As a small business owner, you have a lot on your plate. Apart from developing great products or services, promoting your business, and hiring a team – you also need to deal with tax filing, which can be pretty complex.
You must work on your accounts and prepare for taxes throughout the year. Making key financial decisions while dealing with taxes is something you shouldn't practice without expert advice. Similarly, figuring out how much taxes you need to pay accurately is a huge concern for numerous businesses.
So how do you calculate taxes for your small business? What are the accounting prerequisites that you need to keep in mind? How do you file and pay taxes accurately to avoid any potential trouble? We will answer all of these and more in this blog. Stick around for an insightful discussion.
Step 1: Gather Business Records You Would Need for Tax Filing
The first prerequisite for determining and filing your business taxes is collecting all the financial documents for your business. The way you would file business taxes depends on the scale and what type of business entity you own. It also defines deductions and tax payments.
Before you begin, gather the following documents to help you fill out the basic business tax filing forms:
- Taxpayer Identification Number (TIN)
Your business is identified by the taxpayer identification number. Even TINs are of different types. Social Security numbers and Employer Identification Numbers (EINs) are the most commonly used ones.
If you have registered your business as a corporation and have employees, you must have an EIN. Also, keep your previous year's tax returns in hand, as you might need them.
- Income Statement
The income statement consists of your company's revenue, expenses, and profitability over time. Also known as the profit-and-loss statement, it is a key financial record used to determine the income section of your company tax return.
Deduction claims like business loan interest, business expenses, and others are also done basis of the income statement.
- Balance Sheet
The financial document containing your company's assets, liabilities, and equities at a given time is referred to as a balance sheet. To get tax-ready, a balance sheet audit is usually performed. It includes verification of the company's provisions for depreciation and other anticipated losses to ensure they are at reasonable levels.
- Supporting Documents
Receipts and documents related to expenses are covered under supporting documents. Your tax returns are claimed based on the supporting documents in an audit.
Step 2: Ensure Your Bookkeeping is Tax-Ready
Without accurate and up-to-date bookkeeping, there is no way you can file your small business taxes correctly. And if you don't want to land in trouble with IRS (which we're sure you don't), make sure your books are caught up before the tax season. Fincent’s catch-up bookkeeping services can help you quickly sort your accounting and become stress-free.
Or, you can do it yourself; just follow these steps:
- Track all your business transactions and categorize them
One of the most basic and crucial parts of accounting is recording your business transactions. If you have not been doing that throughout the year, begin your tracking from the beginning of the current financial year, i.e., January 1. Here’s what you must record for every transaction:
- Category of the transaction - Revenue or Expense
- Transaction description
- Align your books with bank account statements
No matter how you record your books, whether you use accounting software or Excel spreadsheets, your bookkeeping must be reconciled with bank account statements. Resolving the discrepancies as soon as possible is the key to accurately accounting for all your business transactions.
As it is always advised to keep multiple bank accounts and credit cards for different purposes, you should refer to all statements while recording categorical accounts.
- Create accounting statements
Summarizing all your accounts in financial statements like income statements and balance sheet is a core accounting requirement for any business. As income tax is calculated based on total income after deducting expenses, you must prepare these financial reports right before the tax season.
Also read: Bookkeeping vs Accounting: Key Differences You Need to Know
- Organize your invoices and receipts
All of your small business expenses and revenue records should be recorded along with invoices and receipts. From customer bills to vendor invoices, debt write-offs, and more – keep all the supporting documents handy.
- File tax forms on behalf of your full-time employees and contractors
As a business owner, you are also responsible for filing taxes on behalf of employees and individual contractors.
- File W-2 Forms for all of your employees’ payroll
- For contractors getting paid over $600 by you in a single financial year, file a Form 1099-NEC after asking them for a W-9 Form.
How Fincent can Help You with Small Business Taxes?
Let’s get it straight - bookkeeping consumes a lot of your time throughout the year, and tax filing is tricky and demands an expert's help. You already have many things to stress that matter for your business growth; accounting is not one of them.
Let Fincent experts handle your bookkeeping with dedicated finance and tax experts for your business. With Fincent's reliable services backed by powerful bookkeeping software, your business finances can have a single source of truth.
