Regardless of industry, all businesses have at least one major thing in common: taxes. However, the type of taxes you’re required to pay — and how often you pay them —varies widely based on a number of factors. Whether you’re new to the process or simply need a refresher, here are the top three things to keep in mind when filing your small business taxes in 2021.
1. Business structure is key for small business tax filing
One of the most important things to consider from a legal and tax perspective when starting a business is what kind of business entity, or structure, you wish to create. Why? Because it determines the type of income tax you’ll need to file in addition to your tax rates.
The five most common business structures are:
- Sole proprietorships, which are typically used by contractors and unincorporated businesses. Sole proprietors are responsible for reporting taxes to the IRS on their personal tax returns.
- Partnerships, which have the same legal structure as a sole proprietorship but allows for two or more owners. Instead of paying income tax, a partnership must file an annual information return and each partner must also report their share of the business’s income and losses on their personal tax return.
- C-Corporations, which are recognized as a separate tax-paying entity for federal income tax purposes. Profits are distributed among shareholders and special tax deductions may also apply.
- S-Corporations, which shield multiple owners from liability and allows shareholders to report pass-through income on their personal tax returns. Certain institutions, such as financial companies, are ineligible for S Corporation status.
- Limited Liability Companies (LLC), which are treated as a corporation, partnership, or disregarded entity (i.e., part of the LLC’s owner’s tax return) by the IRS depending on elections made and the number of members it has. LLC regulations vary by state.
2. The amount you owe varies by tax type and rate
Depending on your business structure, you may be responsible for paying some types of taxes and not others.
The most common taxes paid by small businesses include:
- Income tax, which usually makes up the most substantial portion of taxes owed if your business made a profit during the year.
- Estimated taxes, which include income tax, self-employment tax, and alternative minimum tax. Salaried workers can avoid paying estimated tax by increasing their withholding through their employer.
- Employment taxes (aka payroll taxes), which include social security and medicare taxes, federal income tax withholding, and federal unemployment tax for your employees.
- Self-employment taxes, which cover your social security and medicare taxes if you work for yourself.
- Excise taxes, which vary based on a wide range of factors, like the kind of business you operate, the equipment you use, or products you sell.
In addition, you may also owe state & local taxes, sales tax for certain products or services, and property taxes on real estate & equipment.
3. It pays to be organized
In order to complete your tax returns as quickly and easily as possible, make sure you do the following throughout the year:
- Keep your receipts,
- Input your invoices in a timely manner,
- Keep a general ledger and reconcile your bank statements regularly (ideally on a monthly basis),
- Stay on top of your financials (e.g., income statement, balance sheet, depreciation schedule) so you can plan ahead and avoid unpleasant surprises come tax time, and
- Pay attention to important dates, such as when quarterly taxes are due if your income exceeds a certain level or when your employees need to have received their W-2s or 1099s.
Looking for more information on how to file taxes for your small business? Be sure to visit the IRS website — and don’t forget to check out your state and local government websites, too. Knowing how to properly file your taxes will help you avoid getting your business into trouble.