Welcome to the club: You’ve launched your own design business and, slowly but surely, you’re conquering all the steps that go along with starting a successful small business. One of the essential requirements is learning how to file taxes as a small business proprietor. How your business is taxed depends on the structure of your company—whether it is a sole proprietorship, partnership, limited liability company (LLC), S-corporation (S-corp), or C-corporation (C-corp). The key to successfully filing your taxes as a small business owner is to be painstakingly organized—specifically, knowing your tax filing requirements and the due dates. Does it all seem a bit overwhelming to you? AD PRO is here to help with a comprehensive guide to small business taxes.
Determine your company structure
While the details differ based on individual state laws, there are five basic structures for your small business—and how you decide to structure your company will dictate how you file your taxes.
• Sole Proprietorship: The most straightforward business entity is a sole proprietorship, which is an unincorporated business owned by one person, and you will report taxes on your own individual tax return.
• Partnership: A partnership is when an unincorporated business has multiple owners, and profits are reported on their individual tax returns—general partnerships, limited partnerships, limited liability partnerships (LLPs), and limited liability limited partnerships (LLLPs) all fall under this category.
• LLC: An LLC combines concepts of a corporation and a single proprietorship or partnership: It limits the personal liability of its owners (members) like a corporation but allows for the pass-through taxation of a sole proprietorship or partnership, and profits can be taxed either on a member or corporate level.
• S-Corp: An S-corp has lower taxes but also lower growth potential: The company has one class of stock and no more than 100 shareholders/investors, who have limited liability, and profits are taxed on their returns.
• C-Corp: With a C-corp, you’ll pay higher taxes—you’re taxed once on a business level and again on an individual level—but you’ll also have more flexibility. A C-corp can have unlimited shareholders and multiple classes of stock.
Most small business owners elect to structure their companies as either a sole proprietorship or an LLC. But you’ll have to weigh the options and decide which route is right for you. Each type of business entity requires different tax forms to report your profits and expenses. So what’s the best approach to filing taxes as a small business owner? Here's what you need to do.
Hire a pro or go it alone
Assess whether you will hire a professional tax accountant or file your taxes on your own using tax-prep software, such as TurboTax, H&R Block, or TaxAct. It may be wise to hire a tax preparer so that you can focus your time and energy on other aspects of your company. However, as the owner of your firm, you are still responsible for compiling all the paperwork and ultimately filing on time.
According to Salvatore Benvenuti, a retired IRS agent and appeals officer who worked for the IRS for 34 years, “these filings can be overwhelming and pose a tremendous burden on the proprietor. For this reason it is highly recommended that you engage the services of a competent accountant/tax preparer, who is familiar with both federal and state filing requirements.
“As a small business owner, there are a host of tax filings that are required: not only federal but also state and local filing requirements,” he says. “While most taxpayers concentrate on the federal income tax return, they often neglect federal payroll tax requirements, state income taxes, and state sales taxes.”
If you’re a sole proprietor and your business is very simple, then using tax prep software to file on your own might suffice. However, it still could be worth it to meet with an expert who’s experienced with business taxes. Regardless of whether or not your decide to work with a professional tax preparer, you’ll need to follow the steps below to ensure accurate tax filing for your small business.
Be meticulous about record-keeping
“One of the biggest challenges for taxpayers is proper and timely record-keeping,” Benvenuti says. “Most small business owners are occupied with running the business, and the last thing they want to deal with is contemporaneous record-keeping.” However, accurately recording all your earnings and expenses throughout the year is a crucial step in this process. Hiring a bookkeeper can help, but the onus ultimately falls on you, as the owner, to keep proper records. Calculating your profits and deductions in real time throughout the year is much easier than waiting until tax season, looking back at the past year, and trying to remember each expenditure and profit.
“It is very difficult to file a tax return without the records of income and expenses,” Benvenuti advises. “Every business should invest in a good accounting system that is maintained on a daily basis.” Use a program like QuickBooks that can integrate with your business checking account, and it can also work with TurboTax to import accounting info directly into your tax return. Be sure to compile all of your business records and have them in front of you before you begin filling out any tax forms.
Complete the proper paperwork
The IRS forms you’ll need to fill out depends on your business structure. When filing small business taxes as a sole proprietor or LLC, you can report all your business income and expenses on a Schedule C attachment to your personal income tax return. If filing as a corporation, you’ll need to file a separate corporate tax return and complete a Form 1120.
Since most small business owners will operate as a sole proprietorship or LLC, let’s discuss the details of the Schedule C (or 1040), which is the most basic way to file business taxes. Before completing the paperwork, you’ll need to gather the following documents:
• A profit and loss statement (or income statement) for the entire year
• A balance sheet demonstrating your business’s net worth
• Asset records for purchases and sales
• Information to calculate cost of goods sold (COGS or cost of sales)
• Details about travel, meals, entertainment, and miscellaneous expenses, as well as home business expenses, if applicable
The Schedule C form is only two pages long, and it includes all the expenses you’re eligible to claim. Once your form is completed, you can subtract your expenses from your earnings and calculate your profit or losses for the year. You then transfer this number to your personal income tax form and submit it with the rest of your tax information.
Small business owners also must pay Social Security and Medicare taxes via self-employment taxes, which you can calculate via a Schedule SE form.
Be aware of deadlines
Know how, where, and when to file your taxes. You can submit by snail mail or e-file your small business taxes, and the last page of the 1040 instruction booklet lists mailing addresses for the IRS. You must pay your taxes by the tax return due date of April 15.
If you file for an extension for your small business taxes (for non-corporate taxes), you will get six months, until October 15, to file your tax return. However, this extension does not extend the due date of your payment; you still have to pay your taxes by April 15.
It’s recommended that small business owners pay estimated taxes throughout the year, since you’re not earning a salary and thus not paying taxes on your income as you’re earning it. Estimated taxes are due quarterly on April 15, July 15, October 15, and January 15 of the following year.
And don't forget the single most important piece of advice for filing small business taxes: “Know your filing requirements and due dates,” Benvenuti says. “While you may engage the services of a professional to prepare and file the returns, remember that ultimately the responsibility for timely filing all required returns rests with the taxpayer."