If you’ve recently launched a small business, navigating the world of taxes can feel overwhelming. From choosing the right structure to filing tax returns and making estimated payments, the process involves more than simply reporting profits. It’s about understanding your responsibilities, meeting deadlines, and making smart decisions that support your business’s financial health.
Filing taxes is a crucial aspect of this process, as it involves specific requirements and procedures that vary depending on your business structure.
At Walters Accounting, we like to help new business owners build a strong foundation by demystifying tax requirements. In that spirit, we offer this brief guide as a practical overview of what to expect and how to prepare.
Understanding Small Business Taxes
Small business taxes include more than just filing federal income taxes. As an owner, you’ll need to report income and expenses, pay self-employment taxes, and remit payroll taxes if you hire staff. Also, understanding how and when to pay taxes is important, particularly for small businesses that may need to make quarterly estimated payments. Keeping accurate records from day one will help you be prepared when ready to file a return, take advantage of deductions, and avoid unexpected penalties.
As we’ve mentioned frequently in our articles, this is important not just for compliance reasons, but because it helps set the stage for creating habits that support long-term financial stability. And even if you’re not ready to work with a full-time accountant (as smaller businesses often feel in the beginning), having a tax professional walk you through the process early on can help you avoid mistakes.
Choosing a Business Structure
One of the first and most important decisions you’ll make is choosing a business structure. It’s a choice that affects how you’re taxed, how you report income, and what deductions you’re able to claim.
A sole proprietorship is the simplest option and often used by freelancers and consultants. Your business income is reported directly on your personal tax return using Schedule C, and you’re responsible for self-employment taxes.
Limited Liability Companies, or LLCs, offer liability protection while allowing income to “pass through” to the owner’s tax return. Depending on your setup, an LLC can be taxed as a sole proprietorship, partnership, or corporation, offering flexibility based on your growth and goals.
If you form a corporation, the structure becomes more complex. A traditional C corporation pays its own taxes on profits, and shareholders are taxed again when they receive dividends (known as double taxation) with these taxes reported on their personal returns. This requires filing specific tax forms and adhering to additional IRS regulations. While corporations are typically used by larger entities, they can exist with smaller employee bases.
An S corporation can avoid the “double taxation” issue by passing income directly to the owners who report it on their personal returns. Profits in this situation will only be taxed once at the personal level, offering an obvious tax advantage.
The structure you choose should align with your business model, long-term goals, and tax strategy. It’s wise to revisit this choice periodically, especially as your business changes or grows.
S Corporations and How They’re Taxed
As we mentioned, for some small businesses, choosing to be taxed as an S corporation can give tax advantages. With this structure, the business itself doesn’t pay income tax. Instead, its profits pass through to shareholders, who then report this share of income on their personal returns using a Schedule K-1.
S corporations must file an annual return using Form 1120S, which reports the company’s income, deductions, and shareholder information. If you’re both an owner and an employee, you’re required to pay yourself a “reasonable” salary that’s subject to employment taxes. Any remaining profit can be distributed as dividends, which may be taxed differently on your personal return.
While S corporations can help reduce overall tax liabilities, they also come with added administrative tasks and compliance requirements.
Meeting Federal Tax Obligations
No matter what your structure, every small business is responsible for federal tax obligations. These typically include income tax on profits, self-employment tax (which covers Social Security and Medicare), and, if you have employees, payroll taxes.
Self-employed individuals (you are the business!) often forget that they must cover both the employee and employer portions of Social Security and Medicare taxes. That’s what makes self-employment tax higher than it might seem at first glance. Understanding how this works helps you prepare for a tax bill and avoid surprises. Unlike W-2 employees who share this tax burden with their employer, sole proprietors are responsible for both the employer and the employee’s share of self-employment tax when filing their taxes.
While not always adhered to, the best strategy is to set aside a percentage of your income throughout the year to make quarterly estimated payments. That way, you’ll be ready when it’s time to file and avoid penalties for tax underpayment. For small business owners, accurately estimating quarterly taxes is important to comply with IRS standards and avoid potential penalties. Outside tax advice for this can help.
