Running a business is challenging enough without the added burden of tax preparation. In an ideal world, you would constantly be considering how to prepare your taxes, keeping your records and documentation organized to make the process simpler when the time comes. Indeed, maintaining good ‘financial hygiene’ throughout the year can help you avoid some of the hassles associated with filing business taxes.
Types of Business Taxes
You must understand the various small business taxes in order to run your business. Business taxes come in five different varieties. As follows:
Income Tax
All businesses, except partnerships, have to file an annual income tax return. Partnerships, on the other hand, file an information return.
The form you use to report income tax depends on the structure of your business (e.g., sole proprietorship, corporation). It’s essential to deduct business expenses to determine your net income, upon which the tax is levied.
Self-Employment Tax
Business owners are seen as employees of their own companies. As a result, any profit you make from your business above $400 is considered income and needs to be recorded. On the other hand, you must pay self-employment taxes. 15.3% is the current rate, which may be divided into 2.9% for Medicare and 12.4% for Social Security.
Estimated Taxes
These are periodic (usually quarterly) taxes paid by self-employed individuals and business owners on income that is not subject to withholding.
Since income from self-employed work or business ownership doesn’t have taxes automatically withheld, the IRS requires these individuals to estimate their tax liability for the year and make periodic payments.
Employment Taxes
Popular employment taxes include Social Security and Medicare taxes, federal unemployment taxes, and state and federal tax withholding, etc. These taxes are also referred to as payroll taxes. Employers must partially pay Social Security and Medicare taxes by way of payroll deductions. Withholding of federal and state income taxes is based on the W-4 allowances that an employee claims. If appropriate, you, as a business owner, may be required to pay federal and state unemployment taxes.
Excise Tax
This is a tax levied on specific goods, services, or activities. The type and amount vary based on the product or service.
They may also be assessed for certain actions, such as truck traffic on the roadway. These taxes have a variety of uses, but they are frequently levied to punish or deter particular actions or to pay for associated government initiatives.
Business Tax Forms by Structure and Documents Needed for Tax Return
The tax obligations of a business are closely tied to its legal structure. Different business entities have distinct tax forms they must file, reflecting the unique financial and operational characteristics of each structure.
Here’s a concise breakdown of the tax checklist 2023 forms for various business structures, along with documents needed for tax returns.
Sole Proprietor
Sole proprietors show their business income and expenses on Schedule C or the simplified Schedule C-EZ. Additionally, they must file Schedule SE to calculate and report self-employment taxes.
Required Forms: Schedule C (or Schedule C-EZ) and Schedule SE.
C Corporation
C Corporations are required to report their income, gains, losses, deductions, and credits on Form 1120. This form determines the corporation’s tax liability.
Required Forms: Form 1120.
Partnership
Partnerships file Form 1065, an information return, to report income, deductions, gains, and losses. It provides necessary information for the individual partners to report and pay tax on the shares of their partnership income.
Required Forms: Form 1065.
S Corporation
S Corporations file Form 1120S, an information return, to report income, deductions, gains, and losses. Like partnerships, corporations don’t pay income tax, but shareholders report their share of the corporation’s income on their individual tax returns.
Required Forms: Form 1120S.
Limited Liability Company (LLC)
An LLC’s tax forms depend on its chosen tax classification. A single-member LLC defaults to being taxed as a sole proprietorship. On the other hand, a multi-member LLC defaults to partnership taxation. However, LLCs can be taxed like a C Corporation or an S Corporation.
Required Forms: Varies based on how the LLC chooses to be taxed (Schedule C, Form 1120, Form 1120S, or Form 1065).
Gathering Essential Tax Return Documents
Here’s a list of crucial documents that small business owners should gather before filing their taxes, along with a brief explanation of the relevance of each:
Income Sources
Income sources require documents such as Sales receipts, invoices, bank deposit slips, credit card statements, and any other records of income.
Cost of Goods Sold (COGS)
Cost of Goods Sold requires purchase orders, receipts, inventory records, and product shipping logs.
It is the direct costs related to producing the goods that businesses are selling. These costs are deducted from the gross receipts, which helps in getting the gross profit, a very important figure in tax calculation.
Expenses
Expenses include receipts, bills, canceled checks, credit card statements, and any other records of business-related expenses.
Business expenses can often be deducted from gross income, reducing the overall tax liability. It’s vital to have a detailed record of all expenses to claim these deductions accurately.
Employee Information
You need to have W-2 and W-3 forms, 1099 forms (for independent contractors), payroll records, and any other compensation-related documents.
You can get information about the wages, benefits, and other compensation paid to the employees and contractors. Employee information is essential for filing employment taxes and also ensuring contractors and other employees file their personal tax returns.
Financial Statements
Be ready with your balance sheet, income statement, and cash flow statement.
