If you own a small business, you’ll most likely need to file taxes. But where should you begin? Which forms should you gather and submit? How do you determine the right amount to pay in taxes? And what happens if you skip filing taxes altogether? Here’s a hint: it can lead to serious trouble.
But don’t worry—you don’t have to navigate the tax process on your own. This guide is here to walk you through every step, providing clear and actionable information to make filing taxes as a small business owner as smooth and stress-free as possible.
Organize Your Business Records
Before you begin the tax filing process, it’s essential to gather all your important business records. The specific documents you’ll need can vary depending on your business structure, but here are some key items to start with:
- Your previous year’s tax returns
- Your Employer Identification Number (EIN)
- Your Social Security Number (SSN)
- Financial statements, including your balance sheet and income statement
- Receipts and detailed expense records
Having these documents organized and accessible will make the tax filing process much smoother and ensure that you have everything needed to accurately report your income and expenses.
Prepare Your Books for a Smooth Tax Season
Keeping your books accurate and up-to-date is crucial for a hassle-free tax season. If your records are currently disorganized, don’t panic—you have options. You can hire Austin & Larson Tax Resolution to quickly get your finances in order.
Alternatively, if you prefer a DIY approach, follow these steps to get your books ready:
1. Track and Organize Every Business Transaction Throughout the Tax Year
This step is often the most time-consuming and challenging, but it’s a necessary part of preparing for tax season. Starting from January 1 of the tax year, you’ll need to go through every business transaction and accurately record and categorize it.
You can choose to use reliable accounting software or an Excel template—whichever method works best for you. The key details to include are:
- The transaction amount
- The category it falls under (e.g., income, expenses)
- The date of the transaction
- A brief description of what the transaction was for
Being consistent and thorough in this process will help ensure that your financial records are accurate and make filing your taxes much easier.
2. Match Your Books with Bank Statements
If there are any differences between your bank statements and your bookkeeping records, it’s crucial to address them right away. Regularly cross-reference the transactions on your bank statements with your company’s records to ensure every detail is accurately captured.
Reconciliation allows you to confirm that all transactions have been properly recorded and accounted for. Be sure to reconcile both your bank statements and credit card statements, ensuring every transaction matches your books precisely. This practice will help prevent costly errors and keep your financial records in excellent shape.
3. Create Your Financial Statements
To file your taxes, you’ll need to summarize your transactions through financial statements like the balance sheet and income statement, especially if your business is structured as a corporation. These documents show your total income and expenses, which are essential for accurately completing your tax return.
If you work with Austin & Larson Tax Resolution, they’ll handle this step for you, ensuring everything is accurate and compliant. Alternatively, you can use accounting software or work with an accountant to generate these crucial financial statements, giving you a clear view of your business’s financial health.
4. Collect Your Receipts and Invoices
Keeping detailed records of your business expenses is an important part of preparing for tax season. Be sure to gather and organize various receipts, invoices, and financial documents, including:
- Invoices sent to customers
- Receipts for business-related expenses
- Records of any bad debt write-offs
- Accounts and transactions with vendors
Having these documents organized and accessible will help support your financial claims and ensure a smoother, more accurate tax filing process. Plus, it provides a clear snapshot of your business’s financial transactions throughout the year.
5. Submit Tax Forms for Contractors and Employees
It’s crucial to file the proper tax forms for everyone your business employs or contracts with throughout the year. Here’s what you need to know:
- If you paid any contractor more than $600 during the year, request a W-9 form from them. You’ll use this information to complete and submit Form 1099-NEC to the IRS.
- For employees, file W-2 forms through your payroll service provider, ensuring accurate reporting of wages, taxes, and deductions.
Be sure you collect all necessary details from both employees and contractors, as this information is essential for completing and submitting these forms accurately.
Additionally, remember that the requirements can vary based on your small business entity type.
How Austin & Larson Tax Resolution Supports Your Small Business Tax Compliance
Filing taxes can be complex, but Austin & Larson Tax Resolution ensures that your business stays on track with comprehensive support every step of the way. Their services focus on keeping you fully compliant with both Michigan state regulations and IRS requirements, covering everything from tax return preparation to back tax debt resolution.