Employment Taxes: Know Your Responsibilities
Once you begin hiring employees, the tax picture changes. As an employer, you’re required to withhold federal income taxes and Social Security and Medicare from your employees’ wages. You must also contribute the employer portion of those payroll taxes and submit both regularly.
In addition to employment taxes, small businesses must collect and remit sales tax to the government. This state tax applies even to ecommerce businesses without a physical presence, with the frequency of filing sales tax returns depending on the state.
Beyond that, employers are responsible for unemployment taxes and for issuing W-2 forms to employees at the end of each year. Failing to submit these forms, or missing a quarterly tax deposit deadline, can result in penalties. Accurate, consistent payroll records are key.
Here’s a tip for new small businesses: Many owners choose to work with payroll services or tax professionals to streamline this process. Investing in help early can save time, money, and certainly frustration later.
Business Records and Accounting: Keeping Accurate Records
For small business owners, keeping accurate and detailed business records is non-negotiable. These records help you track your income and expenses, ensuring you pay the correct amount of taxes and take advantage of all eligible tax deductions and credits.
You should meticulously document all business transactions, including income, expenses, and payroll. Retain all business-related receipts and invoices, as these will be crucial when preparing your tax return. Using accounting software like QuickBooks or Xero can simplify this process.
Remember, it’s important to keep your business records separate from your personal ones. As a small business, use separate bank accounts for your business transactions so you can have a clearer financial picture of your “business” activities. It will give you a better view of your company’s position, so you can make better decisions and stay in line with all tax laws.
Tax Deductions and Credits: Maximizing Your Savings
Tax deductions and credits are necessary for reducing your tax liability and maximizing your savings. Common deductions for small businesses include expenses such as rent, utilities, equipment, payroll taxes, and employee benefits. While not as obvious, other deductions that can be claimed can include tax credits such as research and development costs or the work opportunity tax credit (used by employers who hire individuals from certain groups who face barriers to employment).
Filing and Compliance: Stay Organized
Tax filing is an ongoing responsibility and not just a once-a-year event. You need to understand the requirements for your specific business structure. So, depending on the structure, different forms are filed such as:
- Sole Proprietors need to file a personal return (Form 1040) along with Schedule C to report business income and Schedule SE for self-employment taxes.
- Partnerships and Multi-Member LLCs file Form 1065.
- C Corporations file Form 1120.
- S Corporations file Form 1120S.
Employers must also file quarterly reports, year-end forms like W-2s or 1099s, and payroll-related documentation. Using accounting software can help streamline these processes, but having a qualified external advisor may be the right choice for a business.
Tax Audit and Preparation: Be Ready for Scrutiny
For a small business owner, tax audits are real possibilities. They can be stressful and time-consuming, but good preparation can minimize the burden.
An audit can be triggered by various things, such as discrepancies in your tax returns…or failure to even file a return. Implementing internal controls and procedures can also help you stay compliant and reduce the risk of a tax audit. And again, having accurate and detailed business records is your first line of defense. Be mindful of following all local, state, and federal tax regulations.
If you are sent an audit notice, respond promptly to requests, and provide all required documentation and information. Consult a tax professional who can help you prepare and represent you before meeting or speaking with any official tax representatives.
Resources and Tools for Business Owners
We want to share an additional resource to make sure your business tax processes are done right. The IRS offers a robust Small Business and Self-Employed Tax Center, with forms, publications, and tools. You’ll find worksheets, calculators, and even instructional videos to support tax compliance. (They even offer these resources in a variety of languages beyond English, including Spanish, Chinese, Korean, Russian, and more.)
Final Thoughts on Small Business Taxes
Taxes are a fact of life for every business owner, but they don’t have to be a source of stress. With the right structure, clear recordkeeping, and a proactive tax plan, you can stay compliant and build a profitable and sustainable business.
And we’re here to help. Walters Accounting can guide small businesses through each step—from business formation to filing, and everything in between. Whether you’re filing your first return or rethinking your tax strategy over time, we help you make confident, better-informed decisions that will move your business forward.