With financial statements, you can get to know the financial and operational health of the business for the session year. It provides data that can help in tax preparation and validate the figures entered on the tax forms.
Figure Out Tax Deductions and Credits for Small Businesses
Tax deductions and credits play a pivotal role in reducing the tax liability for small businesses. By understanding and leveraging these, businesses can significantly decrease their tax burden. Here’s a breakdown:
Tax Deductions for Small Businesses
- Home Office Deduction: For those who use a portion of their home exclusively for business purposes they may be eligible to deduct expenses related to that space, such as a percentage of their rent or mortgage, utilities, and home maintenance.
- Vehicle Expenses: You can deduct vehicle-related expenses if you use your vehicle for business purposes. This can be done using the standard mileage rate or by tracking actual expenses like gas, maintenance, and depreciation.
- Salaries and Wages: Payments made to employees, including salaries, wages, bonuses, and commissions, are deductible. However, payments to sole proprietors, partners, and LLC members aren’t wages and aren’t deductible.
- Rent or Lease Payments: If you rent or lease a property for business operations, those payments are deductible.
- Depreciation: If you own property used for business, like vehicles or equipment, you can recover the cost through depreciation deductions over the asset’s useful life.
- Professional Fees: Fees paid to professionals like lawyers, accountants, and consultants can be deducted.
- Interest: If you have business loans or use credit for business operations, the interest on that borrowed money is typically deductible.
- Taxes and Licenses: Most of the taxes and licenses that a small business pays can be deducted, including sales tax, property tax, and state income tax.
Tax Credits for Small Businesses
- Work Opportunity Tax Credit: The Work Opportunity Tax Credit is only for employers hiring individuals from certain targeted groups facing employment barriers, such as veterans or those on public assistance.
- Small Business Health Care Tax Credit: Small businesses that offer healthcare insurance or services to their employees and cover at least 50% of the cost might qualify for this credit.
- Research & Development (R&D) Tax Credit: Businesses engaging in the research and development field can get credits on the basis of incentivized innovation.
- Disabled Access Credit: Businesses that make their facilities more accessible to persons with disabilities can qualify for this credit.
- Energy Efficiency Credits: Businesses that invest in energy-efficient equipment or property or that use renewable energy sources might be eligible for various energy tax credits.
Tax Tips for Small Business
Tax season is super busy, confusing, and tiresome for many business owners nowadays. However, you can get the right assistance from experts in record keeping, maintenance, etc. In this way, your tax period can be simplified and become smoother.
Hire an Accountant
Hiring an accountant can solve your tax preparation burden because accountants are financial experts who can provide you with invaluable insights into your business’s financial health.
They can help you have positive business health and also allow you to have tax advantages such as tax deductions and credits. Accountants can also make you aware of the new policies related to tax benefits, tax deadlines, and all information regarding tax payments.
They have a lot of expertise as they have worked with many businesses, and working with them can surely save you effort, time, and money. Also, being safe from any legal complications.
Maintain Accurate Records
Having an accurate and detailed account record is important for tax preparation. You can have your balance sheet account for how much you have spent and earned in a cycle year. This will help you be prepared in advance and reduce the risk of errors during tax filing. Keeping detailed and accurate records is the foundation of a hassle-free tax season. It ensures that you can account for every dollar earned and spent, making tax filing more straightforward and reducing the risk of errors or audits.
Separate Business and Personal Expenses
You must have separate finances for your business and personal use because, at the time of tax payment, it becomes difficult to decipher the difference. By keeping them separate, you ensure a clear financial picture of your business, making tax calculations more accurate.
Establish Your Business Entity Properly
Your business structure (e.g., sole proprietorship, LLC, or corporation) determines your tax obligations. Establishing and maintaining your business entity ensures you’re taxed appropriately and can take advantage of specific tax benefits.
Monitor Payroll
Payroll involves withholding the right amount of taxes, ensuring compliance with employment laws, and providing necessary tax documents to employees. Regularly monitoring and managing payroll reduces errors and ensures you meet all tax obligations related to employee compensation.
By implementing these best practices, you’ll be setting yourself up for a successful tax season. Remember, preparation is the key, and the more proactive you are throughout the year, the easier tax time will be.
Get Organized for Tax Season with Cheqly
With Cheqly, you can get organized with your taxes because it can help you manage your business and track income and expenses with precision. Its advanced analytics can highlight spending patterns, potential savings, and investment opportunities, empowering you to make data-driven decisions.
Tax season serves as a reminder of the importance of organized finances. If you’re looking to elevate your financial management and set your business on a path of informed decision-making, Cheqly is the solution. If you want to get organized with your business finances, then start with our business banking. Applying is hassle-free, and you can establish a Cheqly account in minutes. Take a step towards smarter business banking today!