June 25, 2024

As a small business owner, it’s important to understand your federal tax obligations and deductions comprehensively. This will help you stay compliant and avoid unnecessary payments or penalties. Whether you hire a business accountant or use accounting software, several best practices can help you file your taxes online properly. 

Know Your Taxes

Unlike personal tax filings, which are completed with a few forms once a year, small business taxes require much more research and planning. To ensure you’re doing your best to meet all your obligations and reap the rewards of proper tax filing, you must understand the different types of taxes you’ll be responsible for, how they affect your filing, and which forms you must fill out. The main tax types that will impact your business are federal, state, and local taxes. Every kind of tax has different rules and procedures, and the form you need to file will depend on your legal structure and how you operate your business. For example, sole proprietors report income and expenses on a Schedule C attachment to their tax return, while S corporations and multi-member LLCs file Form 1120S. The IRS also requires businesses to deposit employment taxes monthly or semiweekly, usually made using the Electronic Federal Tax Payment System.

To complete tax filing for small businesses, it’s important to have all your business records, including sales reports, customer invoices, receipts of all purchases, and any bad debt write-offs.

Know Your Deductions

Many small business owners are eligible for tax credits and deductions related to their expenses. Filing incorrectly or claiming excessive deductions can lead to fines and even legal action, so small businesses must know which payments they can deduct and how to claim them correctly. Most deductions are categorized as either above-the-line or itemized deductions. Above-the-line deductions are subtracted directly from your taxable income, while itemized deductions must be calculated and added together before being taken from your total. Generally, it’s best to use above-the-line deductions because they impact your taxable income more than itemized deductions. While there are plenty of obvious deductions like the cost of a home office, health insurance and vehicle mileage, you can also claim things like business-related travel, meals, equipment and advertising costs. You can deduct countless other expenses as long as they’re legitimate and you have the records to back them up. In addition to deductions, it’s important to understand your tax credits are subtracted directly from the amount you owe in taxes. However, credit rules can be complicated and require a thorough understanding of the IRS’s regulations. For this reason, most small business owners opt to have a CPA or another professional handle their tax filings.

Know Your Options

Filing taxes as a business owner can be complicated, with multiple forms and unique filing deadlines. It can also be costly to miss the filing deadline or make mistakes that incur penalties. That’s why it’s essential to take your time to prepare and file correctly. The IRS offers plenty of resources for small businesses. Its taxation page provides complete information on the types of taxes entrepreneurs are responsible for, how to identify your tax responsibilities based on your company’s structure and when to file your business taxes. Some examples of small business taxes include employment, sales, and property taxes. Depending on their entity type, business owners may be responsible for these federal, state or local taxes. In addition, business owners can claim certain expenses as tax deductions that reduce the money they owe. For example, investing in new technology or furniture for your business can be a 100% tax-deductible expense. And, if you need more time to file your taxes, the IRS allows you to request an extension by filling out an appropriate form and paying for the estimated tax you owe.

Another important thing to remember is that keeping your personal and business accounts separate is critical. Mixing funds can trigger the IRS to audit your business. This can be especially problematic if you use your bank account to fund the company or vice versa. It’s best to have a dedicated business bank account for business expenses.

Get Organized

Filing your business taxes is much more complicated than filing your tax returns. Depending on your business structure and type, you must file many forms and deadlines. It is important to understand these details and get them right.

Getting organized can help you avoid the stress of scrambling to meet tax filing deadlines. The key to being prepared is consistent record-keeping throughout the year. That means keeping a dedicated file folder for all your receipts and documents. It is also important to keep a clean workstation to minimize distractions and make finding the information you need easy. Another way to be ready is to set aside time to fill out information returns throughout the year. These include Form W-2 for employees and 1099-NEC for independent contractors. You will also need to send and receive information returns for payments you made to other businesses or individuals. Keeping up with these obligations throughout the year will ensure you have all the records you need for your taxes. It will also make it much easier to file your business tax return accurately. 

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