Their expert team handles your financial records meticulously, ensuring every detail is accurate and up-to-date. Whether it’s reconciling your bank accounts, managing payment platforms, or addressing outstanding tax liabilities, Austin & Larson keeps your financial operations organized and transparent.
With Austin & Larson, you get robust tax compliance services tailored to small businesses, including:
- Preparation and submission of federal and state tax returns
- Assistance with back tax debt and liability resolution
- Ongoing support and consultations with experienced tax professionals
Their mission is to help you meet all your tax obligations seamlessly, reduce liabilities, and take advantage of every deduction and credit, ensuring your business remains compliant and financially secure.
What Are Small Business Tax Rates?
If your business is set up as a C corporation, you’ll pay a flat federal tax rate of 21% on your taxable income.
For other business structures—like S corporations, partnerships, or sole proprietorships—the business itself doesn’t pay taxes. Instead, the income flows through to you personally, and you’ll need to refer to the IRS tax tables to determine your individual tax bracket.
Understanding your business structure and income flow helps you figure out your tax obligations accurately and plan ahead to minimize your liability. Working with a tax expert can also ensure you’re taking advantage of any deductions and credits that may apply.
Save Money to Cover Your Tax Obligations
Running a business means setting aside funds to pay taxes based on your net profits. For many small business structures—such as sole proprietorships, partnerships, and S corporations—you’ll typically need to make estimated quarterly tax payments if you anticipate owing more than $1,000 in taxes over the course of a year.
To ensure you meet these obligations on time in April, June, September, and January, it’s crucial to have sufficient funds readily available. A good rule of thumb is to save 25-30% of your net income to cover your federal income taxes.
It’s wise to keep this money in a separate savings account, distinct from your main business account. This helps prevent you from accidentally dipping into your tax savings for day-to-day expenses.
Here are two effective methods to save for taxes, depending on your business income consistency:
- For Steady Income: Set up automatic bank transfers to move a portion of your income into a separate savings account on a regular basis.
- For Variable Income: Manually transfer money whenever you receive a substantial payment from a client, ensuring you allocate the necessary amount for taxes each time.
With time and discipline, setting aside your tax funds will become a seamless part of your financial routine.
Take Advantage of Small Business Tax Deductions to Save Big
Being a small business owner opens the door to numerous tax deductions and credits that go beyond what a regular W-2 employee can claim. These deductions can significantly reduce your taxable income, which means more savings in your pocket. Here’s an overview of some commonly deductible business expenses. Don’t forget to consult your tax advisor for personalized advice tailored to your business structure and operations.
Startup Costs
If you incurred costs while setting up your business before officially opening, you can deduct up to $5,000 of startup expenses in your first tax year. Any startup costs beyond that amount can be amortized over 15 years, allowing you to spread the deduction over time. These costs may include legal fees, office equipment, and marketing expenses.
Raw Materials
Any costs associated with materials needed to produce goods or offer services can be deducted. For example, a bakery owner can deduct bulk flour, while a calligraphy business can deduct ink supplies. Keeping track of these expenses helps maintain accurate financial records and ensures proper deductions.
Office Supplies
Small office supplies like pens, sticky notes, printer ink, and paper are fully deductible. However, larger purchases such as desks, chairs, and filing cabinets fall under capital goods and must be depreciated over their useful life according to IRS guidelines.
Office/Commercial Rent
Renting a commercial space, coworking office, or any location where you conduct business is tax-deductible. Whether it’s an office, warehouse, or kitchen space, this expense can be fully written off, helping you reduce your taxable income.
Home Office Expense
If you work from a dedicated area in your home, you can deduct a portion of your home expenses. This includes rent, mortgage interest, utilities, insurance, and maintenance costs. The deduction should be proportional to the size of your workspace. For example, a 300-square-foot office in a 1,500-square-foot home would allow a 20% deduction of relevant home costs.
Insurance
You can write off all types of commercial insurance premiums, including those covering buildings, machinery, liability protection, and employee benefits. Insurance premiums are a necessary cost for running your business and can add up to significant savings.
Business Travel
Business travel expenses often include:
- Airfare, bus tickets, hotel accommodations
- Transportation costs (e.g., taxis, Uber, rental cars)
- 50% of meals for employees and clients during trips
These expenses are deductible as long as they’re business-related, ensuring you save on travel costs while staying compliant with IRS guidelines.
