Learn everything you need to know about small business taxes so you can save yourself the hassle later 

Starting a small business can be a rewarding experience that introduces an endless world of possibilities and independence.

But, for the same reasons that it’s empowering, starting a business can also be stressful. Relying on yourself can be freeing, but it also means that you bear full responsibility if something goes wrong.

One of the most stressful aspects for business owners in the first few years is taxes. Small business taxes are an entirely new world of confusing rules and regulations. To someone who’s used to getting a W-2 form from their employer, learning how to do taxes for small businesses can be daunting.

Luckily, it’s not as impossible as it seems. Here are some steps you should take when creating and maintaining your small business in order to create an easy and stress-free tax season.

Choose the Right Type of Business Entity

There are several types of business entities your business can operate as, and they all have different strengths, weaknesses, and tax implications. Which one you pick will be up to your circumstances and preferences. Here are the most common ones:

Sole Proprietorship

The simplest type of business entity, a sole proprietorship, is when one individual (or a married couple) is the sole owner and operator of a business. This type of entity does not require registration with their state to exist — once you launch a business, it is automatically a sole proprietorship. 

In this arrangement, taxes are fairly straightforward. You file your business income and tax information on your personal taxes. You would be subject to income tax on an individual level, as well as self-employment tax.

General Partnership

In a general partnership, two or more people actively own and operate the business. Like a sole proprietorship, it does not require registration.

In a general partnership, all partners can divide business income and losses across their personal taxes. Partners are subject to regular income tax and self-employment tax.

Limited Partnership

A limited partnership involves multiple partners. These partners can be either general or limited, which means they do not assume liability for the business. This is a good choice when passive investors who otherwise stay out of the business’ operations are involved.

Unlike a general partnership, a limited partnership involves an official registration with the state. It is taxed using the pass-through method, where the partnership’s income and losses are passed through to the partners’ personal taxes based on what percentage of the business they own.

C Corporation

A C corporation involves official registration and exists as an entity entirely separate from its owners. Many large companies are C corporations, and they usually involve owners, a board of directors and several other key roles. You can still register as a C corporation if you are a sole owner, as long as you can technically fulfill all these roles yourself.

Taxes for C corporations involve more rules and regulations, but they also offer more opportunities for tax deductions. The corporation is taxed as an individual entity, and owners and operators are taxed as employees on the payroll. Individual self-employment taxes are lessened for this type of business.

S Corporation

An S corporation shares a lot of similarities to a C corporation, including limited liability, with the key difference of using pass-through taxation. 

This means that instead of getting taxed as a separate entity, the business’s income and losses are taxed through the partners’ personal tax returns, with shareholders being treated as employees. 

Limited Liability Company (LLC)

One of the most popular choices, LLCs include many benefits of other business types while minimizing the negative aspects. They preserve limited liability like a C corporation, but they also have less requirements and hoops to jump through, which makes them more like a sole proprietorship or partnership.

A major benefit of LLCs is that you can choose how you want your business to be taxed. You can either have it taxed as an individual entity, or have it taxed with the pass-through method.

How to File Your Small Business Taxes

Once you pick what type of business entity you want to operate as, you need to get set up to actually pay your taxes. Here are 3 things you need to do before you file, no matter what type of entity you choose.

Get an Employer Identification Number (EIN)

Barring cases where you are truly a one-person sole proprietorship, most small businesses who are planning on having employees or filing as a partnership or corporation need to obtain an EIN.

This can be done easily and cost-free using the IRS website. You can also use the IRS’s handy interactive tool for determining whether or not your business needs an EIN.

Even if you don’t technically need an EIN, it may still be beneficial to obtain one. Having an EIN makes it so you don’t have to share your personal social security number with customers or vendors, which can help you preserve your privacy.

Make a Habit of Good Bookkeeping

While everyone knows that good bookkeeping is essential to a stress-free tax season, a surprising few actually keep up with it. While this may slide when you’re doing your taxes as a regular employee, missing data when you’re doing taxes as a business can lead to big consequences.

To avoid negative surprises, penalties or fees when you get your tax return, make a habit of establishing a good record-keeping policy and sticking to it year round. Document all of your profits and losses, and make sure you know where the money is coming from and going.

This can also benefit your business in the long run beyond just taxes. Quality bookkeeping can help you see valuable data such as what products sell the most, how your profit margins are changing over time, and which expenses can be eliminated or consolidated.

Don’t Forget To Deduct Startup Costs

It goes without saying that starting a business requires a bit of financial risk in terms of startup costs.

Luckily, startup costs are often (but not always) deductible, even if they aren’t from the year in which you’re filing your taxes. Here are some tax rules regarding startup costs to keep in mind:

• Expenses that don’t qualify include amounts paid to acquire intangible assets and capital. This may look like franchise fees or equipment a business would depreciate over the course of several years.

• As a rule of thumb, expenses that do qualify include things that could be deducted in normal years after the business begins. This may include inventory, utilities, rent for business property space, office supplies, software, and more.

• You can deduct up to $5,000 in startup costs the year a business begins (within the above limitations), even if the costs were incurred in years prior.

• If your startup costs exceed the $5,000 limit, you can recover the excess costs through an amortization deduction rate over a period of 15 years.

Make Estimated Payments

One of the most common ways to avoid surprise taxes is to make estimated payments throughout the year. Just like regular wage tax deductions, these payments can be adjusted when you get your tax return, so there’s no need to worry too much about getting the amount wrong.

Making estimated payments is recommended for businesses that plan to owe taxes in excess of $1,000 in a year, or $500 if you’re a corporation. Plan to pay quarterly.

Have More Questions About Small Business Taxes?

Small business taxes can be confusing and overwhelming. Many small business owners simply don’t have time to manage their taxes on top of their other day-to-day responsibilities. 

If you need a little extra help managing your small business taxes or just have some more questions about how your taxes work, contact Sims Resource Group. With our services and resources, we can help make your taxes and bookkeeping more manageable, so you have more time to run your business.