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The Ultimate Guide for Filing Taxes as a Small Business Owner

by Mike Abelson   January 11, 2016
Everything you need to know about hiring someone to do your small business taxes or doing them on your own.
Best Practices January 11, 2016

 

While tax day for most small businesses isn’t until April 15, there are forms you may need send out before then. If you hired contractors, then you need to send them their 1099-MISC by February 1. If you run a corporation or S corporation, then your taxes will be due on March 15. No matter what type of business you run, chances are you have tax due dates creeping up quick.

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It can be very hard to keep up with all of these dates and forms. Good news: You don’t have to.

Here’s why it’s smarter to have someone else do your small business taxes:

  • You probably won’t be audited, and it’ll be a smoother process if you are.
  • You’ll save money in the long run.
  • Everything will be more organized.
  • You’ll save a lot of time.
  • You’ll be better prepared for next year.

We just made five bold claims. Give us the chance to explain ourselves.

Less Fear of Being Audited

Stress can lead to weight gain, anxiety, depression, heart disease, memory loss, and other bad stuff that’s better to avoid. Since filing your taxes is one of the most stress-inducing activities of the year – largely because of your healthy fear of being audited – it makes sense to have someone else do it.

If you hand your books over to an expert, chances are you won’t end up being audited. Tax professionals know what the IRS looks for. They know how to reduce the odds that your company will be selected for a more thorough examination by Uncle Sam.

Of course, it could still happen. So you’ll want to go with someone that offers guaranteed audit support. That way you won’t be on your own if the IRS does select your company for an audit.

A Smart Investment

A tax pro might be better at finding special deductions, credits, and refunds for your company. These can often save you more than you paid to have your taxes done. If you file on your own and mess up, there’s a chance you could be fined and have to pay even more.

Everything Where It Belongs

There’s something satisfying about looking at a box of unorganized financial papers and knowing that you won’t have to be the one to sort through it. Depending on the type of tax professional you get, they may be willing to organize your books as they go. That means it’ll be easier for you examine 2015’s numbers after they’re done.

Time Saved

If you don’t have a lot of experience in accounting, then it’ll take you a frustrating amount of time to file your taxes. Only you know how much you value your own time. But I’m going to guess that it’s worth more than whatever you’ll pay to have your taxes done.

Consider this:

Here are some of the forms you may need to fill out depending on your business:

  • 1120, 1120s, and 1120-F – To report losses, dividends, deductions, credits, and incomes of corporation shareholders.
  • 7004 – A three-part form used to apply for a tax extension.
  • 1041 – To report income or losses from an estate.
  • 720, 2290, and 8849 – For everything from taxes on heavy highway vehicle use to refunds for excise taxes.
  • 1099 – Information returns used to report income received from sources outside your business.

This non-inclusive, headache-inducing list is indicative of the hours you will might spend filing your small business’s taxes if you do it on your own. Or you could let someone else do it.

Do It Yourself Next Year

If you let someone else file your business taxes this year, you’ll be better prepared for next year. That doesn’t mean you have to do it yourself next year, but if you do decide to file on your own, all of your financial information from 2015 should be very accessible, since it was professionally filed.

Choosing the Right Tax Professional

Work together for your small business taxes

 

You might be skeptical that it’s easy to find a tax professional for your small business. But it is. Sure, some companies have a full-time accountant that’s in charge of taxes. That makes sense for their business, but if you’ve gotten by without an accountant this long, then chances are you’d be better served by a temporary tax professional, or someone that’ll just handle your books during tax season.

Finding one doesn’t have to be tricky. There are plenty of big names out there who are ready to help. I’d recommend going with a company that you’ve heard of before. Remember, you’re going to be handing over a lot of sensitive information and you don’t want just anyone looking at your books.

We would recommend a tax professional, but that’d look fishy because you’d assume we were getting a cut of their profits. Instead, we’ll just recommend that you don’t get too hung-up on finding one. Compare a few of the most popular options and go with the one that makes the most fiscal sense.

