It’s hard to believe that tax season comes around so quickly, but here we are. It’s time to gather up your paperwork, double-check your information, and get on top of your bookkeeping. While the tax rules for small businesses are a little more complex than for individuals, it’s still easy to get your taxes done. We’ll explore any questions you might have to ensure you’re prepared.
How Does the Tax Process Work for Small Businesses?
Here are the basic things you’ll need to do:
- Set up a bookkeeping system and keep it updated throughout the year.
- Put money aside from your small business to regularly pay taxes.
- Pay your estimated taxes when you’re required to.
- Get information from your bookkeeping system to help you complete your tax forms.
- Gather information and forms from elsewhere.
- Hire an accountant or use online tax filing software.
- File your taxes.
How Do I Set Up a Bookkeeping System?
We’re going to point you to this bookkeeping guide. It gives you all the basics when it comes to setting up bookkeeping for your small business. There are a lot of different bookkeeping systems out there. Here’s our guide to the best free accounting software. If you decide you need a little more, then FreshBooks, QuickBooks, Xero, and Zoho Books are all worth looking into.
How Should I Update My Bookkeeping System?
You will need to enter all of your small business revenue (the money customers spend with you), and your expenses (the money you pay out) on a regular basis. You can then “reconcile” your bookkeeping software against your small business bank account to make sure you’re tracking everything. This will tell you what your overall small business profits are, which are what you’ll pay tax on.
How Much Money Should I Put Aside for Taxes?
A good rule of thumb is to put aside between 39% and 35% of your profits to pay taxes. You’ll pay estimated taxes through the year, then make a final tax payment or get a refund when you file your end-of-year taxes.
When Do I Need to Pay Estimated Taxes for My Small Business?
You’ll pay estimated taxes four times a year:
- Estimated taxes on Q1 profits are due by April 15.
- Estimated taxes on Q2 profits are due by June 15.
- Estimated taxes on Q3 profits are due by September 15.
- Estimated taxes on Q4 profits are due by January 15.
You will calculate and pay these taxes using a Form 1040-ES.
Who Do I Need to Pay Taxes To?
You’ll pay both estimated and end-of-year taxes to two main agencies:
- The Internal Revenue Service for federal income tax and self-employment tax.
- Your state’s Department of Revenue for state income tax.
What Types of Taxes Does My Small Business Need to Pay?
In most cases, the profits of your small business “pass through” to your personal tax return, which is where you’ll report your business income and pay tax. Small businesses will need to pay the following types of tax:
- Self-employment tax of 15.3% on the profits made by your small business.
- Federal income tax which is charged in bands and has a “standard deduction” applied.
- State income tax, which varies from state to state. Not all states have an income tax.
What Tax Forms Does My Small Business Need to File?
The types of forms you need to file depend on the type of business you have.
- If you’re a sole proprietor or a single-member LLC (you’re in business by yourself), then you’ll file a Form 1040 with attached Schedule C and Schedule SE with the IRS and similar forms with your state’s DOR.
- If you’re a partnership or multi-member LLC, you’ll also file a Form 1065, Partnership Return and a Schedule K.
- If you’re taxed as an S Corporation, you’ll also file a Form 1120S, S Corporation return.
If you employ others, you will also need to run payroll and file additional forms.
What Information Do I Need from My Bookkeeping System to File My Small Business Taxes?
You’ll need details of your small business revenue, expenses, and profits to fill in and file your tax forms. Your bookkeeping system will provide this information via a “Profit and Loss” (P&L) report.
Should I Hire an Accountant or File My Taxes Myself?
We would recommend hiring an accountant. They can provide specific advice on your taxes, help you find all the expenses you’re entitled to, and ensure you’re providing information and filing forms correctly. If your small business affairs are straightforward, you might want to file taxes yourself. There are many types of online software that will let you do this.
Do You Have Any Other Advice for Small Business Taxes?
Yes, here are some hints to help your tax filings go smoothly:
- Use a separate business bank account, it will make your bookkeeping easier.
- Always keep your bookkeeping system up to date. Enter new transactions on a regular basis, preferably once a week or a couple of times a month.
- Keep receipts for any expenses that you’re claiming, in case the IRS wants to know more.
- Always report all of your income, whether it’s shown on a Form 1099 or you got it from other sources.
- Be aware that there are certain deductions that can reduce your tax, like the employer portion of your self-employment tax, or the Qualified Business Income. Your accountant or your tax filing software should take care of these.
That’s it! Keep your bookkeeping up to date, ensure your records are accurate, pay estimated tax throughout the year, file the correct forms, and you’ve got this!
Please note that this information is only intended as general advice. You should always consult a tax professional about your financial situation.