If you own a new small business, you probably have a lot on your mind. Questions like: Is there enough money in the bank? Will there be plenty of customers? And so on.
One of the most critical items for a small business owner to address, especially a new one, is appropriately handling taxes. Failure to comply with all tax rules and regulations can be just as devastating for your business as running out of money. This article will give tips to small business owners on filing small business tax returns.
7 Tax Filing Tips for Small Businesses
#1: Understand the Difference Between Paying and Filing
This article focuses on filing taxes, but it is necessary first to be aware of the difference between filing and paying taxes.
- Filing taxes means filling out the correct form(s) and sending them by mail or electronically to the IRS by the required deadline.
- Paying taxes means giving the required money to the taxing authorities. (This does not always coincide with a tax return’s filing date).
Most taxing agencies a small business will deal with use the pay-as-you-go method, meaning you pay taxes on a series of dates during a tax period.
You file a tax return, on the other hand, at the end of the appropriate tax period, which summarizes the tax incurred and the amount paid throughout the period. Ideally, you have already paid the taxes by the time the tax return is due. The biggest mistake small businesses, or any taxpayers, make is not understanding which is more important.
The penalty for failing to file a tax return is always more severe than the penalty for not paying the tax.
#2: Understand the Business Forms
When a business owner starts a new enterprise, one of the first and most important requirements is determining the form of business it will operate under. The business form you choose affects your filing requirements.
The Internal Revenue Service (IRS) recognizes five entities for tax purposes, each with its own operating and tax structures. The five entities and the required forms are:
- C Corporation – Form 1120
- S Corporation – Form 1120S
- Partnership – Form 1065
- Sole Proprietorship – Schedule C attached to Form 1040
- Limited Liability Company (LLC) – depends on the tax classification chosen by the entity
Each business form provides benefits and drawbacks from a business and tax standpoint. A properly run business must consider both business purposes and tax purposes.
Each business form has its own tax filing date and extension periods (although there is some overlap). A professional, such as a Certified Public Accountant or Enrolled Agent, can help you determine your business’s proper form, the type of tax returns required, and their due dates. An attorney can help with setting up paperwork.
#3: Understand the Required Taxes
Depending on the nature and size of your business, agencies require a number of taxes. A business could be subject to any or all of the following:
- Income Taxes
- Sales Taxes
- Payroll Taxes (Forms 941, 940, and various state returns)
Payroll taxes are particularly important for a small business. Regardless of the business’s form, any business with employees is subject to payroll taxes. Failure to understand and follow the rules of these taxes can be devastating.
If your business has employees, you must act as the tax collector and withhold the following taxes from employees’ wages each pay period:
- Federal Withholding – an employee tells an employer how much income tax to withhold by filling out a W-4 form.
- OASDI (Social Security) – the employer must withhold 6.2% of the gross wages from the employee’s pay for social security. The employer must also match that amount and pay the government an additional 6.2% of the gross wages.
- Medicare – you must withhold and match 1.45% of the employee’s gross wages for Medicare.
- Federal Unemployment (FUTA) – employers pay a percentage of gross wages (usually 0.8% of the first $7,000 in wages for each employee) to fund federal unemployment benefits.
- State Withholding – essentially the same as federal withholding, though not every state has an income tax.
- State Unemployment – almost every state has its own version of an unemployment fund. An important note: at both the federal and state levels, the employer alone, and not the employee, pays this tax.
Many states and local governments require other tax withholdings, though that is a topic beyond the scope of this article. Just remember the business is responsible for collecting and paying these taxes and filing a timely return.
Taxing agencies, especially the IRS, are very aggressive in ensuring you withhold, pay, and report payroll taxes on a timely basis. One of the worst things a small business can do is withhold these funds and neglect to pay or file a return for them.
#4: Know the Filing Dates
Filing dates for tax returns depend on the type of tax and, in some cases, the type of entity. Generally, small businesses file their income tax returns once a year (while making payments throughout the year). You usually file payroll taxes quarterly or annually, depending on the type of tax and the jurisdiction (again, making payments monthly or after each payroll period).
Most income tax returns allow for an extension of time to file beyond the required date.
For example, the six-month extension (April 15 extended to October 15) for Form 1040 would affect a sole proprietor, but each entity has its own filing date and extension period. There are no extensions for payroll taxes.
#5: Understand the Consequences of Not Filing or Late Filing
As mentioned above, the penalties for not filing a return or filing late are much more serious than not paying or paying late. The IRS penalties (subject to certain conditions affecting the amount and their assessment) include:
- Failure to file a tax return can result in a penalty of 5% of the tax not paid for each month or part of a month that the return is late, up to a maximum of 25%. If there is fraud, the penalty is more severe.
- Failure to pay the tax (or paying late) can result in a penalty of 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid (up to a maximum of 25%). Again, there are more severe penalties for fraud.
Although rates differ, state taxing agencies have the same approach. In addition to penalties, interest on unpaid amounts also accrues.
If a business continues not to file returns or ignores notices from the taxing authorities, even more serious consequences, such as tax liens or levying of bank accounts, may come into play.
#6: Understand How to Fill Out the Returns
Tax returns can be confusing and complicated. Instructions are often lengthy and unclear. If you incorrectly prepare and file tax returns, this gets the taxing agency’s attention.
As a business owner, it is vital to understand or have training in the intricacies of tax forms for your business or to employ someone with these things.
#7: Consider Hiring a Professional
Correct form preparation, required tax payments, and timely return filing are essential for all business owners. It can be especially daunting to file returns for your business for the first time. Most successful businesses engage professional help for these tasks.
A payroll service provider can be enormously helpful, especially in the case of payroll taxes. They can prepare your company’s payroll checks correctly and on time. They can also calculate all required taxes, collect money from the business, remit the taxes on its behalf, and ensure your business files all the necessary forms on time.
A professional such as a Certified Public Accountant or Enrolled Agent with training and experience can prepare and file all the proper forms. If your business has yet to file on time or at all, that professional can communicate with the IRS or other agencies to resolve the situation in your best interests.