Small business owners have to balance many different aspects of their company. One of the most important things on the list is staying in compliance with tax laws. Tax deductions can be a great way to reduce your tax liability, but you have to know what you are doing.
Step 1: Understand the types of business taxes
All businesses are required to pay certain taxes to the IRS and state tax authorities. As a small business owner, it is your responsibility to ensure that your federal and state tax obligations are met, nobody else’s. That’s why we’ve included a list of the typical business tax responsibilities as the first step in our small business tax prep checklist. Whether you run a sole proprietorship, S corporation, or C corporation, these are the five main types of taxes your business may be responsible for:
1. Income tax
Income taxes are based on income generated by a business and are paid on both a federal and state level. Depending on the type of entity your business is categorized as—also known as your business structure—your small business tax obligations vary.
For C corporations, taxes are paid based on the net income of the business. The current federal income tax rate is a flat 21% for C corporations.
On the other hand, all other types of business entities such as sole proprietorships, partnerships, and S corporations pay income taxes on an individual level. This means that business owners of these types of entities are responsible for reporting business income on their individual tax return. Income taxes are then paid based on the tax bracket you fall into.
A business’s state income tax, however, varies from state to state, and potentially county to county. Depending on where your business operates, you will need to check the local tax rate that applies to you based on your income.
2. Estimated taxes
Estimated taxes are the payments businesses are required to make on a quarterly basis. Estimated taxes are due April 15, June 15, September 15, and January 15—or the next following business day if the day falls on a holiday or weekend. For C corporations, estimated taxes must be paid if you expect to owe more than $500 in taxes. For all other business entities, you are required to pay taxes if it’s likely you’ll owe more than $1,000.
3. Self-employment tax
As a business owner, you are likely considered an employee at your own company. If you personally earned more than $400 from business activities, it should be reported as income and paid at the self-employment tax rate. The current self-employment tax rate is a flat 15.3%. That breaks down to 12.4% for Social Security and 2.9% for Medicare, since there is no employer responsible for paying these on your behalf.
4. Employment taxes
When you have employees, you have certain employment tax responsibilities, also known as payroll taxes. Examples of employment taxes include:
- Social Security and Medicare taxes: Employers are responsible for deducting Social Security and Medicare taxes from employee paychecks, as well as paying a portion of these taxes. The Social Security tax rate is 12.4%: 6.2% is paid from the employee’s wages, and 6.2% is paid by your business. The Medicare tax rate is currently 2.9%: 1.45% is paid out of the employee’s wages and the other half is paid by the employer.
- Federal and state income tax withholding: As a business owner, you are responsible for withholding income taxes on behalf of your employees. The amount withheld will vary per employee, as it is based on the W-4 allowances they claimed.
- Federal unemployment tax: The federal unemployment tax rate is 6% on the first $7,000 of income for each employee. You may also have to pay state unemployment taxes, if applicable in your state.
5. Excise tax
If your business performs any of the following, you may have to pay excise taxes:
- Communication services
- Air transportation
- Sale of liquor
- Sale of cigarettes
- Sale of fuel
- Sale of heavy trucks, trailers, and tractors
- Wagering or sale of lottery tickets
For a full list of which goods and services excise taxes may apply to, refer to the excise tax overview by the IRS.
Step 2: Select the appropriate tax forms
There isn’t a one-size-fits-all business tax form. Depending on your business structure, you may need specific tax forms—Form 1099-MISC, Form 1120, etc.—to report profits, losses, deductions, and credits to the IRS. Some of the most commonly used IRS forms used to report small business taxes include:
- Schedule C: Return with Form 1040 to report income as a sole proprietor.
- Schedule K-1: Use to report income for pass-through entities. You will need to complete Schedule K-1 as an owner of an S corporation or partnership, or as a member of a multi-owner LLC.
- 1099-MISC: Use to report self-employed income as a business owner or for independent contractors.
- Form 1120: Use to report income for a C corporation.
- Form 1120-S: Use to report income for an S corporation. Form 1120-S is filed separately from your personal income tax return.
- Form 1065: Use the information return as an owner of a partnership.
- Form 720: Use for reporting excise taxes for your business.
If you have questions about which forms to file or how to fill them out, it may benefit you to speak with a tax professional. While tax software may be useful, a dedicated tax preparer can be more reliable in helping ensure you file correctly and on time.
Step 3: Create and maintain a tax calendar
With everything else on your plate as a small business owner, it’s understandable that tax due dates might not be top of mind. However, it’s important that you keep track of when payments are due and when taxes need to be filed. Unfortunately, the IRS doesn’t take tardiness or failure to pay lightly.
