Small business owners live by a different calendar—one that doesn’t have four seasons, but five.
While we wish the fifth season was a steamy second summer or a fall that lasted more than a few brisk, golden weeks, it’s unfortunately not. In business, the fifth season is tax season.
Although tax season is no walk in the park, it doesn’t have to be the bane of your business’s existence.
Here’s a sneak peek at the four things you’ll need to do when filing small business taxes:
- Gather your business’s financial records
- Prepare the right tax forms for your business
- Claim your small business tax deductions
- File your business's tax forms by the required deadlines
In just four simple steps, you’ll be well on your way to land of small business tax filing.
Keep reading to learn how tax season can become the most wonderful time of the year. (Or at least a close second.)
What taxes do small businesses need to file?
Businesses come in all shapes and sizes: sole proprietor, partnership, corporations, and limited liability companies (LLCs). This is called your business entity. This structure, along with factors (like employees or assets) will dictate what types of taxes you have to pay.
Here are a few types that you might need to file:
This is a percentage of your business’s income that’s paid to the IRS. How much depends on how your business is structured and where you’re located.
For example, the majority of states impose taxes on corporate income. So, if you’re in one of the 43 states that have this requirement and you’re a sole proprietor, you’ll pay business income taxes on your personal returns that range from 10% to 37%.
Does your business have employees? Then you’ve got to pay payroll taxes. These include Social Security and Medicare taxes, and are broken into the employee part—what you, the employer, withholds from your worker’s wages—and the employer’s matching portion. Each component pays 6.2%, totalling a Social Security tax of 12.4%.
And let’s not forget Medicare. This tax is 2.9% of a worker’s gross wages. Here, your worker and the business each pay 1.45%.
Lastly, every small business has to pay the federal unemployment tax for each of their employees. This is 6%, up to $7,000 of each worker’s annual wages.
Whether your business is part time, full time, or gigs here and there, you’ve still got self-employment taxes to pay. These are a combo of Social Security (12.4%) and Medicare taxes (2.9%), equalling 15.3%.
Capital gains tax
This tax is applicable to small businesses that sell assets (example: residential properties) for a profit.
It’s also applicable to those who have investments that see an increase in value. When this happens, you would owe the capital gains tax on that increase, which is a percentage of the amount. It typically falls at 15% but can be anywhere from zero to 28% on the high end.
Speaking of properties, if your business owns any, including land, it might be subject to property taxes. This amount will be based on the value of your property and location.
This is the part of a corporation’s income that gets divided up to shareholders. It’s taxable to the shareholder, and depending on how long the investment is and the shareholder’s taxable income, the dividend tax rate is between 0% and 20%.
How to file taxes for small businesses
Now it’s time for the fun part: the how-to of filing taxes for small businesses. Let’s begin.
Step 1: Gather your business's financial records
This is the most important step of the process. Without gathering your records from the past 12 months, you might miss some mandatory pieces that can help lower your taxable income.
Pro tip for tax time? Have a separate business bank account for the income that’s flowing in and out of your business. This prevents your personal and business finances from getting mixed up. Plus, it makes reconciliation so much easier.
When things are kept separate, you can ensure that your business records are actually aligning with your bank records. Nothin’ personal about it.
Step 2: Prepare the right tax forms for your business
Once you’ve got your records compiled, it’s time to categorize them and prepare them. This will look different depending on how your business is structured.
- Sole proprietor: Is your business unincorporated and owned by the one-and-only you? Welcome to sole proprietorship! In this structure, there’s no legal distinction between you, the owner, and your business entity. Plus, filing taxes is super easy. Simply fill out a Schedule C when you file your yearly personal tax return. You’ll attach this form to your main tax return on Form 1040.
- Partnership: Run things with one or more partners? Then you’ve got to file Form 1065. After that, each partner will include Schedule K-1 while filling out their personal tax returns. This indicates their respective share of profits and losses for the past 12 months.
The K-1 is important because it’s the form that reports taxes on the individual partners’ shares of income for that year, so they can pay them.
