How To File Small Business Taxes For The First Time
Last Updated May 27, 2022
Business counts its first anniversary from the day the foundation of the establishment was laid out. I say the business anniversary must be accounted for when a small business successfully completes its tax filings – for the first time.
As a new business owner, you will dread the moment when tax season is nearby. Nothing provokes the fear of the idea of IRS auditors standing at your doorstep. Eerily dreadful, agreed?
Tax laws and codes are ever-evolving. So, it can be hard for some to remain at the top of their game. In this article, we have broken down the information for small businesses so that they can better handle their taxes and minimize the burden.
Table of Contents
Successful Tips about Tax Filings for Small Business
Types of Taxes
Businesses pay various forms of taxes. Not every business is entitled to pay “all taxes” but here are some of the most common taxes you are more likely to engage as a small business owner.
- Income Tax
When filing your taxes for small businesses, income tax is the most common of all at the federal level. Several states have imposed business taxes but they might not be similar to each other.
The specifications and requirements for these taxes may vary slightly from state to state. However, remember that a substantial amount of taxes are derived from income tax.
- Sales Tax
Businesses involved with the sales of products and services are eligible to pay sales tax. Usually, businesses pass on the sales tax burden onto their customer’s shoulders. But a business is responsible to collect the tax and state it to the tax authorities.
- Property Tax
If a business stands on personal property the local government authorities will charge you with property tax. Real estate and business equipment tax is one primary example of a tangible property
- Payroll Tax
Whether it’s W2 employees or 1099 workers working under you, then the small business is eligible to pay payroll taxes or also known as FICCA taxes (Social Security, Medicare, and unemployment insurance).
Before filing your tax for small business, as an employer, you will withhold an adequate amount for payroll taxes from an employee’s paycheck.
- Self-Employment Tax
A business dealing as a sole proprietor, partnership, or an LLC (limited liability company) will have to pay self-employment taxes on their business income as well. Self-employment tax is different from income tax. It is eligible for every business owner to have their share of interest in the business.
- Other Taxes
Some of the taxes are also involved like an excise tax on specific goods like fuel or franchise etc. these taxes are applicable only on selective small businesses.
Determine the Tax Rate
Every type of tax has a specific rate charged to a small business. The percentage of the rate your small business pays will depend on certain factors. Some of the common tax rates are mentioned below.
- Percentage of Income
The net income identifies the income tax and self-employment tax. Usually, the corporate taxes rates are 21%. These tax rates differ from one state to another. A self-proprietor, a partnership, or an LLC is eligible for the tax rate on their personal income at 37% whereas the self-employment tax rates are calculated at 15.3%. It depends on the maximum wage limit and 2.9% if above the limit.
- Percentage of Gross Sales
The revenue small businesses earn by selling taxable goods and services is charged a sales tax. Again, it varies from one state to another. However, some states have no sales tax altogether. The highest rate for gross sales can be as high as 10%. It can be even more based on the local city and town sales taxes.
- Percentage of Wages
Payroll taxes are based on the percentage of the wages paid to employees.
When an employee earns a minimum wage of $600 or above then payroll taxes are applicable, otherwise not.
- Tax per Dollar of Property Value
After the property is assessed against its value, the property tax also becomes eligible. The estimated amount is $100 per value. So if you have your own land that your business is built on, you need to be ready for the property taxes as well.
Organize Tax Records and Documentation
When filing taxes for the first time, you need to make sure to organize the documents for your own ease.
Tracking business transactions from day one means no need to scramble through the daily schedules to calculate the income and expenses. It’s best to save time before the tax season arrives. It also helps small businesses to reduce tax preparation costs like hiring an accountant at the eleventh hour!
According to IRS, only less than 1% of taxpayers are audit. But to avoid even the slightest chance you can always hire a professional accountant from day one. Apart from this following is the list of essential financial records you MUST maintain.
- Gross receipts
- Checking and savings account interest
- Returns and allowances
- Sales records
- Unclassified income
- Employee wages
- Insurance premiums
- Professional fees
- Contractor payments
- Office rent
- Transportation and travel expenses
- Advertising costs
- Office supplies and equipment
- Telephones and other communication devices
Clarity about Tax Obligations
When you plan to start your own small business, always identify the kind of legal entity you want to become. Every legal entity is entitled to various types of tax forms (as stated above), it’s hard to understand all related forms at a given time. But to help you become familiar with the form you need to learn which type of form is eligible for the relevant business structure.
- Sole proprietorship – You need Schedule-SE for self-employment tax and Schedule C for profit and loss.
- Single Member LLC – You will also need Schedule C but do not require Schedule SE like a sole proprietor.
- Corporation – You need to fill the Form 1120 for the corporate tax return.
- S-Corporation – It is a different corporation, so you will need Form 1120-S for a corporate income tax return.
- Partnership – Fill out Form 1065 for your business but each partner will need to complete a Schedule K-1.
Small Business Deductions
To minimize the taxable income means lowering the tax penalties. Tax filing needs to be done the right way. However, there are some business deductions you need to be aware of too. The deductions are related to the relevant expenses made by the business.
Some of the deductible expenses include;
- Mileage Deduction
- Health Insurance
- Banking fees
- Advertising costs
- Software cost
- Depreciation etc.
For instance, if a vehicle is used for business purposes (like an official trip) you can deduct the miles/hr at the rate of 58 cents per mile. This way you can recover the cost of fuel.
Don’t Forget the Tax Deadlines
There’s a lot going on during the tax season. So it’s one of the most common blunders a new startup can make is to miss deadlines. When you do, the panic sets in. What you need to know is how to avoid small business taxes and deadlines.
If you are buried deep in your responsibilities, it’s about time you hire a professional CPA or an accountant to handle the taxes. As they are well equipped to handle the tax preparations you will not need to worry about the availability of the financial records, or fear the penalty.
If you think just because you are a new business you may have an excuse to delay the tax filings is wrong. Bottom line is that if you find yourself short of cash, you need to explore options like business loans to protect yourself against any penalty.
Bottom Line – Ask for Help
Tax filings for small businesses can be gruesome for new business owners. It is different from individual tax filings. Rules are different and more factors involved raise the stakes at the business side of the coin.
Therefore, My Count Solutions understands that navigating through the tax system is not as easy as some are led to believe. You can take advantage of our tax preparation services to avoid any costly penalties. If you are concerned about hiring an expensive accountant or CPA, fess not! The assigned accountants, bookkeepers, or CPAs are right under the budget that actually may save you money.
Take your time and contact us for further queries.