Business Taxes: Everything You Need to Know
Business taxes can vary depending on company structure and strategies. Small businesses have many different ways of paying business taxes.8 min read
What are Business Taxes?
Business taxes can vary depending on company structure and strategies. Small businesses have many different ways of paying business taxes.
How Each Business Type Pays Income Tax
Businesses all need to pay taxes on the company’s income. How and what taxes are paid varies depending on the business type. For partnerships, small businesses (single-member LLCs and sole proprietorships), and S corporations, the owners pay the company’s tax on their individual tax returns. The basics of taxation are similar for all the small business forms, however each business’s tax procedure varies. Single-member LLCs and sole proprietors pay their taxes by including a Schedule C with their individual tax return.
How Each Business Type Pays Income Tax
For partnerships and multi-member LLCs, their owners have to still file a business tax return. However, the owners pay their corresponding share of the business’ income on their personal return.
Sales Tax on Products and Services Sold in Some States
Businesses do not pay sales tax on products and services directly. If the state taxes income, then the business has to create a method to collect, report, and pay the sales tax. Most states require merchants to collect the sales tax and then pay it to the state’s revenue department. Many products and services are eligible for the sales tax. Consequently, the taxes need to be collected and paid. Reports must also be made regularly. Products sold online also are eligible for sales taxes.
Property Tax on Business Property
Property taxes on real estate are paid to the local tax authority for the property’s location. Property taxes are derived from the property’s assessed value. When selling business properties, there are certain important factors to keep in mind.
Excise Taxes on Use or Consumption
Businesses have to pay excise taxes for specific kinds of use, consumption (ex. fuel), and activities (ex. transportation, communications). Businesses use Form 720 to pay excise takes to the IRS quarterly or annually, depending on product usage.
Self-Employment Tax on Owner Share of Business Income
Sole proprietors and partners pay self-employment taxes, depending on the business’ income, for Medicare and Social Security. Taxes are not withheld from the business owners’ paychecks because they are not employees. Therefore the self-employment tax is imposed.
Owners of LLCs need to similarly pay self-employment taxes. If a corporation owner works as an employee, they don’t have to pay self-employment taxes.
Employment Taxes (Payroll Taxes) Paid on Employee Earnings
Employment taxes are paid after being collected and reported. The taxes are paid to the Social Security Administration and IRS. Depending on their employees’ gross pay, the business owner pays employment taxes for multiple types of taxes.
These taxes include FICA (Social Security and Medicare), federal and state unemployment, as well as federal and state worker’s compensation. Employees don’t pay unemployment taxes. The employer has to totally pay unemployment taxes.
Gross Receipts Tax on Businesses in Some States
Certain states require a tax on gross business receipts instead of a state income tax. In these states, the business’ revenues (gross receipts) are taxed.
There are some states where business can deduct this tax as well as some states where businesses are exempt. Often sole proprietor businesses don’t have to pay gross receipts tax, however they usually still have to pay state income tax. Usually, corporations and occasionally LLC's have to pay revenue taxes.
Franchise Taxes - Like Gross Receipts Tax
Many states require corporations to pay franchise taxes that are based on the company’s value. Franchise taxes are very close to state income taxes and gross receipts taxes.
Steps to File Federal Income Taxes for Small Businesses
1. Collect your records
Small businesses need to collect their earnings and expenses records before filling out a tax form to file taxes. It is much easier for a business to calculate its income and deductions every year if you use a spreadsheet or other computer software to keep track of your transactions, especially compared to trying to recall every transaction.
QuickBooks and Quicken are programs that work with TurboTax and allow you to straightforwardly transfer information to your tax return.
2. Find the right form
You need to find the proper IRS tax form in order to file your small business tax return.
If you have a sole proprietorship, you can use a Schedule C personal income tax attachment form to report all of your business income and expenses.
If you are the sole owner of an LLC you can also use the Schedule C form.
In contrast, you need to use Form 1120 to file a corporate tax return if you own a corporation or choose your LLC to be like one.
3. Fill out your form
When you have a Schedule C or Form 1120, you can begin the process of filing your small business tax return. For Schedule C earnings reporting, either use TurboTax to create the form after putting in your financial data or find a copy on the IRS’s website. Schedule C is an easy method for filing your business’ taxes because it’s just two pages and shows all the claimable expenses. After filing out the form, you can get your net profit or loss by subtracting the expenses from the earnings. Then transfer the net profit or loss to your individual income tax return for filing.
