(Newswire.net — August 15, 2019) — Both new and veteran entrepreneurs find themselves struggling with taxes. It’s not abnormal – and everyone would feel overwhelmed. Businesses need to do their tax prep continually, and there’s a lot to cover.
If this is your first year running a small business, your concerns double, and you likely have a lot of questions. Today, we will go through the basics of business taxes in the hope to put you a bit more at ease.
Tax Types for Small Businesses
There are five main types of small businesses, and each affects your tax burden a bit differently.
Sole Proprietors
The sole proprietorship is owned and run by one individual. Therefore, this type of business has the most straightforward time filing taxes. The owner reports their business income and loss on the personal income tax return. Business profits are taxed at the personal income tax rate, too.
Sole proprietors must also pay self-employment taxes that cover medical care and social security. You will be paying quarterly estimated taxes as well, including social security and medical care, along with income tax.
Partnerships
Two or more owners run partnership businesses. In this case, each of the owners pays income, self-employment, and quarterly estimated taxes.
The trick about partner-run small businesses is that the company itself doesn’t pay the income tax. Instead, only the owners do. Partners file their business income on personal tax returns.
C-Corporations
C-corporations legally separate businesses and owners. They’re subject to double taxation. Besides paying a flat income tax, all shareholders get charged on their personal tax returns.
C-corporations go through a more complicated taxation process, but there are tax advantages to C-corporations and ways to make more money and pay smaller amounts.
S-Corporations
S-Corporations operate similarly to sole proprietors and partnerships. Each shareholder reports their income and losses on their personal tax returns. The business doesn’t pay corporate tax, thus avoiding double taxation.
Limited Liability Companies
In LLC, owners are considered separate entities from the company, and they don’t pay for its debts. The benefits are the same as with a sole proprietorship and partnerships.
There’s additional flexibility in LLCs taxation. When it comes to taxes, you can choose the C or S-Corporation method.
Payment Deadlines
No matter your type of small business, you have to pay quarterly estimated taxes if you owe a certain amount of income. Paying four times a year means that filing taxes is more a routine thing than a one-time large project, which can be both a benefit and a drawback.
Additionally, businesses need to deposit federal income taxes from employees, unemployment taxes, employer and employee social security, as well as medical care taxes. As a business owner, you choose to do so every other week or once a month.
Calculating Your Quarterly Taxes
For calculating the payment, you must make quarterly calculations. You should estimate your expected gross income, taxable income, deductions, and tax credits.
It sounds like a lot, but you can look at your previous year’s taxes to guide you. However, if it’s your first year doing taxes, you won’t have such assistance. In that case, legal assistance companies such as taxpage.com can help you.
Deadlines for small businesses exist four times a year in April, June, September, and January. Each covers the previous three months.
Prepare Your Taxes
The best method of making your returns as simple as possible is by staying organized throughout the year. Prepare all financial records and documents before the season. The documentation to keep at hand includes:
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The previous year’s tax return
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Credit card and bank statements
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Payroll and accounting documents
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Partnership agreements (in case you run a partnership)
Besides, you’ll have to do accounting for all income and expenses that incur in your small business. For that reason, try to save all receipts for payments and income you got throughout the year, and keep them neatly stacked.
Doing so will make for a more accurate statement, as well as less stress related to accounting. Organizing these reports is as simple as using a piece of software or hiring a competent accountant.
The Bottom Line
It seems simple and clear cut, right? Unfortunately, this was the tip of the iceberg. You are yet to familiarize yourself with different IRS forms you need to file your taxes.
Either way, we hope that this guide made it a bit more simple to understand the general obligations you have as a small business owner. Hire a professional if it seems like too much, and try not to worry. Over time, it becomes routine.