- LLC: If you’re the only member of your LLC, you get to follow the same steps as a sole proprietor and complete a Schedule C with your personal taxes.
More than two members? You’re filing more like a partnership: first Form 1065, then each partner gets a Schedule K-1, and then report that number gets reported on each partner’s personal tax return.
- C Corporation: This type of business is taxed separately from its owners. If your business is a C Corp, you’ll prepare and file a separate corporate tax return along with Form 1120. Plus, you’ll have to prepare your personal tax return, too.
- S Corp: If you’re an S Corp or an LLC that’s elected S Corp status, each shareholder is required to report their share of profit or loss with a Schedule K-1 on their personal tax returns. Plus, the corporation needs to file its own corporate tax return with Form 1120S.
- Non-profit: Non-profits are considered to be business entities that aren’t in it for commercial or monetary benefit. That means if you’re operating a nonprofit, you’ll be taxed differently than other companies. You can apply to the IRS so you’ll be exempt from federal taxes under subsection 501(c) of the IRS tax code.
Step 3: Claim your small business tax deductions
It’s time for your favorite part: tax deductions! Getting this step right is critical as it can help you save money in the long run.
However, we want to emphasize the word critical. Not only is it important to leverage tax deductions for you and your bank account, but the IRS often scrutinizes claims and searches for mistakes or discrepancies. The result? Tax penalties.
So, what can you deduct? Things like home office, properties, office supplies, internet, education, employee taxes, and contractor work.
For instance, small businesses are able to claim the cost of hiring an independent contractor, like a freelance designer, as contract labor. But for each of these claims, there are rules. Like this one: if you’ve paid your independent contractor over $600 in the tax year, you’ll want to send them a Form 1099, then send a copy to the IRS by the required deadline.
Step 4: File your business's tax forms by the required deadlines
Last but not least, it’s time to file—on time.
The “on time” part is important here, especially if you want to avoid fines.
Here’s what you need to know to make sure you stay on the IRS’s good side:
- Deadlines can be annual or quarterly. For quarterly, the filings are usually on the 15th of a certain month. For the remainder of 2023 and leading into the new year, that’s October 15 and January 16, 2024.
- To know which deadlines are for you, you’ve got to look at how your business is structured. For example, some deadlines are only applicable to you if your business has employees. If that’s the case, you’ll have some extra filing deadlines to know, including January 31 for Form 940 and your quarterly filings for Form 941.
- If your business is a corporation, you have to file Form 1120 on an annual basis. Due dates depend on if your business operates using a calendar or fiscal year, and will be on the 15th day of the fourth month after that end of tax year.
- If you’re a sole proprietor, you’ll need a Schedule C and Schedule SE which will be due on April 15 along with your individual tax return. Then, your estimated tax payments will be due on a quarterly basis.
- Is your business a partnership? If so, Form 1065 will be due on March 15.
Now, to the actual filing part. You can do that in three ways. Your first option is to download the forms and fill them out manually. Alternatively, you can use tax preparation software.
And, if you think you might need some extra support along the way, you can hire a tax pro, or say hello to Wave and our money management tools.
Because trust us when we say that tax time is a lot easier when you’ve got everything in one place: files, receipts, and reports included. It’s like baking the perfect pumpkin pie, but instead of rummaging through cupboards and drawers looking for that pinch of nutmeg, everything is laid out and organized.
Plus, if you need a sous chef, reach out to a Wave advisor who can lend a very-qualified hand.
(With the money stuff…not the baking.)
Start preparing to file your taxes now
We get it: no matter how easy we make it, taxes are still… taxes.
And depending on if you’re a corporation, non-profit, sole proprietor, or structured in one of the other various ways, filing your taxes comes with its own unique set of steps, forms, and deadlines.
The key to doing it all comes down to preparedness, organization, and—you guessed it—time. Fines are not fun, so be sure to file your forms at the right time.
Feel like you might need some support? We’re here for that. Reach out for personalized help with your business taxes, and we’ll make the season feel like just another notch in the entrepreneur belt.
You’ve got this!
The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.