Filing taxes when you have a business income is probably more complicated than your personal taxes. This is because there are several additional factors to consider like the type of business (Sole Proprietorship, Partnership, C-Corporation, etc.) that you have and the economic nexus rules that affect sales tax.
Let’s learn about how to file business taxes by looking at these six different items:
1. What are business taxes?
Business taxes are required yearly payments that businesses make to the government in exchange for permission to operate. Taxes are usually broken down into different categories, including income tax, sales tax, property tax, etc. These taxes can be impacted by factors such as economic nexus.
2. How do you file your business taxes?
Depending on which business structure you have, filing your business taxes can be done in different ways.
For example, if you are a sole proprietor then there is no need to file any paperwork with the government or pay any fees. One of the downsides of this type of business structure is that you will still be responsible for paying self-employment taxes.
Partnerships require a filing of Form 1065, which will provide information about how much each partner earned and the amount of tax that was paid on it. The same goes for C-Corporations, while S-Corporations have different requirements that you should consult with an attorney about. Depending on your business structure and the amount of income, you may need to pay taxes several times a year and in different ways.
3. What are the types of business taxes?
There are many different types of business taxes that can be paid depending on your business structure and location. These include:
Income tax – This is a yearly payment that all businesses with a net income make to their local, state, and federal governments. This tax is often based on a percentage of your business’s yearly income.
Sales tax – All businesses with a physical location where goods are sold must pay sales tax in the states they have a presence in. Many countries require multiple sales taxes to be paid depending on how much inventory you have in each state.
Property tax – This is a yearly payment that all businesses with property must make to the local government. In some areas, this amount may be determined by market value while other areas set a flat rate for each type of property.
Estate tax – Businesses can receive an inheritance from their owners when they pass away, which means they must pay estate tax if the value of these assets is over a certain amount.
Entity fee – This is a yearly charge that all businesses with an official business status from their state government will have to make to keep this status. In some cases, you may also be required to provide proof that your company’s structure qualifies for the status that you have.
In addition to these taxes, you may have to pay employment taxes if your employees are not classified as independent contractors. This will include a combination of federal and state unemployment insurance tax, FICA tax, and federal income tax withholding. You should consult with an accountant or business attorney about how much this is likely to cost.
4. How do tax deductions affect your business taxes?
One way that businesses can lower their tax liability is by taking advantage of all available income tax deductions, which are written off as expenses to the business every year. Common examples include:
Travel expenses – If your company sends you on a work trip or vacation, you may be able to deduct all of your travel expenses including transportation, lodging, meals, incidentals, and the cost of entertainment.
Meals and entertainment – Any business-related meals or activities that you attend with customers or vendors will be tax deductible if they are done in order to further business relations.
Home office – According to the IRS guidelines, having a home office that you use at least 51% of the time for business purposes will allow you to deduct a portion of your rent, mortgage interest, taxes, insurance, utilities, and repairs each year.
5. What are some tax tips for small businesses?
When it comes down to the day-to-day operations of running a business there are many ways that you can save money if you are aware of them.
Keep detailed records – By keeping good records of all expenses, income, and tax payments, you will be able to minimize future liabilities by taking advantage of all possible deductions.
Pay in cash – If your business has a large enough bank account, paying all recurring bills with paper checks will save you money on stamps and processing fees.
Look into tax credits – Every business is eligible for some type of tax incentive, which can include hiring veterans, funding educational programs, or saving energy.
Purchase used equipment – By purchasing used tools and equipment instead of new ones you can net significant savings without sacrificing quality.
Learn about your industry – As a business owner, it is important to know what other businesses in your area have been audited and whether they have any outstanding tax liabilities.
6 How economic nexus affects your business taxes
As a small business owner in the United States, you will need to make quarterly estimated tax payments if:
Your company’s total income from all sources is expected to be at least $1000 for this year and was at least $5000 in any of the previous three years, or your company’s total income from all sources exceeded $500 in any of the previous three years.
You may also have to file a state income tax return if your business brings in enough revenue to be considered taxable by that state.
To understand how economic nexus affects your business click here.
Small businesses are responsible for paying numerous taxes every year. The good news is that there are plenty of ways you can reduce your tax liability. By understanding what taxes your business must pay, how deductions work, and smart tax tips, you should be able to lower your costs considerably.