Mastering small business tax: Essential tips for streamlined filing

Managing your small business taxes got you down? You’re not alone.

A joint research survey by American University and the Fed has revealed that 37% of small businesses and gig workers feel stressed and confused about how to file their company’s taxes.

Moreover, a third were unaware if they had to pay estimated taxes, and a quarter had no knowledge of how to file. 

With so much confusion around the topic, this article will attempt to cut through the jargon to deliver straightforward guidance on key tax types, compliance strategies, and filing essentials. 

With brief, focused sections on income, self-employment, and employment taxes, you’ll learn how to handle your taxes confidently.

Deciphering small business taxes: Key categories

For the astute small business owner, understanding the core types of business taxes is the initial step toward maintaining compliance and effective tax planning. A myriad of obligations are involved, including:

• Income tax
• Self-employment tax
• Employment taxes
• Excise taxes

It’s no wonder that the world of small business taxation can feel overwhelming. However, don’t worry; mastering the fundamentals makes the process simpler.

Consider this:

• The average tax rate for small businesses in the US is 19.8%, with variations across different states.
• Not all states enforce a corporate income tax.
• Small businesses must file a federal income tax return if their net earnings from self-employment exceed $400.

This makes understanding income tax obligations a top priority, but that’s just the tip of the iceberg when it comes to dealing with income taxes.

Understanding income tax obligations

When dealing with income tax, the structure of your business plays a significant role. Federal income tax rates for C corporations are fixed at 21%. However, pass-through entities such as sole proprietorships, partnerships, and S corporations have their business income subjected to personal tax rates ranging from 10% to 37%.

Moreover, the method by which your business is taxed can significantly impact your tax planning decisions. For instance, corporate dividends can be ordinary, taxed at the same rate as the shareholder’s other income, or qualified, taxed at lower capital gains tax rates. This can impact your business’s tax planning decisions, especially in the context of double taxation.

Navigating self-employment tax requirements

Now, we shift our focus to self-employment tax. This tax encompasses both Social Security and Medicare taxes and is the responsibility of small business owners who function as both the employee and the employer. The current rate for self-employment tax is 15.3%, and it’s paid by sole proprietors and individual partners in a partnership.

Small businesses are commonly advised to allocate around 30% of their income after deductions to cover federal and state taxes, guaranteeing they remain compliant with the law.

Managing employment taxes

Employment taxes, also known as payroll tax, are another key category that small business owners need to understand. These include Social Security and Medicare taxes, income tax withholding, and the Federal Unemployment Tax Act (FUTA).

The FICA tax rate for businesses with employees is 15.3% of the employee’s gross wages, divided equally between the employer and employees, each contributing 7.65%. As for FUTA tax, employers are subject to a rate of 6% on the first $7,000 paid to each employee annually, but they may be eligible for a tax credit of up to 5.4%, reducing their FUTA tax rate to as low as 0.6%. 

Filing the correct forms for these taxes, including Forms 941, 943, or 944 for Social Security, Medicare, and income tax withholdings, and Form 940 for FUTA, is vital.

The role of EIN in small business taxation

Another crucial aspect of small business taxation is understanding the role of an Employer Identification Number (EIN). An EIN is a nine-digit number the IRS assigns to identify the tax accounts of employers and certain other entities without employees. The IRS uses this number to identify taxpayers obligated to file different business tax returns.

Securing an EIN is necessary for various reasons, such as setting up a business bank account, acquiring business licenses, filing tax returns, meeting federal tax obligations, hiring employees, and keeping personal and business finances separate. 

Small businesses can acquire an EIN from the IRS by determining eligibility, understanding the online application process, and submitting the application. The typical processing time for obtaining an EIN from the IRS is approximately two weeks (or up to four weeks if applying by mail).

Maximizing returns: Deductions and credits

Once you understand your tax obligations and how to pay them, your next move is to learn how to boost your returns through deductions and credits. These can significantly reduce your tax burden and, in some cases, even result in a refund.

For example, depreciation is a tax deduction that enables small businesses to claim an income tax reduction by gradually reducing the value of property or assets, such as machinery, equipment, buildings, vehicles, and furniture. 

Sole proprietors and owners of pass-through businesses can benefit from the Qualified Business Income Deduction (QBI), which offers a 20% deduction to those whose taxable income falls within specific thresholds.

Commonly overlooked business deductions

Maximizing your tax deductions requires knowledge of what you’re eligible to claim. Some of the most commonly overlooked business deductions include:

• Employee wages
• Bonuses
• Commissions
• Employer contributions made toward employee benefits

The standard mileage rate deduction for small businesses is currently set at 65.5 cents per mile driven for business use. Companies can also deduct advertising expenses if they are reasonable and directly related to the business. Furthermore, utility costs, including electricity, gas, water, telephone, and internet, can be deducted from tax returns.

Depreciation strategies for long-term savings

Understanding depreciation is another factor for long-term tax savings. Depreciation involves deducting the value of property or assets to calculate income tax. This can result in a decrease in taxable income, consequently lowering the tax liability.

Following specific IRS guidelines and depreciation limits for business vehicles is critical for legal compliance and maximizing tax benefits.