Salaries and Benefits
Deduct employee salaries, health insurance premiums, performance bonuses, and retirement plan contributions. Additionally, any other costs associated with employee benefits, incentives, and job training can be fully written off. Offering competitive salaries and benefits can also improve employee satisfaction and retention.
Keep Accurate Records of Your Business Expenses
Properly tracking your business expenses is a crucial step in claiming deductions with the IRS. Whether it’s a minor purchase or a significant investment, having the right documentation for each transaction helps protect your business during audits and ensures compliance with IRS regulations. Here’s a breakdown of the essential information you need for every business expense:
- Amount of the Purchase
Always record the exact amount spent on the expense. This ensures transparency and accuracy when filing your taxes. - Date of the Transaction
Note the specific date when the purchase was made. This helps to match your expenses with the correct tax year and prevents any discrepancies during financial reporting. - Vendor/Location
Record where you made the purchase, such as the name of the store, supplier, or service provider. This adds clarity and authenticity to your financial records. - Payment Method
Specify how the purchase was made, whether through cash, credit card, bank transfer, or any other method. The IRS often looks for details about the transaction form to validate business spending. - Purpose and Business Connection
For each expense, write a brief explanation of its relevance to your business operations. Whether it’s office supplies, marketing materials, or software subscriptions, demonstrating its business purpose is essential for IRS compliance. - Meals and Entertainment Details
For meals and entertainment expenses, it’s crucial to note who was present, including clients, employees, or business partners. The IRS requires this information to confirm that these expenses were connected to legitimate business interactions.
How to Keep Track of Your Expenses
You can organize this information in various ways:
- Use an Excel spreadsheet or Google Sheets to log every detail systematically.
- Attach notes directly to receipts or scan them for a digital copy with the required details written in a note.
- Utilize accounting software, which often includes built-in tools for expense tracking and categorization.
Keeping accurate expense records not only ensures IRS compliance but also gives you valuable insights into your business’s financial health and spending patterns. Regularly monitoring these details helps improve cash flow management, identify cost-saving opportunities, and optimize overall business efficiency.
How to File Taxes for Your Small Business
Filing taxes for your small business isn’t a one-size-fits-all process, as the forms and requirements vary based on your business structure. Different types of business entities have distinct responsibilities when it comes to tax filings. Here’s a breakdown of how each business structure handles its taxes so you can quickly find the information you need.
- Sole Proprietorship
- Partnership
- Limited Liability Company (LLC)
- C Corporation
- S Corporation
- Nonprofit Organizations
Understanding the tax filing requirements for your business structure ensures compliance and maximizes your savings.
How to File Taxes as a Sole Proprietor
Being a sole proprietor means you run your business as a single owner with no legal separation between yourself and your company. In other words, your personal and business finances are intertwined. This setup is common for freelancers, consultants, and small business owners because it’s quick and easy to get started.
Filing taxes as a sole proprietor is a straightforward process. When tax season rolls around, you’ll need to complete Schedule C and attach it to your main personal tax return, Form 1040. The purpose of Schedule C is to report the profit or loss your business experienced throughout the year. This form allows you to detail your income, business expenses, and any deductions, which helps determine your taxable income. Keeping accurate records of your business finances throughout the year can make this process even smoother, ensuring you pay only what’s necessary while staying compliant with IRS regulations.
How to File Taxes as a Partnership
In a partnership, two or more individuals join forces to run a business together, and taxes are handled differently than in a sole proprietorship. Partnerships must file Form 1065, which provides a comprehensive summary of the company’s profits and losses for the year. This form is crucial because it offers the IRS a snapshot of the overall financial health of the business.
Additionally, each partner receives a Schedule K-1, which outlines their specific share of the profits or losses. When partners file their personal tax returns, they must attach this Schedule K-1 to Form 1040 and report the income or losses they received from the partnership. By accurately distributing income and losses among partners and reporting it on the K-1, the IRS ensures that each individual pays taxes according to their share of the business’s financial outcomes. Keeping detailed and organized financial records throughout the year can streamline this process, reduce errors, and help maintain compliance with IRS guidelines.
