Tax season. It’s the least wonderful time of year for business owners. The last thing any entrepreneur wants to think about is bleeding hard-earned revenue to the government.
Still, taxes are one of life's most consistent certainties. Wise business owners are always looking for ways to reduce the "sting" associated with tax time — and fortunately, plenty of help is available. For instance, Hiline provides both small business tax help and corporate-level assistance for clients who want to streamline the process.
Let's review five critical types of business taxes, what you should include in your business tax preparation checklist, and how you can get ready to file your business taxes with the IRS.
Understanding the 5 Types of Business Taxes
How your business is taxed depends greatly on how it is structured. For example, how LLCs are taxed differs from how C-corps are taxed.
Apart from the tax implications associated with the various business structures, there are five common types of business tax that you should be aware of before you start your business tax prep.
1. Income Taxes
Every business entity is required to file an income tax return each year. Most small business structures allow income to "pass through" to the owner so that they are only taxed once (using Schedule C in conjunction with Form 1040).
However, income doesn't directly pass through to the owners if a business is a C-corporation. Instead, C-corps are often taxed twice: first on the corporate level, after deducting expenses from revenues; and then once dividends are distributed to shareholders, as personal income taxes.
2. Estimated (Quarterly) Taxes
In contrast to employees who have their income tax withheld throughout the year, business owners typically have to make quarterly tax payments to the IRS. Owners can often use their previous year's tax return as a guideline to determine how much they should pay in taxes each quarter.
For example, if a business owed a total of $6,000 in federal tax the previous year, each estimated payment for the current tax year would equal $1,500. The IRS has provided Form 1040-ES to help individuals make their calculations.
3. Self-Employment Taxes
Virtually all self-employed individuals (including many business owners) must pay self-employment tax at the end of each year. This self-employment tax is in addition to any regular income taxes they owe.
4. Employment Taxes
Business owners who have employees on their payroll are required to pay certain employment taxes on their behalf throughout the year. These include Social Security and Medicare tax, federal income tax, and federal unemployment tax.
5. Federal Excise Taxes
This tax type applies to certain businesses, such as companies that use heavy highway vehicles, indoor tanning businesses, and companies that sell various fuel types.
Save This Business Tax Preparation Checklist
How can you effectively prepare to calculate and file your business taxes? This checklist will walk you through some key documents you'll need on hand come tax time.
Your Business Tax Return From the Previous Year
Last year's tax return can serve as a roadmap for preparing this year's return, especially if your business has remained relatively stable over that time frame. Some helpful information included in your previous year's return is:
- Which accounting method you're using (cash or accrual)
- Federal tax ID number (FTIN), also known as an employer identification number (EIN)
- Your business code number
- Business activity description(s)
- Shareholder or partner information (if applicable)
Perhaps most importantly, your previous year's tax return can be an excellent comparison tool for your current return. For example, if your taxes for this year are much lower or higher than last year, you may need to investigate further to see if there’s a mistake.
Your Articles of Incorporation and/or Partnership Agreement (if Applicable)
If you don't have access to your previous year's tax return — or if you're filing for a newly-incorporated business — these two documents can provide a range of helpful information, including:
- Titles and names of company officers
- Names shareholders (and perhaps ownership percentages if your business is an S-corp)
- A list of partners
- The state in which you incorporated your business
- The date the partnership began
- Your accounting method (cash vs. accrual)
Accounting Records
These may include your balance sheet and a profit and loss statement (perhaps printed out from an accounting software program or a spreadsheet tool). Such records form the basis of your business tax return.
Bank and Credit Card Statements
If you have a full catalog of the bank and credit card statements your business received throughout the year, you can use these documents as an important "safety check" during tax time. For example, you can reconcile your year-end cash balance from your balance sheet to the checking account balance on your final bank statement of the year. You can also use credit card statements to accurately classify which business expenses you can deduct from your income.
Payroll Reports (if Applicable)
Payroll tax filings (on both the federal and state level) allow you to double-check that you have the correct payroll and payroll expenses on record (e.g., on your balance sheet in other accounting documents).
Other Forms and Documents
Whether you need to have the following information on hand depends on your business's nature. Even if these documents don't apply to your business now, it's good to at least be aware of them in case they do become relevant to you one day:
- Details of asset purchases. If you buy a major asset for your business (for example, a fleet vehicle), you should keep track of the cost, the service date, and the amount of time used for the business vs. personal use stated as a percentage of total use. (Please note that when you sell a major asset, you will likely need similar documentation: e.g., its sale price, when you sold it, any expenses related to the sale, and any prior depreciation.)
- Depreciation schedules. If an asset depreciates over time, you'll need to record its depreciation schedule, including accumulated depreciation up to the current tax year, business use percentage, and the asset's recovery period.
- Vehicle information. If your company owns any vehicles used for business purposes, you'll need to have a record of the mileage driven for the year. Separate data mileage into miles driven for business, personal miles, and commuting miles (mileage to and from your personal residence, even if it's part of your commute, generally can't be counted as a business deduction).
Get Ready to File Your Business Taxes With the IRS
Once you've collected all the relevant records for your business tax preparation, you'll need to take a few additional steps as you prepare to file your business taxes.
Make Sure You Have the Right Tax Forms
Determining which IRS tax forms apply to your business is always important. For example, sole proprietors and owners of an LLC generally report all their business income and expenses on Schedule C. On the other hand, corporations need to prepare a separate return to pay corporate taxes, using Form 1120 (for C-corps) or 1120S (for S-corps). Partnerships must file using Form 1065.
Carefully Fill Out Each Form
Some business tax forms (like Schedule C) are relatively simple to fill out, especially if your business is a small operation. However, taxes can become more complicated depending on the nature of your business; filing corporate taxes requires a level of detail that small business owners generally don't have to deal with. While most forms come with a separate set of instructions to help tax preparers, navigating IRS documentation can still be a daunting task (which is why so many businesses invest in outsourced tax services).
Keep Deadlines in Mind
It's important to note that business tax filing deadlines may differ from personal filing deadlines. Granted, Schedule C is considered part of the filer's personal income tax return and therefore doesn't have a separate deadline. However, Forms 1120S and 1065 should generally be filed by March 15th instead of April 15th and can't be included as part of a personal tax return.
Its Time to Revamp Tax Time
Understanding the different types of tax that may apply to your company and keeping all relevant financial records organized and accessible will help you nail your business tax preparation. You also need to ensure that you're filing your taxes on the correct IRS forms.
All of this can be very stressful and time-consuming—but the good news is, it doesn't have to be! Instead of navigating the maze of business tax law on your own, you can partner with our team of experts at Hiline.
Not only will we ensure your company's compliance with all applicable tax regulations, but we'll also help you to minimize your tax burden and maximize net profits. Reach out today to learn more about how our outsourced tax services can help your business!
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