What should I know about Taxes as a Small business owner
It's critical for business owners to comprehend their federal, state, and local tax obligations. This will assist you in timely payments and accurate tax filing. The type of business structure you select when opening a company will affect the taxes you'll have to pay and how you'll pay them.
You might think, as a small business owner, that the IRS has more important things to worry about than your company's operations. But according to recent reports, the IRS is increasingly focusing its tax audits on small businesses.
According to the National Taxpayer Advocate, small businesses prepare tax returns or respond to IRS questions about their returns in the region of 2.5 billion hours annually. This equates to 1.25 million full-time positions. According to the study, 70% of small businesses hire tax professionals to prepare their taxes and represent them before the IRS.
1. Make wise legal structure selections.
Understanding the various legal forms that can be used for a business is crucial because each one has unique tax ramifications. Limited liability companies (LLCs), S corporations, C corporations, and sole proprietorships are all different types of legal entities with unique tax obligations.
These distinctions between each are listed.
You are a sole proprietor if you are the only owner of an unincorporated business and are operating it. With over 23 million sole proprietorships in the US, this is the most prevalent business type. Since you personally take on all financial and legal obligations, it's the simplest to set up and manage but also one of the riskiest options.
Taxes for sole proprietorships are simple because you can use Schedule C on your personal tax return (Form 1040) to report business income and losses. Your business profits are added to other income (interest, dividends, etc.) on your personal tax return.
As a result of the new tax law, sole proprietors can benefit from the 20% tax deduction, which entitles them to deduct 20% of the net income from their taxable income, thereby lowering their tax obligation.
To avoid double taxation, S corporations may distribute income to shareholders directly. Double taxation occurs when a company's profits are taxed on its business tax return and any distributed after-tax profits are taxed as personal income. But if your business is organized as a S corporation, this won't take place.
S corporations are limited to 100 shareholders, all of whom must be citizens of the United States, and each shareholder is only permitted to hold one class of stock. The profits, losses, and deductions of shareholders are included in their personal tax returns. S corporations are also qualified for the 20% tax deduction, but shareholders are subject to the personal income tax rate on business profits. For small business owners, it's one of the most popular types of legal structures because it offers many of the same benefits as a traditional corporation while also offering more tax flexibility.
C corporations are common corporations (C corps). A C corp's management team is made up of shareholders, a board of directors, officers, directors, and employees. Although Fortune 500 companies are the most well-known C corps, doing this with your small business is still an option. It gives you credibility with clients and investors, which enables you to raise money more quickly and win bigger contracts. The C corporation structure might be appropriate for you if you plan to go from a startup to a more established business quickly.
The only business type covered here that is required to pay taxes at the corporate level is C corps. For C corporations, the current corporate income tax rate is a flat 21%. Furthermore, shareholders receive dividends as opposed to S corps, which permit shareholders to report profit and loss on their personal tax returns (i.e. a share of company profits). On those dividends, shareholders must pay personal taxes.
Double taxation is the term used to describe the tax system that applies to both the company and the shareholder levels. Many small business owners are put off by this. For a variety of reasons, LLCs are more frequently chosen than C corporations when starting out.
Companies with Limited Liability (LLCs)
An LLC is a popular structure for small businesses. Members of LLCs enjoy two significant tax benefits: no double taxation and the ability to deduct business losses.
LLCs are only subject to one individual level tax, as opposed to C corporations, which must pay taxes on business income both at the corporate level and at the individual level. This means that, like a sole proprietorship or a S corporation, members must report their business income on their personal tax returns. A "pass-through" tax treatment is what this method of treatment is known as.
2. To reduce your tax liability, use tax deductions.
Young entrepreneurs in small business must stretch their financial resources.
Small businesses must pay for things like rent on real estate owned for business purposes, utilities, vehicle expenses, wages, business travel, contract labor (such as hiring freelancers and independent contractors), supplies, equipment, depreciation of assets, and repairs.
Thankfully, as a small business owner, you can reduce your business taxes by deducting a large portion of those operational costs during tax season.
3. Deduct your startup expenses
Many newly formed businesses make the error of believing their initial business expenses are not tax deductible until they are fully operational. However, before starting operations, the IRS permits small business owners to write off a variety of startup costs.
The IRS permits a $5,000 deduction for organizational costs and a $5,000 deduction for business startup costs, but only if your total startup costs are $50,000 or less. You can write off the typical startup costs for a business during tax filing with the aid of your tax software or a tax professional.
4. Quarterly tax payments
Individuals, including sole proprietors, partners, and shareholders of S corporations, are required by the IRS to make quarterly estimated tax payments if they anticipate having a tax liability of $1,000 or more upon filing their federal returns or state tax returns.
Form 1040-ES can be used to calculate your estimated tax payments if you are a business owner. It may be useful to start with last year's income, deductions, and tax credits. The federal tax return from the previous year can also serve as a guide.
Basics of tax preparation
1. Establish deadlines.
2. assemble your financial documents
3. Fill out the appropriate tax forms.
Create the correct tax forms in order to report any business profits or losses, valid expenses, and estimated taxes. These documents will be filed in addition to or concurrently with your individual 1040. Typical tax documents include:
Report your profit and loss in Schedule C. (sole proprietor).
Report your income, gains, losses, deductions, and credits using Form 1120 or Form 1120S. (corporations). Report business expenses, income, and losses on Schedule K-1 (partnerships). Usually submitted with Form 1065. Additional forms for depreciation, home-based businesses, self-employment taxes, and estimated taxes may be required.
4. Count on a tax expert
For this step, you just have to send and email to me. I have your back
Kotini & Kotini