A Beginner's Guide to Small Business Taxes
Business taxes can be tricky, especially for small business owners who are new to the game.
But filing your taxes doesn’t have to be a stressful affair. These days, there’s smart accounting software for small businesses that can help you keep track of your business records and receipts in real-time, monitoring your spend as you go. That way, you’re not buried under a pile of paperwork when tax season rolls around.
Want to make the most out of tax season and protect your assets, all while lowering your stress levels? This beginner’s guide to small business taxes will help you get started.
Why You Need to File Business Taxes
No matter what kind of business ownership you have, the government expects you to pay taxes on money you made over the year. It might even surprise you to learn that small businesses are scrutinized more heavily by the IRS than their larger corporate counterparts. Donald Williamson, Professor of Taxation at American University in Washington D.C., states that “the IRS appears to disproportionately target small business taxpayers” due to the assumption that they are more likely to misreport their business income.
As a small business owner, the penalties associated with misreporting taxes depends on the extent of the mistake. Here are just a few of the ways improperly filing your business taxes (or not filing them at all) can sting:
- You could lose your refund if you don’t file within three years of the deadline.
- You could face stiff penalties for not filing at all or even criminal prosecution.
- The small business audit process is inefficient, usually resulting in weeks or months of busywork and waiting for the results.
- Managing an audit as a small business is also expensive, often forcing you to sink capital into CPAs, attorneys, or enrolled agents for assistance.
What Taxes do Small Businesses Have to Pay?
Depending on your business activities and corporate structure, you may be taxed differently at the local, state, and federal level as a small business owner.
Some of the primary types of taxes small businesses can expect include:
- Income taxes for small businesses and corporations
- Self-employment tax on owner’s share
- Excise taxes on use and consumption
- Dividend tax on shareholders
- Sales tax on products and services (certain states)
- Payroll/employment taxes
- Property taxes
- Gross receipts tax
- State income tax
Of course, you’ll want to confirm exactly which taxes you have to pay and when—for resources to find out your precise tax requirements, refer to the IRS and Small Business Administration websites for more detailed information.
How to File Small Business Taxes (in Four Simple Steps)
Small business tax filing doesn’t have to be the intimidating process it appears to be. In fact, this process can be broken down into four simple steps:
- Gathering your financial records
- Determining your deductions
- Filing the correct forms for your business structure
- Filing by the right deadline
Step 1: Gathering Your Financial Records
The first step to preparing yourself for the hustle and bustle of business tax season is to get your financial records in order. Organization is key. Try not to leave this step for a few days before the filing deadline. Instead, keep a record of the following in an organized fashion:
- Your taxpayer identification number
- Bank statements
- Credit card statements
- Your business tax return from the year prior
- Pertinent accounting records (collect these year-round to streamline the process)
If manual organization is not your MO, automated expense management software can help you keep track of yearly accounting records (detailed below).
Step 2: Determining Your Deductions
Business deductions can be a welcome relief to the hassle of tax season. With the right organization, awareness, and tax prep software, you can optimize your tax filings in order to recoup a maximum amount of deductions.
The first step is to know what you can claim each year. Here are a few of the most common deductions to watch out for:
- Rent on office spaces
- Business insurance
- Vehicle expenses
- Business-related meals
- Office supplies and machinery
While how much you can deduct depends heavily on your business size and sector, keep in mind that 9-in-10 businesses overpay on their taxes each year. If you aren’t hiring a tax professional to assist you during tax season, be sure to familiarize yourself with industry-specific deductions and the right tax software to decrease your tax bill.
Step 3: Filing the Correct Forms for Your Business Structure
Depending on the corporate entity you’re registered with, your business tax forms may differ from the individual income tax form. However, some business structures simply attach an extra form with their individual tax form when filing their business income.
Refer to these basic requirements when you’re filing your business taxes:
- Sole Proprietorship or Single-Member LLC – You must attach a Schedule C form to your usual individual tax return (Form 1040).
- Multi-Member LLCs – LLCs offer a lot of flexibility when it comes to taxation purposes. You can file taxes as a corporation and use Form 1120, file as a partnership using Form 1065, or even file as an S corp using Form 1120-S.
- Partnerships – Partnerships must file taxes with IRS Form 1065, even though the partnership itself does not get taxed. This form is designed to report business-related profits and losses. You must also attach a Schedule K-1 form to your tax return.
- C Corporations – C corporations must file taxes using IRS Form 1120. They also have to file Form 941 to report quarterly employment taxes, like Medicare, social security, and income tax withholdings.
- S Corporations – S corporations file with IRS Form 1120-S. However, C corps and LLCs can also file taxes as S corps, depending on their situation.
Step 4: Filing by the Right Deadline
The deadline for tax filing differs depending on your business structure. Here’s the breakdown:
- Single-member LLCs and sole proprietorships only have to file by the tax day we all know and love: April 15th.
- All other corporate entities, like S corps, C corps, partnerships, and multi-member LLCs, must file a month before: on March 15th.
- Partnerships and corporations are also required to file quarterly employment taxes. These deadlines are typically in mid-April, June, September, and January. Refer to the IRS website for a full list of deadlines for this year as the response to COVID-19 has affected regular tax filing deadlines.
If you don’t file an extension and miss this deadline, penalties can be stiff: the IRS will charge them approximately $200 per owner for every month their taxes haven’t been filed after the deadline.
Make Tax Day a Breeze With Automated Expense Management
To make filing small business taxes as painless and accurate as possible, tax prep needs to occur year-round. And an automated expense management platform can help.
Expense automation helps with tax prep by:
- Keeping all of your expenses organized, searchable, and automated for easy access.
- Automatically sorting your expenses by category, department, or employee.
- Continuously keeping tax documents up-to-date so you never left scrambling during tax season.
Ramp’s Expense Management Platform
Not all automated expense platforms are the same, however. Ramp’s is the ideal tool for filing small business taxes because it helps keep your documents in order year-round, without the hassle of manual processes. It’s also the only one that’s connected directly to your corporate card.
Here’s how Ramp makes small business tax prep easier than ever:
- Automatically collects and matches receipts to transactions made on the corporate card. Ramp even sends reminders to employees if they don’t immediately submit a picture of the receipt.
- Eliminates manual data-entry processes, thus reducing the need to fix errors in expense reporting.
- The platform integrates with your accounting and tax-filing software and prepares pertinent data for submissions to the government every month.
Ramp Doesn’t Stop at Tax Prep
On top of making tax prep a breeze, Ramp’s automated expense management platform offers robust, real-time accounting that can help any small business stay on top of their company spend.
Enjoy dynamic spending controls on each card, 1.5% cash back on all purchases, and high spending limits.