To help you avoid fines and serious penalties that can interfere with your business’s cash flow, the best thing to do is create a tax calendar. In 2021, your tax calendar should include these important small business tax dates:
- January 31: Deadline to send W-2s to your employees and 1099-MI
- SCs to independent contractors
- This is also the final day to submit copies of these tax documents to the IRS
- February 28: Deadline for companies to file their information return using a 1099 or 1096 on paper
- If filing electronically, the deadline is April 1
- March 15: Partnerships, S corporations, and multimember LLCs must file their return by this date
- April 15: Single-member LLCs, sole proprietors, and C corporations (that follow the standard calendar year for accounting) must file their return by this date
- April 15: First estimated tax payment due
- June 15: Second estimated tax payment due
- September 15: Third estimated tax payment due
- January 15: Final estimated tax payment due
Keep in mind that if any of these dates fall on a weekend or holiday, returns and payments are due the following business day. If you cannot meet the filing or payment deadlines, you can file an extension with the IRS. Use Form 7004 to file an automatic 6-month extension.
Step 4: Gather essential business tax return documentation
Filing taxes for your small business requires mountains of paperwork, and figuring out which forms to complete and documentation to supply can be daunting.
Use our small business tax preparation checklist below to compile all the essentials, whether you’re tackling your business taxes on your own or enlisting the services of a professional tax preparer.
Small business tax preparation checklist: Essential documentation for your tax return
- Federal tax ID number
- Social Security number
- Previous year’s tax return—up to 3 years prior for both state and federal
Business income taxes documentation
- Accounting journals and ledgers
- Financial statements—specifically your balance sheet and income statement
- Transactional supporting documents
- Bank deposit slips
- Bank account statements
- Invoices received and paid
- Credit card statements
- Vehicle and mileage logs
Business-related expenses documentation
- Receipts grouped into the following categories:
- Supplies: General office supplies
- Recurring operational costs: Rent, utilities, and subscription-based services
- Entertainment/travel: Any applicable business entertainment and travel expenses
- Marketing/advertising costs: Expenses used to promote your business
- Professional fees: Attorneys, consultants, accountants, bookkeepers, and more
- Insurance policy details: Gather both individual and group plan documents, company vehicle policies, and any other insurance coverage documentation
- Equipment and assets: Include depreciation schedules for each
Employment tax documentation
- Employee forms:
- W-9: Employee tax withholding certificate
- I-9: Verification of employee legal working status
- W-2: Wage and tax statements for each employee
- Subcontractors and professional services:
- 1099: Nonemployee tax form
- 1099-MISC: Summary of fees and payments for nonemployees
- Payroll reports
- Gross monthly payroll
- Total deductions withheld from employee gross wages
In-home office documentation
- Square footage of office space
- Office square footage
- Total square footage of home
- Mortgage interest or rent paid
- Insurance policy
Running a business can be stressful. Filing taxes for your small business doesn’t have to be. Don’t waste precious time navigating complex state tax, sales tax, and employment issues.
Step 5: Research tax deductions and credits
Tax credits and deductions are excellent opportunities to reduce your small business tax bill. This is possible because certain expenses—such as health insurance—and investments may be deductible from your taxable income or your final bill, reducing how much you owe. Researching the deductions and credits that might apply to your business is an important step on your small business tax preparation checklist, so do your due diligence.
Some of the notable small business tax deductions you may qualify for include:
- General business expenses
- Legal services
- Internet and phone services
- Depreciation of assets—can be divided up over useful life of asset or in a single year
- Employee salaries and benefits
- Training and education
- Meals and entertainment for business dealings
Business tax credits you should be aware of include:
- Small Business Health Care Tax Credit—you may be eligible if you have fewer than 25 employees and contribute to their health insurance costs
- Investment Credit—qualifying energy, reforestation, and similar projects
- Disabled Access Credit—applies to expenses required to improve accessibility
- Work Opportunity Credit—applies to businesses that hire certain targeted groups of employees including veterans and ex-felons
- Alternative Motor Vehicle Credit—applies to electric cars and hybrids for business use
Step 6: Ask for a filing extension, if necessary
Whether you’re a new business owner who simply wasn’t aware of your tax liability or you just aren’t prepared, filing an extension is an option. This year, the IRS allowed for a longer extension than usual because of the extenuating circumstances related to the COVID-19 pandemic.
However, moving into 2021 and beyond, you can use Form 7004 to file a tax extension for reporting your business income. This will give you an automatic 6-month extension to file your taxes accordingly. In the meantime, use this small business tax preparation checklist to make sure you’re able to file before your extension expires.
While an extension to file applies to submitting your tax forms, it does not give you an extension on paying. Make sure you keep up with your estimated payments during this period. Otherwise, you could face steep fines, or worse. If you’re unable to keep up with tax payments, reach out to the IRS to see if you can arrange a payment plan—the sooner, the better.
As with other taxpayers, the IRS is eager to collect tax payments, so they’re often willing to work with small business owners to find a solution.
Get ready to file your small business taxes with the IRS
Now that you’ve made it through our entire small business tax preparation checklist, you’re ready to file. Navigating tax filing and payments is never simple, but with the right help—like Overdraw and this checklist, it’s a lot easier. Enjoy the peace of mind that proper tax prep and compliance brings by applying these resources in 2021 and beyond.