Leveraging tax credits effectively

Tax credits offer another effective way to reduce your tax liability. They are designed to reduce taxes on a dollar-for-dollar basis and can significantly diminish tax liabilities.

Small businesses can benefit from a variety of tax credits, including:

• General Business Credit
• Investment Credit
• Employee Retention Credit
• Paid Leave Credit
• Research and Development Tax Credit
• Credit for Small-Business Health Insurance Premiums
• Employer Credit for Paid Family and Medical Leave

Effectively using these credits can result in considerable tax savings.

Strategic tax planning for small businesses

With knowledge of tax obligations, deductions, and credits, the next step is to form a strategic tax plan. This involves considering the following:

• a tax status change
• taking advantage of tax deductions
• leveraging tax credits
• deferring or accelerating income
• setting up or contributing to retirement plans
• being proactive about procurement and depreciation.

Record-keeping is a key element in tax planning for small businesses as it aids in identifying deductible expenses, accurately calculating tax liabilities, and providing justifications for business income, deductions, or credits during tax filings. 

Simplified tax filing procedures for small enterprises

The tax filing process for small businesses typically includes completing a Schedule C (form 1040) and attaching it to the annual personal tax return. 

Single-owner businesses and disregarded entities, such as single-member LLCs, typically file taxes by completing a Schedule C and attaching it to the owner’s personal tax return.

Small partnerships file their taxes by preparing Form 1065, US Return of Partnership Income, an annual information return used to report the income, deductions, gains, losses, etc., from its operations.

Valuable resources for navigating small business taxes

Besides grasping the basics of small business taxes, knowing where to locate trustworthy resources is also helpful. The official IRS website is a valuable resource for federal taxes.

Information on state and local taxes can be accessed through the websites of your respective state’s tax and revenue departments. If you’re planning to conduct business operations in multiple states, you might be required to register with tax authorities in every state where you intend to conduct business and adhere to the tax regulations of each state.

Defining ‘small business’ in the context of taxation

The IRS does not have a specific definition for tax purposes for small businesses. However, it typically includes taxpayers who file Form 1040 or 1040-SR, Schedules C, E, F, or Form 2106, along with small businesses with assets totaling less than $10 million.

The IRS distinguishes between a small business and a large corporation based on the form of business structure, which can vary from sole proprietorships to partnerships to corporations, including S corporations, each with distinct tax rules and requirements.

Revenue thresholds for small business taxation

It’s important to understand the revenue thresholds determining when a small business must file taxes and pay income tax. Small businesses must file taxes if their net earnings from self-employment reach $400 or more.

Businesses with variable income can determine the revenue threshold by calculating the average monthly income over a specific period of time. Failing to file taxes upon reaching the revenue threshold incurs a penalty of 5% of the unpaid taxes for each month or part of a month that the tax return is overdue, with a maximum penalty of 25%.

Who should make estimated tax payments?

Individuals, including sole proprietors, partners, and S corporation shareholders, must make estimated tax payments if they anticipate owing tax of $1,000 or more. Corporations must make payments if they expect to owe tax of $500 or more when their return is filed.

The deadline for estimated payments for pass-through businesses is typically around:

• April 15
• June 15
• September 15
• January 15 of the following year

If an estimated tax payment due date coincides with a weekend or legal holiday, the due date is shifted to the subsequent business day.

Why understanding taxes matters for small businesses

Comprehending tax rules is not merely a legal obligation—it’s a significant element in maintaining the financial health of your small business. Small businesses that lack a thorough understanding of tax rules may encounter substantial consequences, including fines, penalties, and potential legal ramifications such as imprisonment.

Employing a tax professional can be a smart move, as it can:

• Aid in compliance with tax laws and regulations
• Simplify payroll processes
• Guarantee accurate employee compensation
• Save significant time

Final word

Mastering small business taxes is not just about staying on the right side of the law—it’s about making informed decisions that can positively impact your business’s bottom line. From understanding the key categories of taxes to leveraging deductions and credits, navigating the world of small business taxation can be a daunting task. But with the right knowledge and resources, it’s one you can conquer.

Frequently Asked Questions

How much does a small business need to make to pay taxes?

If your net earnings from self-employment were less than $400, you don’t have to file a business tax return. However, you must file an income tax return if your net earnings from self-employment are $400 or more.

What is considered a small business for tax purposes?

According to the Small Business Administration (SBA), for tax purposes, a small business is typically defined by its annual revenue, which ranges from $750,000 to $38.5 million. 

What is the federal tax rate for LLCs?

The federal tax rate for an LLC depends on how it chooses to be taxed. If taxed as a C-corporation, the rate is 21%. Otherwise, the total self-employment taxes owed to the IRS is 15.3%, including 12.4% for Social Security tax and 2.9% for Medicare tax.

How do I file taxes if I am self-employed?

When you are self-employed, you will need to file Form 1040 along with Schedule 1 and Schedule C. Additionally, you may need other forms, such as Schedule SE, Form 4562, and others, to accurately report your self-employment income.

What are the key categories of small business taxes?

The key categories of small business taxes are income tax, self-employment tax, employment taxes, and excise taxes. These are important to understand in order to manage your business finances effectively.