After a long duration, lots of sleepless nights of planning, and years of toil, you are finally ready! Now is the actual time to kickstart your business!
Probably, tax payment is the last thing that would pop up in your mind. But the right way of doing it is by trusting us. It does not have to be a nightmare filing small business taxes when we help.
The sooner you plan it, the more you will save money and time.
Ready to learn how these small business tax deductions work?
WHAT DO YOU KNOW ABOUT SMALL BUSINESS TAXES?
STEP 1: CHOOSE YOUR BUSINESS TYPE.
The initial decision you will have to make as a small business owner is to decide how to organize your business. The legal structure affects not only the operation of your business but also your taxational structure. Small business falls under one of the following categories when filing taxes with the Indian Revenue System (IRS).
• SOLE-PROPRIETORSHIP
A Sole proprietorship, also known as sole tradership or proprietorship, is owned and run by one person in which there is no legal distinction between the business and entity owner.
In a sole proprietorship, the owner is personally responsible for any debts caused in the business. Because, according to IRS, the owner and the company are the same entity.
There is good news. This makes filing your taxes somewhat up straight! All that is needed is to use the Schedule C Form (1040) to report your business expenses while filing your tax return.
• PARTNERSHIP
A partnership is nothing but an association of two or more persons engaged in a business in which the profits and losses are shared equally. An accounting is provided between its business partners, an agency relationship between the partners. Individual partners could legally bind the partnership, and an individual partner’s liability for the partnership’s debts and obligations. Partnerships are very similar to sole proprietorships. The IRS taxes these businesses. Although, partnerships can have as many owners. All of the owners are personally liable for any debts in the industry.
A partnership is called a pass-through tax entity that reports its profits and losses on Form 1065. Instead of paying income taxes, the partnership passes the tax liability to its partners. Partners receive a Schedule K-1 from the firm to report their share of the profits and losses in their Form 1040 and pay the taxes as prescribed.
• C-CORPORATIONS (C CORPS)
A C-corporation is a business with no limited number of owners called shareholders. Each shareholder shares the company, and profits are distributed among them as ‘dividends. If the company owner actively works for it, he would generally receive a salary that would probably be reported on a W-2.
The IRS considers C-corporations and their shareholders as separate legal entities, which means taxing the company’s profits. The shareholders are taxed individually on distributing the profits. This is named a “double tax.” Double taxation may sound unpleasant, and a corporation has some benefits.
• S-CORPORATIONS (S CORPS)
S corporations are similar to partnerships, considering how they work. In S Corp, profits and losses are reported on a Form 1120-S but do not pay income taxes. Schedule K-1 is given to the shareholders by the S Corp to pay the income taxes on their personal Form 1040.
• LIMITED LIABILITY COMPANIES (LLCS)
The ability to structure your company as an LLC depends on what state you live in. Each state has different regulations LLC requirements that needs to be fulfilled. The IRS also treats an LLC differently based on its many members.
STEP 2: KNOW YOUR BUSINESS TAXES.
1. Income Tax
This would ease things with income tax. In the business world, this tax is on your business’s profits. Unless your business is registered as a corporation, you file your business income tax with your tax return as well. Corporations pay income tax as well the double taxation.
2. Self-employment tax
If your business is classified as a sole proprietorship, partnership, or LLC, you will have to pay the self-employment tax. As a self-employed individual, your Med-care and social contributions fall under this category. To make things easier, the IRS requires to make an estimated tax payment every quarter.
3. Excise Tax
If your business deals with certain products or services, you may pay an Excise tax, which is required regardless of your business structure. This tax is often built into the price of the goods or services provided. But you need to make sure to pass on these taxes along to the IRS using Form 720.
4. Sales tax
Most cities impose their own sales tax, so be sure you are well-known with your place and local tax laws. Sales tax is frequently built into the product’s price, and these business owners are liable for sending these tax payments to IRS.
5. Property tax
If the business involves a housing location, do not forget to include it in your property tax. This tax depends on the regulations enforced by your city or county, so keep in mind to brush up on your laws to adequately budget your small business property taxes.
STEP 3: KEEP GOOD TAX RECORDS.
This is primarily the crucial step to making sure your business remains successful. Considering your business structure and pay, you need to budget the taxes sufficiently.
STEP 4: TAKE THE FRUITS OF SMALL BUSINESS TAX DEDUCTIONS.
Tax deductions for new businesses are the IRS allows new business owners to deduct up to $5,000 of business start-up costs and $5,000 to organizational expenses. To get certified for this deduction, your start-up costs need to be a total of $50,000 or lesser than that. If not, your start-up costs can be reduced over 15 years, which means you can deduct a fixed amount of expenses each year.
Everyday business expenses you may deduct may include property rent, equipment purchased or supplies for your business, business travel expenses, business insurance costs, contract labor costs, etc.
How to start your small business tax preparation?
Now that you might know how to pay your small business taxes, it is time to put that knowledge into practice.
Remember, your business is the key to finding how you will pay your business taxes. Once you’ve determined your business structure, read the local tax laws and regulations to help you prepare an efficient and estimated tax budget. Do not forget to stay organized!
Keeping the records detailed will help you maximize your tax savings and minimize your business taxes. With planning and preparation, you’ll be a small business tax expert in no time!
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