3 Things You Need to Know to Do Your Taxes as a Small Business Owner
Taxes can get pretty confusing, particularly if you’re a new small business owner. Keeping tabs on new rules related to business taxes – on top of all the tasks required to keep your business running – may start to feel overwhelming.
Fortunately, when you break it down, doing your business’ taxes isn’t too complicated. With sound record keeping and a little planning, you can make sure your small business taxes are squared away without too many headaches.
In this post, we’ll break down three key pieces of information you need to successfully file your taxes as a small business owner. Along the way, we’ll highlight handy resources and tools you can use. Let’s get started!
1. How to Classify Your Business and Which Forms to File
Before you can do much of anything else related to your business’ taxes, you’ll need to determine what kind of business you have. Your classification influences just about every other aspect of your taxes, including which forms you need to file.
There are five main types of businesses yours might fall under:
- Sole proprietorship. With this type of business, you’re the sole owner, but also personally responsible for any business loans, expenses, or debts. You’ll likely pay self-employment taxes.
- Partnership. A partnership is similar to a sole proprietorship, except that the income and expenses are split between two or more people. If you’re in a partnership, you’ll have several forms you need to complete, so make sure you don’t miss any.
- Corporation. Incorporating your business goes a long way to protect you (the owner) from potential losses by separating personal and business assets and liabilities. This means you’ll need to file taxes for your business, then file again as an individual.
- Limited Liability Corporation (LLC). An LLC will separate your personal and business assets and liabilities. LLC tax regulations vary by state, but generally speaking, your business will be treated as either a sole proprietorship, a partnership, or a corporation. If you prefer the latter, you’ll need to specify this on an Entity Classification Election form.
- Nonprofit Corporation. If you have 501(c)3 status, you’re exempt from state and federal income taxes. However, there are special rules regarding your business’ income, and you’ll need to file an income report.
If you’re not sure which of the options above describes your business, you’re probably a sole proprietor. To receive status as any of the other types of businesses listed you would need to go through the process of registering your business, which (of course) you would probably remember doing.
2. What Records You Need to Keep to Claim Deductions
Regardless of what type of business you run, record keeping is key if you want to file your taxes smoothly. Ideally, you’ll want to keep up with your records and save important documents all year round. Otherwise, you’ll be scrambling to put it all together come tax season.
For starters, you’ll want to keep all your tax returns for at least seven years, due to legal reasons. You’ll need the previous year’s return (if you have one) to file taxes for the current year, and you’ll need the past seven years records in the event of an audit.
It’s also vital to keep careful track of your income and business expenses. It will help immensely to have all your client invoices, as well as receipts for any business-related purchases you’ve made. Plus, you’ll need to track any business-related travel or transportation costs.
Your income and expenses will be used to determine how much you owe. Work-related expenses can be deducted to lower the amount you have to pay in taxes, so keeping careful track of them can ultimately save you money. You should also determine whether you qualify for a home office deduction.
When it comes to tracking income and expenses, it’s helpful to be able to automate the process for easy record keeping. With our platform, you can keep detailed invoices noting your income, and also track expenses and mileage with ease.
Additionally, you can generate helpful monthly financial reports with all your income and expenses displayed in a single document. Readable charts and ‘year-to-date’ summaries will make it easy for you to stay on top of your finances.
3. When to Pay Your Business Taxes and How Much to Pay
Just like your individual income taxes, your business’ taxes will be due on April 15 of the year after the one you’re filing for (if you’re in the U.S., at least). So, when you file for 2019, your taxes will be due on April 15, 2020.
However, it’s important to note that you’ll almost definitely need to pay estimated taxes four times throughout the year as well, typically in April, June, September, and January. Make sure to include receipts from these payments in your records, as you’ll need them when filling out your annual return as well.
If you don’t pay your estimated taxes, you’ll incur penalties on your next annual tax return, so it’s better to pay throughout the year than to wait. Your tax forms should help you determine how much you need to pay for both your annual and estimated taxes.
Taxes have a bad reputation for being confusing and complicated. The last thing you need when trying to manage your small business is another time-consuming task on your to-do list. However, with a little preparation and planning, your small business taxes don’t have to be a slog.
This post has outlined three key pieces of information you need to successfully file your small business taxes:
- How to classify your business and which forms to file.
- What records you need to keep to claim deductions.
- When to pay your business taxes and how much to pay.
Do you have any questions about how to pay your taxes as a small business owner? Leave them in the comments section below!