How to File Taxes as a Limited Liability Corporation (LLC)
Filing taxes for your LLC is straightforward, but the process varies depending on whether you have one or multiple members. If you’re the sole member of your LLC, it’s as simple as following the rules for a sole proprietorship. You just need to fill out Schedule C and attach it to your annual personal tax return (Form 1040). This way, you report your business’s profit or loss along with your personal income.
If your LLC has two or more members, the process is slightly more complex but still manageable. In this case, your LLC is treated more like a partnership for tax purposes. You’ll need to file Form 1065, which summarizes the company’s overall profits and losses. Additionally, each member will receive a Schedule K-1, detailing their share of the business’s income or losses. Each member then includes this information on their personal tax return, ensuring the IRS receives an accurate account of each person’s taxable income. Want more insights? Check out our simple guide to LLC taxes to stay fully informed and compliant.
How to File Taxes as a C Corporation
If your business operates as a C corporation, or if you’ve chosen to treat your LLC as one, your tax responsibilities are a bit more involved. You’ll need to file a separate corporate tax return using Form 1120, in addition to your personal tax return. This form is essential for reporting your company’s income, expenses, and overall financial performance to the IRS.
While the IRS provides detailed instructions for completing Form 1120, navigating the complexities of corporate taxes can often be tricky for small business owners. Many business owners find it more efficient and accurate to hire a tax professional or accountant to handle these forms. A qualified expert can ensure that everything is properly documented and that your business remains fully compliant with IRS regulations, while also helping you identify potential deductions and credits that could minimize your tax liability.
How to File Taxes as an S Corporation
If your business is structured as an S corporation, or an LLC that has chosen to elect S corporation status, there are specific steps you need to follow to stay compliant with IRS requirements. Shareholders must report their share of the business’s profits or losses on their personal tax returns using Schedule K-1, which is attached to Form 1040.
In addition to this, the S corporation itself is responsible for filing a separate corporate tax return using Form 1120S. While the IRS provides comprehensive instructions for completing Form 1120S, many small business owners prefer to hire a Certified Public Accountant (CPA) to ensure these forms are filled out accurately and efficiently.
How to File Taxes as a Nonprofit
Nonprofit organizations have a unique tax status that sets them apart from for-profit businesses. In most cases, nonprofits can apply to the IRS to become federally tax-exempt under Section 501. This means that, if approved, the nonprofit won’t have to pay federal income taxes.
However, nonprofit tax filings still require careful attention to detail. Organizations must submit the necessary IRS forms, like Form 990, to provide transparency about their finances and operations. This form includes important information about income, expenses, donations, and other financial details. While the process may seem complex, understanding your nonprofit’s relationship with taxes ensures compliance and maintains your eligibility for tax-exempt status.
How to Handle Self-Employed Taxes
If you’re self-employed, you’ll likely operate under a business structure such as a sole proprietorship, LLC, partnership, or S corporation. All of these structures are considered pass-through entities, meaning your business income is reported as part of your personal income on your tax return.
Being your own boss also means you’re responsible for paying self-employment taxes, which include Social Security and Medicare contributions. The self-employment tax rate is 15.3% of your total income, which includes both the Social Security tax (12.4%) and the Medicare tax (2.9%). While these taxes may seem high, they help ensure your eligibility for benefits like retirement, disability, and healthcare coverage.
Understanding Sales Tax for Small Businesses
Sales tax is a state-level tax that small business owners must collect from customers and then pass on to the government. This applies to most retail and service transactions, ensuring that sales are properly accounted for according to state laws.
If you run an e-commerce store, it’s important to know that you may still need to collect and remit sales tax, even if you don’t have a physical presence in a particular state. States have economic nexus laws, which mean that businesses must collect sales tax based on factors like sales volume or transaction numbers.
The frequency of filing a sales tax return depends on your state’s requirements. Some states require returns to be filed monthly, while others prefer quarterly or annually. Staying aware of your state’s regulations and deadlines will help prevent costly penalties and keep your business in good standing. For a clear and practical breakdown of your state-specific sales tax obligations, make sure to familiarize yourself with your local sales tax laws and guidelines.
How to Manage Payroll Taxes for Your Business
As an employer, managing payroll taxes is a crucial part of keeping your business compliant with federal, state, and local regulations. There are several payroll-related taxes you need to handle:
- FUTA (Federal Unemployment Tax): This tax supports unemployed workers and is generally 0.6% of an employee’s wages.