Connect unlimited bank accounts and credit cards to track your transactions through a centralized dashboard for seamless accounts management. Apart from helping you with catch-up bookkeeping and year-round accounting services, we also assist you with tax filing by ensuring that you’re ready with up-to-date books and financial reports.
Fincent makes your finance handling easy with 24x7 support, expert advice, and dedicated bookkeepers for your business; learn more to get started with our complete accounting services.
Step 3: Determine the Relevant Tax Forms as Per Your Business Structure
Once you have your books updated and financial statements in hand, it’s time to figure out which forms you need to fill out for filing taxes. The answer to this lies in the type of business structure you own.
- Sole Proprietorship: One of the simplest structures, sole proprietorship requires you to file Schedule C, Profit or Loss From Business. You just need to attach Schedule C to your income tax return.
- Corporation: In the case of a C Corp, use Form 1120, U.S. Corporation Income Tax Return for filing company tax returns. The S Corp firms, on the other hand, use Form 1120-S, U.S. Income Tax Return.
- Partnership: A business registered as a partnership must use Form 1065, U.S. Return of Partnership Income to file tax returns. The partners involved must file IRS Form 1065 with their Form 1040. Additionally, the Schedule K-1 Form should also be filled by partners to complete parts of their individual returns.
- Limited Liability Company (LLC): These are flexible businesses depending on size and scale. If an LLC is taxed as a corporation, Form 1120 needs to be filled. On the other hand, single-member LLCs need to file Schedule C, and multi-member ones are supposed to use Form 1065.
Note: Individuals must use Form 1040, U.S. Individual Income Tax Return, to file their personal taxes.
Also read: A Complete Guide to Paying Yourself As a Small Business Owner
Step 4: Claim Small Business Tax Deductions
This is the part you must have been waiting for – deductions are the sweetest thing for most small business owners regarding tax filing.
Although deductions are subjective, knowing the following categories of small business tax deductions would help when filing taxes.
- Startup costs: Up to $5000 can be deducted as business setup costs in the year you launch your business.
- Office rent: The rent or lease amount you pay for your office or any other type of business space.
- Home office rent: If you’re working remotely from your home, you can claim a portion of your rent or mortgage along with home expenses.
- Raw materials: If you sell goods - the cost of raw materials you had to buy totally can be deducted as expenses.
- Office expenses: Small office expenses, including stationary, meals, and other miscellaneous expenses of your office, are covered.
- Payroll and benefits: Salaries you pay to your employees and contractor fees, along with the perks and benefits you provide, are covered.
- Insurance: From the building to equipment, machinery, and more valuable things require insurance, which is deductible while paying taxes.
- Business travel and client meeting expenses: All the travel and hospitality expenses done for business purposes are covered under deductions. This is especially relevant for more client-facing service businesses.
Step 5: File Your Taxes by The Deadline
Now is the time to file your taxes with the IRS. The tax deadlines depend on your business structure too:
- Multi-member LLCs and Partnerships businesses should file Form 1065 and give out Schedule K-1 to partners
- S Corps need to file Form 1120-S
- Sole proprietors along with single-member LLCs need to abide by this deadline for submitting Schedule C
- Corporations ending their year on December 31 need to submit Form 1120.
- If your fiscal tax year ends on June 30, you should file Form 1120 by the 15th day of the third month from the end of your tax year, which will be September 15
- On the other hand, if your company ends a tax year on a date other than December 31, the due date becomes the 15th of the fourth month from the end of your tax year.
Also read: How To Avoid Tax Penalties - A Simple Guide
Tax filing is not a straightforward job. Continuously recording and maintaining your books, managing expenses, creating financial statements, and figuring out taxes require a lot of commitment and expert-level accuracy. Add up to that the complexity of filing your taxes and paying them, and it can easily get overwhelming. We hope this guide will help you with the nuances of small business tax filing.
As you own a business and aim to grow it, investing a major chunk of your time in accounting operations is not optimal. Fincent helps you take the stress off your plate with end-to-end catchup bookkeeping, financial accounting, and tax filing support so that you can focus on areas that drive scalability for your small business.
Fincent: Your Business's Personal Financial Wizard - From Bookkeeping to Tax Filing