Nearly one-third of all small businesses owners overpay on their federal and state taxes. While tax refunds may be appreciated in your personal life, overpaying on your small business taxes means you are not taking advantage of applicable deductions, not keeping accurate records and not using these funds to reinvest in your business throughout the year.
While tax season may be stressful for many small business owners, there are ways to lessen the anxiety, leverage beneficial tax opportunities and make the most of your business funds. Here are some financial ideas and tax tips to help you at tax time and beyond, along with up-to-date information regarding deadline changes made as a result of the coronavirus pandemic.
As a small business owner, the U.S. Internal Revenue Service (IRS) requires you to pay four basic kinds of taxes. For convenience, the IRS allows you to pay taxes with electronic deposits, checks, money orders or cash. Federal taxes you are responsible for include:
Income tax: All small businesses (except partnerships) are required to file annual income tax returns yearly. If you are a business that uses the withholding method of paying taxes, you must pay taxes as you earn income. If you pay estimated taxes, you should pay the additional taxes due when you file your income tax return.
Self-employment tax: Most small business owners, who work for themselves, pay this tax on self-employment net earnings that go toward Social Security and Medicare funds. Many taxpayers find this to be beneficial as this coverage provides them with retirement, disability and hospital insurance benefits.
Employment taxes: Small business owners with employees are responsible for taxes related to Social Security and Medicare, federal income tax withholdings and federal unemployment tax. Payroll taxes are in this category. In most cases, you will pay half of these taxes out of pocket and deduct the other half from your employees’ paychecks. You are responsible for paying all federal unemployment taxes (FUTA).
Excise taxes: Small businesses that are in specific service industries like environmental, alcohol, tobacco, fuel, and air and heavy truck transportation services are required to pay these taxes. Merchants often figure the amount of these taxes and include them in product and services prices.
Most small business owners who have limited liability companies (LLCs) or sole proprietorships are required to file their tax returns by April 15 of each year. However, if you are part of an S Corporation (S-corp), a business entity that passes corporate income, losses, deductions and credits through to their shareholders, you are responsible for filing a tax return for your business by March 15. This is because once the S-corp files a tax return, the company shareholders are responsible for paying taxes on their allocated share of income by April 15 on their personal return.
If you pay quarterly estimated taxes for your business, they are due by April 15, June 15, September 15 and January 15.
While there are common tax rules and regulations you can expect every year, 2020 has a few special considerations you should be aware of.
As a result of the coronavirus, the IRS has extended the federal income tax filing due date from April 15 to July 15, 2020. If you need more time, you can ask for an extension to October 15 2020. This extension is available to individuals filing 1040s, corporations filing 1120s and trusts and estates filing 1041s. For additional information, please view the official IRS announcement here.
Additionally, international business taxes and regulations have become complicated. Small businesses that have operations outside the U.S. should work with an international tax specialist to ensure they are meeting their obligations and filing their taxes correctly.
Small businesses should be aware of a “SALT cap” that now limits deductions to $10,000 in state and local property and income taxes. Additional tax code and regulatory changes may apply and you should consult with a tax professional to ensure you are properly filing your taxes, avoiding mistakes and taking advantage of applicable tax deductions for your business and personal taxes.
Hire a professional: There’s too much at risk at tax time not to partner with a trusted tax professional. Work with a reputable CPA or tax advisor to ensure you file properly, keep your small business financial affairs in order and reduce your risk of getting audited by the IRS. For example, if your business takes a loss on profits more than three years in a row, it could attract negative attention and require a detailed explanation.
Other things that may provoke an audit include consistent math mistakes, underreporting cash transactions and incomplete information. A tax professional can help keep you on track and ensure a seamless filing experience.
Stay organized: Today’s technology gives you access to many financial apps and online tools to help you manage your financial data. Digital apps like TurboTax mobile, FreshBooks, MileIQ and IRS2Go can help you document expenditures and receipts and even file your taxes to ensure you meet your tax obligations while making the most of your business finances.
Make taxes a year-round focus: Taxes are not an annual event – there are implications all year long. Waiting until the last minute to file creates stressful situations and may limit your money-saving options. Set calendar reminders to ensure you are keeping track of all necessary data each month and quarterly.
Look for deduction opportunities: Keep detailed and accurate business records throughout the year like travel, office supplies, utilities and client entertainment expenses. Online tools like Quickbooks and SAP Concur help you easily track expenses that may qualify for tax write-offs or reimbursement.
Tax refunds are not your goal: While you should obviously take a refund if it is due, tax refunds indicate that you have overpaid on your taxes. These are valuable funds that you could be using to reinvest in your business throughout the year
Be well educated: Even if you work with a tax professional, it pays to be well versed in small business tax codes and regulations. Ultimately you are responsible for the accurate filing of your business tax returns. The IRS has a helpful small business tax information center and the U.S. Small Business Administration has good information on navigating the tax code.
Few small business owners look forward to tax season. Following these tips will help you more easily manage your taxes during the filing deadline and beyond to ensure you make the most of your business funds.