of purchase and send your sales tax payments to the state. Usually, you’ll send it quarterly and complete a sales tax return to submit with your payment.
Now that you're familiar with the types of taxes you might come across, let's get to the checklist.
How do I prepare my small business for tax season?
Organization is one of the best ways to get through tax season without losing your hair or throwing your computer at the wall. We can't say this enough: organization is the key to successful tax prep.
As we move forward, the information on the checklist applies primarily to year-end income taxes, the ones due in March or April.
The other taxes we mentioned before may have different filing or payment requirements outside of the traditional tax season, but it's vital information to have organized throughout the year.
Here are a few other things you can do to get ready for tax season.
- Gather and organize tax paperwork, including all tax forms, receipts, credit card statements, bank account records, and canceled checks pertinent to your business taxes.
- Become familiar with your qualified tax deductions and tax credits to know how to reduce your liability.
- Become familiar with the latest federal tax laws that benefit your business to ensure you reduce your tax liability. The IRS website or a CPA can help with this.
- Keep up with your state's tax laws to take advantage of further credits and deductions.
- Organize, itemize, and categorize your expenses through your bookkeeper or accounting software.
- Plan for payroll taxes.
- Determine if you need an extension.
Whether you prepare your taxes or someone else does it for you, staying organized throughout the year makes the tax season easier. It also helps you pay only what you owe and makes sure Uncle Sam doesn't slap your wrist for missing something.
What items do I need for tax preparation?
The following is a general list of items to complete your business tax return. Some things may either not apply to your situation or may only apply at certain times of the year. If you have specific questions about your needs, reach out to your tax advisor.
- Income items
- Gross receipts for sales and service
- Returns and allowances
- Accounts receivable
- Business checking/savings 1099-INT
- Form 1099-NEC
- Other statements such as 1099-MISC
- Cost of goods sold (COGS)
- Beginning inventory dollar amount
- Ending inventory dollar amount
- Inventory purchases
- Items removed for personal use
- Materials and supplies
- Business expenses (this list may not be exhaustive for your business)
- Advertising
- Commission and fees
- Professional expenses
- Travel and transportation expenses
- Phones
- Computer and internet expenses
- Independent contractor expenses
- Depreciation
- Business insurance
- Interest expense
- Office supplies
- Rent
- Wages paid to employees
- Employee benefits
- Repairs
- Estimated taxes paid
- Financial statements
- List of adjusting journal entries
- Capital asset activity
- Vehicle use (if you used your personal vehicle for business purposes)
- Summary of home office expenses (if applicable)
- Payroll records (if applicable)
What are the three primary income tax forms for a small business?
If there's one thing you've likely noticed by now, the IRS not only loves its forms but has an absolute ton of them. We're not sure what the metric value of an absolute ton is, but it can probably be measured in U.S. tax forms.
When it comes to small businesses, most companies are taxed as either a sole proprietorship, a partnership, or an S corporation. All three utilize pass-through taxation, which taxes the business income through your personal income tax return.
But each of these tax types has federal tax returns to complete. Here are the three forms you’ll use for your taxes when you set up your company as a pass-through entity.
Form 1065
Also known as the U.S. Return of Partnership Income, you use Form 1065 for multi-member LLCs and partnerships. It reports the partnership's income, losses, gains, deductions, and credits, and you must file the form, or an extension, by the March 15 due date.
Form 1120-S
The U.S. Income Tax Return for an S Corporation, or Form 1120-S, is for… you guessed it. An S corporation. It reports the S corporation’s income, losses, gains, deductions, and credits. This return must be filed or extended by March 15.
Schedule C of Form 1040
Schedule C is the form used by sole proprietors to report income and losses. Unlike the other two, you must file Schedule C with your individual tax return due date of April 15.
Now, you're ready to file.
Taxes don't have to be stressful. The key to success is organization or an outstanding tax expert who keeps you in line. Either way, you have other important things to worry about. Don't let taxes get you down.