If figuring out how to pay small business taxes feels overwhelming, that’s because all too often it is. The tax code can get complicated, and it’s not always clear what you need to do and when you need to do it.
That’s why we created a guide covering many of the basic tax questions: What kind of tax do I owe, what are the deadlines for business owners, and how much tax does a business pay? And yes, we even delved into the types of forms you’ll need to file. Whether you’re wondering how to pay small business taxes for the first time, or just need a refresher heading into tax season, be sure to review this information.
Common Taxes for Small Business Owners
Income tax – You’ll owe income tax on your earnings from running the business, both on your salary and on any profits. Depending on the structure, your business itself may need to file a separate tax return and pay its own income taxes before the profits can go to you personally.
Self-employment tax – Self-employment taxes pay for Social Security and Medicare. Typically, employers will cover half of this tax, and employees will cover the other half. But when you’re self-employed, you need to cover the entire share yourself.
Employment taxes – If you have any employees, you’ll be paying several taxes on their behalf. You’ll pay part of their Social Security and Medicare taxes, as well as federal unemployment tax. You’re also supposed to withhold part of their paychecks to cover their estimated taxes, which they calculated using Form W-4 when you first hired them.
The Impact of Your Business Structure
The IRS states that your business structure will affect how to pay small business taxes and the forms you’ll need to submit:
Sole proprietorship – In a sole proprietorship, you’re the only owner of the business. It’s the simplest structure. You don’t have to file a separate tax return for your business. You handle everything through your individual tax return, and all the income passes directly to you. When you prepare your individual tax return, you’ll include a Schedule C form, which calculates your net profit or loss from the sole proprietorship.
Partnership – A partnership is similar to a sole proprietorship except it has more than one owner. The business income still passes through to the owners. You divide it up according to ownership percentages set during your original partnership agreement. While the partnership itself doesn’t pay business tax, you’ll have to file an extra informational return, Form 1065, which lists the total income, deductions, net profit and how it was divided between the partners.
Corporation – Corporations have the most complicated system for how to pay small business taxes because the income is taxed twice. First, every year your business will need to fill out its own tax return, and will owe corporate income tax on any profits.
After that, you and the other owners decide whether you want to pay out any of the after-tax profits to yourselves, as a dividend. You’ll have to report this dividend income on your personal tax return as well.
LLC – The way to pay business tax for an LLC depends on how you structured it. The typical LLC uses the pass-through setup, so you’re only owing taxes at the personal level. If you’re the only owner, the taxes work as a sole proprietorship, and if there are multiple owners, it works like a partnership. You can also elect to classify your LLC as a corporation for taxes, which means you will need to pay taxes at both the corporate and individual level.
Key Tax Forms
The IRS has a full list of tax forms, and we’ve pulled out the most relevant for small business owners. Keep in mind this is not a complete list, and you may need to submit others, depending on your business situation.
Schedule C – Use this form to calculate your profit/loss from a sole proprietorship.
Form 1065 – Use this form to calculate the profit/loss from a partnership.
Schedule K-1 – In a partnership, each owner needs to submit a Schedule K-1 as part of their individual tax return to report their share of the income.
Form 1120 – Use this form to calculate your profit/loss from a corporation.
Form 940 – Use this form to report the amount of unemployment taxes you paid on behalf of your employees under the Federal Unemployment Tax Act (FUTA).
Form 941 – This form helps you report what you paid your employees in wages, as well as the taxes you withheld for them. You need to submit this every quarter (April 30, July 31, October 31 and January 31).
W-4 – Anytime you hire a new employee, they need to complete a W-4 to estimate their tax withholding. This way, you know how much to take from their paycheck for taxes.
W-2 – In January, you send each employee a W-2 which lists their total wages for the year, as well as how much tax you withheld. They need this information to prepare their tax return.
1099 – If you hire any independent contractors, you’ll need to send them a 1099 in January listing what you paid them during the previous year.
Documents for Your Tax Return
As you prepare for your small business tax return, here are some of the documents you may need to put everything together.
Gross receipts, invoices and all other sales records – You’ll need this information to calculate your total income for the year.
Inventory records, for the cost of goods sold – If your business bought raw materials and inventory before selling the final product to customers, keep the purchase records so you can deduct the cost of goods sold.
Bank and credit card statements – With this information, you can identify your income and business deductions throughout the year.
Business expense receipts – To identify all your deductions, it helps to have the actual receipts. Keep track of business expenses like travel, equipment, office supplies, insurance, repairs, advertising, professional fees and rent.
Depreciation schedules – For long-term business assets that apply for depreciation, you should record when you bought each asset and at what cost, whether you sold any of them, and the amount of personal use for an asset (if any). This information is used to calculate your depreciation deduction.
Payroll documents – You’ll need to confirm how much you paid in wages to employees and contractors, as well as the taxes you paid on their behalf. You can do so through their W-2s, their 1099s, Form 940 and Form 941.
Previous tax returns – If you’ve submitted tax returns for your business in the past, you can use that old information as a guide to prepare this year’s return.
Tax Deadlines
The IRS lists key deadlines:
Estimated taxes (April 15, June 15, September 15, January 15)
The IRS expects you to pay business taxes throughout the year. You are supposed to make four payments on these deadlines: April 15, June 15, September 15 and January 15 of the following year. For example, your last estimated payment for 2019 taxes is due January 15 of 2020. Missing these deadlines can lead to extra penalties, which can impact how much tax a business pays.
Provide employee W-2s and contractor 1099s (January 31)
If you hire employees, every year you need to issue them a W-2, which lists what they were paid, as well as the tax withholding. With contractors, you give them Form 1099 which only lists how much they were paid, according to QuickBooks. Contractors handle their own tax withholding. Both employees and contractors need these forms by January 31, so they have time to prepare their personal tax returns.
Partnership and S corporation tax returns (March 15)
If you are running a partnership or an S Corporation, you need to file the tax return for these businesses by March 15.
Individual and corporate tax returns (April 15)
Your individual tax return (including for sole proprietorship income) and the tax returns for corporations are due April 15.
Last chance for tax moves (December 31)
December 31 is the last chance to impact your tax return for the year. For example, making a sale on the last day of 2019 will apply to your 2019 income. If you wait until the new year, that income will go on your 2020 return. The end of the year is a good time to estimate how much tax you will owe. If it looks like taxes will be high, you may want to push for some extra tax breaks before the end of the year, like paying off some vendor invoices early, or buying new equipment using the section 179 tax deduction. On the other hand, if you don’t expect to owe much tax, you can delay these moves until the following year to save your deductions.
If you work with an accountant or use tax software, they can process most of the technical information for you. But you should still understand what’s going on with your bookkeeping. Not only will this give you more confidence in your company’s financial situation, but it will also help you strategize how to pay small business taxes, meet your deadlines, and get the most out of your tax deductions.