- FICA (Social Security and Medicare): Employers and employees each contribute 7.5% of wages for Social Security and Medicare taxes, totaling 15% between both parties.
- Employee Income Tax: You’re responsible for collecting and remitting federal, state, and local income taxes from your employees’ wages.
- State and Local Taxes: These taxes vary depending on your state and local tax laws, so compliance may differ depending on your location.
To accurately calculate federal payroll taxes and ensure proper withholdings, refer to IRS Publication 15, which provides a detailed guide and formulas for calculating employee wages and withholding amounts. Staying organized and consistent with payroll tax compliance helps you avoid fines and keeps your business operations running smoothly.
How the Tax Cuts and Jobs Act Has Impacted Small Business Taxes
The Tax Cuts and Jobs Act (TCJA), which took effect on January 1, 2018, brought significant changes to the tax landscape for U.S. small businesses. Here’s a breakdown of the key changes:
- Lower Corporate Tax Rate: The corporate tax rate was slashed to a flat 21%, which provided a substantial reduction in tax liability for C corporations.
- Qualified Business Income (QBI) Deduction: Small businesses structured as pass-through entities, such as sole proprietorships, partnerships, and LLCs, benefit from a 20% QBI deduction, which lowers taxable income, provided they meet eligibility requirements.
- Client Entertainment Expenses Are No Longer Deductible: Businesses can no longer deduct expenses for client entertainment, a change that impacts social and networking activities.
- Office Snacks and Meals Deduction Reduced: Previously, businesses could deduct 100% of meals and snacks provided in an office setting, but under the TCJA, only 50% of these costs are now deductible.
- Increased Car Depreciation Limits: The TCJA also almost doubled the amount of car depreciation that businesses can deduct, making it easier to account for vehicle costs.
Although the Tax Cuts and Jobs Act is currently set to expire at the end of 2025, there is a possibility that Congress may extend it. Keeping up with these changes and consulting a tax professional can help small business owners maximize their savings and remain fully compliant with tax regulations.
How to Pay Small Business Taxes
Paying taxes as a small business owner typically requires quarterly estimated tax payments instead of an annual lump sum. Here’s a simple guide to help you stay on top of your obligations:
- Estimate Your Taxes: Determine your expected net income, deductions, and credits to calculate your estimated tax liability accurately.
- Submit Your Payment with IRS Form 1040-ES: One common method is to complete IRS Form 1040-ES, attach a check, and mail it to your local IRS office.
- Pay Online or By Phone: To make the process more convenient, you can use the IRS Payments Gateway on the IRS website, or make payments by phone. These options ensure quick and easy tax remittance.
- Electronic Federal Tax Payment System (EFTPS) for Corporations: Corporations must make their tax payments through the EFTPS, an online system that ensures compliance with federal tax regulations.
- Stay Informed About Your Business Structure and Location: Your specific tax obligations will depend on your business structure (e.g., sole proprietorship, LLC, S corporation) and location, as state and local taxes can vary.
Staying proactive and consulting a tax professional or accountant can help streamline the process, ensuring timely and accurate payments while taking advantage of any deductions or credits available.
Conclusion
Filing taxes for your small business doesn’t have to be overwhelming. By organizing your records, maintaining accurate books, and understanding your financial transactions, you lay the foundation for a hassle-free tax season. Whether you choose a DIY approach or seek professional assistance, keeping your finances transparent and organized is key. Small business owners should prioritize tracking income, reconciling bank statements, and generating financial reports like balance sheets and income statements to ensure compliance with IRS and state requirements.
Austin & Larson Tax Resolution is here to make the tax process simple and stress-free. Their expert team of IRS Enrolled Agents, Accountants, CPAs, and Tax Attorneys specialize in supporting small businesses throughout Michigan. From tax return preparation to back tax debt resolution and ongoing financial consultations, they ensure your business remains compliant, minimizes liabilities, and maximizes savings through every available deduction.
Don’t let taxes derail your business operations. Partner with Austin & Larson Tax Resolution today and experience comprehensive support tailored to your needs. Let experts handle the details so you can focus on growing your business with confidence and peace of mind.
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