What You Need to Know About Small Business Taxes (USA)

by | Business Skills

It’s the start of a new year and if you have a small business in the United States, it’s time to start thinking of filing your taxes.

Of course you have a few months, but I’m a fan of getting started early.  I don’t like the pressure that comes from waiting until the last minute.  Also, accountants are less busy early in the year and get swamped as April approaches.  And if you file early in the year then your return, if you get one, will come much faster.

So get on it.  Although if you’re going to owe taxes, then I understand waiting to file and pay until the last moment possible.

When you own a small business, taxes is one of the things you have to deal with.  And if you’re really small with low revenues and few or no employees then you can probably save a few bucks by filling out and filing your business tax forms yourself.  All US tax forms for the current year can be found at the IRS website at the link below.

http://apps.irs.gov/app/picklist/list/formsPublications.html

First, though, let me tell you about my experience with business taxes.

The first year I had a business that actually had to file tax forms I was fresh out of college.  I had a good job in addition to my small business but I didn’t have a lot of extra cash.  I started this business with a couple friends but in the first year, it really didn’t bring in much.  In fact we were recording a loss that year, which meant we got to deduct that from our personal income on our taxes.  Yay!  But that also meant we really didn’t have a bunch of money laying around to hire an accountant.

So there I was, VP over finances and accounting (when you own the company, you get to be CEO, president, VP, or whatever you want!) and I had never done anything with taxes before.  That year, I opted to use my parents’ accountant for my personal taxes which was amazing because it gave me access to ask all sorts of questions, and I totally milked it.  I got him to explain to me all sorts of terms on tax forms that I didn’t understand.  He set me up with the right forms and straightened me out on some accounting mistakes I was making.  It was awesome!

The best part is, from then on I knew exactly how to fill out my business tax forms.  I gained confidence in my ability to comprehend IRS jargon.  And by the next year, I was doing all my own taxes both for my businesses and for myself.  This helped me not only save a few bucks on an accountant when I didn’t have extra to spare, but it also gave me a solid understanding of taxes and how they work.  As a business manager/owner, this understanding is so valuable as it allows you to actually strategize how you form and run your business to minimize how much you legally have to pay in taxes.  I’ve since been a part of a handful of start-ups where I could handle all of the business taxes in the early stages, before we were making any money.

I guess the moral of this story is that business taxes for small businesses really aren’t that complex, and if you want to take a stab at them, it’s definitely worth a shot.  So let me give you some direction to help you get started.

First, the forms.  These are the forms you will absolutely need to fill out for small businesses.

  • Sole Proprietorship: You just need to fill out the Schedule C of the form 1040.  That’s it.  And that one is pretty straightforward.  The instructions for that form are in a .pdf file on the IRS website at the link above.
  • Partnership: You need to start with the form 1065.  You’ll also have to fill out the form 1125-A.  This is the form where you calculate your cost of goods sold.  It’s also quite straightforward.  The 1065 can be a bit more confusing though.  You’ll also need to fill out a Schedule K-1 for each partner in the partnership.  This is the form that reports that partner’s share of earnings.  You’ll have to fill out at least these forms.  There are others you may need to fill out and attach depending on what type of business you have.  If you earn money through investments and have capital gains or dividends, there’s a form for that.  It can get complicated quickly so if you feel you’re in over your head, get help from a tax adviser.
  • So what about LLC’s?  LLC’s are really common these days.  They are great because they do a good job of protecting the personal assets of business owners.  So if your business gets sued, or if it goes bankrupt, your personal assets are mostly protected.  But for the purpose of federal taxes, an LLC is not a taxable entity.  In fact, it’s called a pass-through entity which means that all of its earnings are passed directly through to the owners and they are taxed as individuals.  What this means is that if you are the sole owner of an LLC, then file the Schedule C for the 1040 just like any other sole proprietorship.  And if your LLC is owned by multiple people, then you need to file the forms for a partnership.

Now please, don’t go away from this thinking that I recommend that you do your own taxes.  Tax forms and even the instruction pages are so complicated and full of jargon.  They’re really hard to understand unless you’ve been immersed in it.  Doing your own taxes puts you at risk of making mistakes that could be costly.  My point here is that in the early stages of a business, when the revenue is really low, your business taxes will generally be much simpler, and the cost of making a mistake is really low.  Not to mention that you’ll get the benefit of learning how taxes work for your business.

But please, if you get into it and determine that you’re in over your head, call a tax professional.  Good accountants, like good lawyers, are almost always worth more than you pay them.  Hiring an accountant will save you headache, help ensure that you get it right on your taxes, and probably save you a lot of money in the long run.  But if you hire an accountant, pick their brain.  Learn everything you can about how taxes work.  Listen to their advice.

Taxes make up the largest single expense for most companies and even individuals.  So paying a little up front to make sure you don’t pay more than you have to can be a great investment.  But if your small business can’t afford to pay an accountant, you might try working through the business forms on your own.  Who knows, maybe you’ll find you’re an accountant at heart.

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