As a business owner, you will be faced with the burden of making tax payment- something that you will not have been burdened with if you were an employee. Even though it may have not been apparent to you, your employer was always remitting the taxes that were deducted from your salary to the government. The company was also matching your Medicare and Social Security taxes and filing information returns with the IRS.
The method you will use to file your tax will differ according to the type of business you own; that is if you run the business as a sole proprietorship or use a legal entity such as an LLC or corporation.
Each type of entity requires a different tax form on which you report your business income and expenses. Regardless of the form you use, you generally calculate your taxable business income in similar ways.
Here are steps on how you can do tax for a small business;
Gather your records
The first thing you should do would be to gather all your business records. You should make sure that you have all reports pertaining income that you made from your business before you fill out any form.
It is advisable to use a computer program or a spreadsheet to organize and keep track of all transactions during the year, because it will make calculating your income and deductions much easier than trying to remember every sale and expenditure that occurred during the year.
2. Find the right form
The next step would be to determine the correct IRS tax form that will be most suitable for your business. You always need to report your business earnings to the IRS and pay tax on them, but choosing the right form to report earnings on depends on how you operate your business.
A lot of small businesses make use of sole proprietorship which allows them to report all of their business income and expenses on a Schedule C attachment to their personal income tax return. However, in the event that you manage your business as an LLC and you are the sole owner, the IRS also gives you the liberty you to use the Schedule C attachment. However, if you use a corporation or elect to treat your LLC as one, then you must always prepare a separate corporate tax return on Form 1120.
3. Fill out your form
Fill out your Schedule C or Form 1120. Schedule C is a simple way for filing business taxes since it is only two pages long and lists all the expenses you can claim. When complete, you just subtract your expenses from your business earnings to arrive at your net profit or loss. You then transfer this number to your personal income tax form and include it with all other personal income tax items. However, if you use a Form 1120, you calculate your taxable business income in the same way, but the form requires more details that may not always apply to a small business. The biggest disadvantage of filing a Form 1120 is that it is separate from your personal income tax return.
4. Keep the deadline in mind
There are different filing deadlines and you should have them in mind. When you use a Schedule C, it becomes part of your Form 1040 and therefore, no separate filing deadlines apply. It is generally subject to the same April 15 deadline. If you are taxed as a C-Corp, you need to file a Form 1120, you must file it by the 15th day of the fourth month following the close of the tax year, which for most taxpayers is April 15. If you are taxed as an S-Corp, you need to file a Form 1120S, you must file it by the 15th day of the third month following the close of the tax year, which for most taxpayers is March 15. You cannot send this form to the IRS with your personal income tax return.
Do you need to hire an accountant to do your tax?
Truth be said, doing tax can be quite confusing. A lot of people find their own personal tax returns complicated, let alone the even more complex tax returns of a business. If you are not skilled enough to carry the tax duties (understand the requirements, correctly prepare returns and calculate payments), then it will be in your best interest to hire an accountant to do it for you. You will find out that the time that you would have spent cracking your head about tax issues will be better directed to focusing on your business. Also, doing the wrong thing during that tax preparing process can lead to penalties which a skilled accountant can easily help you prevent. Hiring an accountant is also a tax deductible business expense.
If you would like to do your tax yourself but do not have the prerequisite skill, then you should take some tax preparation classes and/or seek instruction from your accountant.
Still, with or without having an account in your business, you will have to keep accurate record of your business.
Best practices for small business taxes
- Claim all income that is reported to the IRS: The IRS gets a copy of the 1099-MISC forms you receive which they use to check if the income you reported correlates with the amount they know you received. You should always ensure that the amount of money you report to the IRS tally with the amount that is shown in the 1099s, else, this can raise a red flag for the IRS. Even if a client doesn’t send out a 1099, you still need to report that income.
- Separate business from personal expenses: as a business owner, it is never advisable to mix up your personal expenses with that of your business. In the event of an IRS audit and it is found out that your business and personal expenses are entwined, irrespective of if you reported your business expenses correctly, the IRS could start looking at your personal accounts because of commingled money. Always get a separate bank account and credit card for your business and run only business expenses through those accounts.
- Hire the right accountant: the right account for a small business should do more than just prepare financial statements and do taxes. The right accountant should work with the business owner all year round to track income and expenditure to make sure you don’t have a cash flow problem, and to monitor your gross and net profits. If you are not proficient as a business owner to fill in the shoe of an accountant, then it is best to hire an accountant from the very beginning instead of waiting for the tax season(March and April) to come around the corner.
- Keep adequate records: the need for adequate record keeping cannot be overemphasized for business owners. Keeping adequate record will ensure that your tax returns will be accurate. Inadequate record keeping on the other hand can leave deductions on the table, or worse, you could be putting yourself at risk for an audit. An accounting software can go a long way to keep track of income and expenses and as such, they are a very important tool for small businesses.
- Correctly classify your business: often times, some small business owners fail to properly classify their businesses and as such, they end up paying more tax than they should. Deciding whether to classify your company as either a C Corporation, S Corporation, Limited Liability Partnership, Limited Liability Company, Single Member LLC or Sole Proprietor will have a different effect on your taxes. Most would-be small owners do not know the differences, advantage and disadvantage of these business forms and as such it is important to consult an attorney and accountant to determine how your business should be classified.
- Manage payroll: depending on the size of your small business, it may be advantageous to hire a company to assist with payroll – but be sure that the company is reputable. In a bid to save money, it is not uncommon for small businesses to go for lesser-known payroll services only to discover later that the payroll service was not remitting payroll taxes for the company. If that happens, the business owners are on the hook for the payroll taxes. The IRS typically checks every quarter to see if payroll taxes have been paid.
- Write-off bad debts: a business is only eligible for tax deduction when it meets some certain conditions. For the deduction to be made, the debt must still exist at the time it is written off. Thus, if the debt is forgiven or compromised before it is written off as bad in the accounts, no deduction will be available. The debt must also be effectively unrecoverable and written off in the accounts as bad in the year the deduction is claimed. The bad debt must have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money-lending business. Certain additional requirements must be met where the creditor is either a company or trust.
In conclusion, owing and managing a business is no walk in the park, let alone when you add the additional burden of preparing taxes each year. Experts have always advised that it is best to work with an accountant all through the year to do your tax returns. Making financial decisions without consulting an accountant or financial adviser can put you at risk and cost you more money in the long run.