Small Business Taxes: How To Successfully Navigate Tax Season
It might sound strange, but most accountants love tax season. It’s the one time of the year when we get to be rock stars. And we get to be rock stars, well, because pretty much everyone else hates tax season! Particularly for small business owners, tax season is a messy time of year where you’re stuck filling out forms, poring over documents, and tackling Excel spreadsheets.
There’s a lot to know and the process can be tough—which is why we want to help walk you through the process with some tips on successfully navigating the 2020 tax season.
Get Your Deadlines Straight
Given that proper small business tax planning is a year-round affair, we always recommend that small business owners be aware of tax planning deadlines well in advance. For our purposes, we’ll list three of the most important for the 2020 tax season (where you’ll be filing your 2019 taxes):
- March 15, 2020: Tax filing deadline for S-corporations and general partnerships
- April 15, 2020: Tax filing deadline for individuals, C-corporations, sole proprietorships, and single-member LLCs
- October 15, 2020: Filing deadline for those who have filed extensions
How Business Classifications Affect Tax Reporting
If you’re new to small business tax preparation, one of the first things you should know is that the taxes you’ll be asked to pay will depend on the way your company is structured.
- Sole proprietorship: Although you must account for self-employment taxes and quarterly estimated taxes, sole proprietors may report business income profits and losses on their personal tax return.
- General partnership: Those in general partnerships must file self-employment taxes and quarterly estimated taxes, but they also must file Forms 1065 and Schedule K-1 to adequately report the income, profits, and shares of each partner.
- C-corporation: C-corporations are subject to corporate “double taxation” rules and must report income on Form 1120.
- S-corporation: S-corporations report income and losses on personal returns, though unlike C-corporations, they are not subject to corporate taxation rules. Form 1120S must be submitted along with personal tax returns.
- Limited Liability Corporation (LLC): Like sole proprietors, partnerships, and S-corps, LLCs are not subject to corporate taxes. Instead, you’ll report profits and losses on personal income tax reports alongside Form 1065.
Tax for Small Business: The Types You’ll Encounter
Tax planning for small businesses means understanding the different types of taxes you’ll encounter. This is great to know as you keep records throughout the year, but it becomes critical when tax season hits you in full. For a quick overview, here are the most common types:
- Income: Taxes paid on income, revenue, gains, or dividends.
- Employment: For companies with employees, employment taxes encompass federal withholdings, unemployment, and Social Security/Medicare.
- Self-Employment: Those who are self-employed must take care to withhold taxes for Social Security and Medicare in absence of an employer.
- Excise: Indirect taxes paid on specific products or services (alcohol and tobacco, for example).
- Estimated Tax: Taxes relating to your expected taxable income at the end of the year, usually paid on a quarterly basis.
- Property: Taxes paid based on your property’s assessed value.
Your business will likely have other types of small business taxes to deal with on top of these, so don’t consider this an exhaustive list. You’ll need to work with your bookkeepers and tax prep team to make sure all the bases are covered for your unique business.
Rules Are Variable and Region-Based
As if small business tax planning weren’t complicated enough, keep in mind that many aspects of your tax prep will depend on your location. Different states have different rules for how they handle taxes, and it’s up to the business to keep everything straight.
For example, Wyoming and South Dakota are unique in that they do not tax business income—yet all other states do. Issues like sales tax can be just as confusing. Some states levy taxes based on the location of company’s headquarters, while others levy them based on where the end customer is located.
Add in these confounding variables to already complicated set of small business tax tips, sprinkle in a few significant changes to tax law (courtesy of 2017’s Tax Cuts and Jobs Act), and it’s clear why so many companies throw their hands up and simply outsource their small business tax preparation.
Navigating the Upcoming Tax Season
Taxes are a tricky area for anyone to navigate, and when business taxes enter the picture, things get exponentially more complicated. Most of us can figure out how to work through an individual return—but when you’re responsible for submitting business taxes on behalf of your company, there’s a lot more at stake.
We recommend soliciting the help of a third-party tax preparer, if you haven’t already. Even if you plan to manage tax prep on your own over the years, hiring a temporary consultant to walk you through the steps, even on a short-term basis, can make a huge difference in your small business tax planning.