For Form 1120 for corporations, you compute your net profit or loss in a similar way. Form 1120 requires is much more detailed however and is not always relevant for small businesses. Form 1120’s main problem is that it is filed separately from your individual tax return.
4. Pay attention to Deadlines
When filing your small business income tax returns you need to be aware of deadlines. Schedule C merges into your Form 1040 and so has no separate filing deadline. Therefore filing it usually has the same deadline of April 15th. If you are a C-Corp and therefore file Form 1120, you need to file by the 15th of the fourth month after the tax year’s close. For most people, this is also April 15th.
As an S-Corp that therefore files Form 1120S, you need to file by the 15th of the third month after the end of the tax year. For most people this is March 15th. You aren’t able to include Form 1120S with your personal tax return to the IRS.
5. Self-Employment Tax Deduction
Self-employment taxes are employer-portion Medicare and Social Security taxes self-employed people have to pay. All people that work pay self-employment taxes. In 2016 and 2017 for employees, they are 7.65 percent for employees and for the self-employed they are 15.30 percent. Employees and employers also each pay 6.2 percent social security taxes for the initial $118,500 in wages. In 2017 this increases to $127,200.
Each employee and employer also pays 1.45 percent in Medicare taxes with no wages limit. Income thresholds for more Medicare taxes are applicable to self-employment income as well as combined wages and compensation. While having to pay more taxes in order to be independent is not enjoyable, you can deduct half of the self-employment taxes from your net income and therefore make it less burdensome. The self-employment tax’s “employer” part is considered a business expense by the IRS and can be deducted.
6. Home Office
Deducting your home office is quite complicated. Basically, you can deduct the cost of workspace used “regularly and exclusively” for the business, no matter if you own or rent it. Deductible expenses include the home’s depreciation, homeowners insurance, maintenance, property tax, and deductible mortgage interest up to the percentage used for business.
In making the home office deduction, you can use either the standard method or simplified option. You can change the method yearly. You need to calculate your specific home office expenses for the standard method. In contrast, you can use a square-footage based rate determined by the IRS for the simplified option. Using the simplified option can be good when you are short on time or have poor bookkeeping of home office expenses that are deductible.
7. Internet and Phone
No matter if you claim a deduction for your home office, your business phone, internet, and fax are deductible. You have to only deduct expenses clearly connected to the business. For example, you shouldn’t deduct your whole monthly phone cost if you have just one phone that is used for both personal and business purposes.
8. Health Insurance Premiums
Self-employed people who pay their own health insurance premiums and who are not able to be a part of a plan based on their spouse’s employer are able to deduct all health, dental, and qualified premiums for long-term care insurance. Premiums are also deductible if they were paid to cover one’s spouse, dependents, or children younger than 27 (no matter if they are dependents). Look at IRS Publication 535, “Self-Employed Health Insurance Deduction Worksheet,” for calculating the deduction.
If you are on business travel or entertaining clients, you can deduct meals as a business expense. Meals are not able to be luxurious or lavish, depending on the situation. If you keep your receipts, only 50 percent of the meal’s cost can be deducted. If you do not have receipts but kept records of the place, business reason, and time of the meal you can deduct 50 percent of the meal allowance.
There are many IRS restrictions for the entertainment deduction. You need to be doing business with the person you are entertaining right before, right after, or during the entertainment. Also, keep careful records to ensure you are ready for audits. Be certain these records include the business done, as well as the time, persons, and reason for the entertainment.
Business travel is a deductible expense often mixed with meals and travel. To deduct business travel, it must be longer than normal workdays, need you to rest, and be significantly away from where your tax residence is (ex. beyond the city your business is in). In summary, only business portions of your trip can be deducted as expenses. Furthermore, the business aspects have to be planned beforehand.
Driving expenses for your car’s business uses are often tax deductible. Ensure that you have proper records for the mileage, trip purpose, and date of the trip. Do not attempt to deduct car trips for personal purposes as business expenses.
You are able to determine the car deduction through the actual expenses or an IRS-determined standard mileage rate created annually. If you want to avoid detailed recordkeeping and computation, using the standard mileage rate is much easier.
When using actual expenses, you need to determine what business driving percentage you did during the year and also the complete cost of using your car, which includes fees, insurance, maintenance, gas, etc.
You can deduct the interest from bank business loans as a business expense. You are unable to deduct credit card interest if the interest has been accumulated due to personal purchases. However, if the interest is for business purchases, then it can be deducted.
Remember that deductions only return part of your money. Avoid borrowing money if you do not need to.
If you need help with planning or filing your business’s taxes, you can post your legal need to UpCounsel’s marketplace. Upcounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.