In the U.S., there are approximately 28.8 million small businesses!
Most small business entrepreneurs often find the filing of taxes challenging. However, it’s a simple process if you follow all required regulations.
There’s a lot of that goes into the scrutiny of tax forms. Therefore, it’s crucial to know all of the fine details before filing your tax returns. Otherwise, you’ll make the whole process tedious and costly.
Here’s a comprehensive tax guide that’ll help you decide what type of small business you should set up.
Why Small Business Taxes Depend on the Business Structure
Before filing your tax records, you should know the type of business that you’re running. Various business structures have different legal requirements for tax filing. Therefore, ensure that the business taxes are as per the guidelines of the federal government.
Generally, you pay taxes depending on the size of the business. Sophisticated business structures require more advanced tax filing procedures. It also determines the types of taxes that you’ll pay in the long run.
There are five types of small business structures:
- Sole Proprietorship
- Limited Liability Companies
Each of these structures has a unique way of filing business taxes.
Sole Proprietorship Small Business Taxes
A sole proprietorship business is owned by a single individual. Filing for taxes in this type of business setup is relatively simple. It doesn’t involve complex tax return procedures, but you should be keen while filing for taxes.
You’ll need to state your business income as well as the losses of your income tax return. Besides, you should also file for self-employment taxes. This covers your Medicare insurance together with other social security obligations.
As a sole proprietor, you should file a Schedule C-EZ or a Schedule C alongside the 1040 form. You’re also obliged to pay quarterly taxes before the completion of financial business year.
Business taxes for a sole proprietorship are less sophisticated, so less time is spent in the filing process.
Partnership Small Business Taxes
Its advantage is that business owners create a pool of funds hence enabling the business to run smoothly.
However, business owners should do extensive consultation before making any decision. Any slight confrontation might lead to the dissolution of this type of business. Before filing the taxes, business owners should agree with the final decision.
For this type of small business setup, business owners should pay self-employment taxes, income taxes, and quarterly estimated taxes.
Also, they should file for Form 1065. This tax form indicates the income, gains, deductions, and losses of the partnership. It also covers equipment operation cost.
Partnerships go through a process known as pass-through-taxation. This means that the partnerships don’t pay any income tax. Instead, the business owners are the ones subjected to pay corporate taxes.
Therefore, business owners need to state their shares in the tax file. This helps in determining their income as well as the losses. As a result, it provides a platform for a fair taxation process.
C-Corporations Small Business Taxes
C-corporations operate as a single entity. Meaning that they have individual tax rights separate from the owners. Therefore, they also go through double taxation.
Usually, the C-corporations should pay a flat income tax rate of 21% based on their size and income. Then, the shareholders should also pay personal return taxes of the profits based on the number of shares owned.
Active shareholders pay taxes as employees of the corporation. Additionally, they pay self-employment taxes based on their salary.
To save on self-employment taxes, most corporations often pay themselves smaller wages but increase the amount of their dividends. Also, check on the IRS guidelines if you have any questions regarding small business taxes.
S-Corporations Small Business Taxes
S-corporations are like partnerships and sole proprietorship. Each shareholder should report income and losses based on the income tax rate. Besides, they should also document their profits, which should be taxed as personal income.
To avoid double taxation, the S-corporations file for Form 1120S to cover informational tax return. As a result, they aren’t obliged to paying corporate tax.
Like C-corporations, S-corporations spread their self-employment taxes with smaller wages and dividend distribution. However, the salary should be reasonable and as per the IRS guidelines. Otherwise, you’ll part with more money should they report you for tax evasion.
Limited Liability Companies Small Business Taxes
In this type of business structure, business owners are legally separated from the company’s responsibilities. As a result, they aren’t reliable for the company’s debts and liabilities.
LLC owners enjoy unlimited protection. Should the company go bankrupt, the business owners won’t have to auction their property to pay for the company’s debts.
Just like partnerships, LLC owners are subject to pass-through taxation. They don’t have to pay taxes twice. Instead, they should make quarterly tax payments based on their income. Also, they should submit Form 1065 every year so that the IRS can update their financial record.
Compared to the other business structures, LLCs offer a more flexible tax payment option.
When Is the Right Time to Pay Small Business Taxes?
Regardless of your business entity, you should pay quarterly estimated small business taxes. These are generally payable when your business income surpasses the $1000 mark. For corporations, they should only pay quarterly taxes if they estimate that their annual taxes could go over $500.
It’s very crucial that you keep updates of your tax payments. The IRS requires that small business owners pay quarterly taxes consistently without any delays. Otherwise, you’ll get tax fines that you can avoid by making timely payments.
To estimate your quarterly payable taxes, estimate your annual tax income, gross income, tax credits, and any other deductions. The simplest way of gauging this is by looking at your previous tax records. Always ensure that your quarterly tax doesn’t surpass what you’ve been paying in the earlier years.
Update Your Tax Records!
As a business owner, it’s advisable that you keep track of the amount of money you spend annually on taxes. Avoid operating a business blindly because it could cost you a lot in the long run.