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.
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 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.
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 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.
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.
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:
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.
You can find a complete list of excise taxes on the IRS website.
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.
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.
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.
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.
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.
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.
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 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.