Types of Business Taxes

The taxes you pay and how and when you pay them will depend on what type of business you run. The IRS lists five types of business taxes you might need to pay:

1. Income Tax - Except for partnerships, all businesses must file an annual income tax return.

2. Estimated Taxes - Using the previous year’s tax return and the IRS worksheet found in Form 1040-ES, you pay an estimated one-fourth of what you might owe the IRS at the end of the current year. Small businesses usually need to make estimated tax payments if they will owe the IRS more than $1,000 when filing their returns. Since it is an estimate, you could overpay, but get a refund from the IRS later. However, you could also underpay and need to pay extra later. 

3. Self-Employment Tax - If you work for yourself, you pay a Social Security and Medicare tax which contributes to your Social Security coverage. You must typically pay self-employment tax and file the IRS Form 1040 if your net self-employment earnings are over $400 or if you work for a church or a qualified church-controlled organization that chose an exemption from social security and Medicare taxes and also makes more than $108.28. The IRS defines self-employed as:

  • Doing a trade or operating a business as a sole proprietor or an independent contractor
  • Being part of a partnership that engages in a trade or business
  • Being in business for yourself (even if it is just a part-time business) in some other way

4. Employment Taxes - If your business has employees, you must pay employment taxes. These include Federal income tax withholding, Medicare and Social Security taxes, and Federal unemployment (FUTA) tax.

5. Excise Tax - Businesses that manufacture or sell certain products, operate certain types of businesses, receive payment for certain services, or that use various kinds of equipment, facilities, or products pay excise taxes. For example, there are excise taxes on vehicles which operate on public highways.

Plan for your annual small business taxes

Annual taxes or quarterly taxes?

Every business is required to file an annual tax return. Some businesses also need to pay quarterly taxes. These payments are due April 15, June 15, September 15, and January 15.

As stated above, those who are self-employed or run a sole proprietorship that has operated for 12 months and is earning an income from the business must pay taxes quarterly based on the previous year’s income. There are a few exceptions:

  • if you haven’t been operating a full year OR
  • if you operate on a net loss OR
  • if you earned less than $600 the previous year from the business

Apart from paying quarterly business taxes, you may also need to file payroll taxes. If you have paid employees, you must withhold taxes from their paychecks. These taxes must be paid within a certain amount of time (depending on the amount), and you must file federal payroll tax returns. The most common tax form is Form 941. It must be filed within one month of the end of each quarter - April 30, July 31, October 31, and January 31.

Save money on small business taxes

Six Tips to Help You Save Money on Your Small Business Taxes

Not every small business pays the same types of taxes or the same amount of taxes. Small business taxes for a restaurant cover certain items specific to the restaurant industry. In the same way, small business taxes for a contractor are different from small business taxes for a trucking company. Below are a few tips for saving money on small business taxes.

1. Claim your home as a deduction

Small business owners need every tax advantage they can get. Small business taxes for a home-based business can take advantage of the home office deduction. If part of your home is used for your small business, you might be able to use the home office deduction. It is available to both homeowners and renters. Costs like mortgage interest, utilities, insurance, repairs, and depreciation can be deducted.

2. Deduct the self-employment tax and health insurance costs

As stated above, workers who are classified as ‘self-employed’ must pay the self-employment tax. However, the self-employed can also deduct the employer-equivalent portion of the tax when calculating their adjusted gross income. The deduction does not affect either your net earnings or the self-employment tax, but only affects the income tax.

Small business taxes for the self-employed may also involve deductions for health insurance. According to Section 2042 of the Small Business Jobs Act, the self-employed can deduct the health insurance costs. If used, this deduction becomes a part of net earnings

3. Taxes on restaurant tips

Restaurant owners pay taxes on the restaurant’s income as well as payroll taxes. However, since tips are usually subject to withholding, small business taxes for a restaurant also covers tips. You must claim and pay taxes on employees’ income from tips. These can be collected either from wages or other funds that employees make available.

Your employees also need to report their tips to the IRS using Form 4070 (Employee's Report of Tips to Employer). It is due on the 10th day of the month after the month in which the employee received the tips. Unless an employee receives less than $20 in tips in a given month, they must report their tips.

4. Small business taxes for a trucking company

Individuals or small businesses who operate heavy trucks with a taxable gross weight of 55,000 pounds or more must file IRS Form 2290, Heavy Highway Vehicle Use Tax Return “the last day of the month following the month in which you first used the vehicle on a public highway during the taxable period.” However, there are a few ways to get tax credits on heavy trucks:

  • If a vehicle is driven 5,000 miles or less (7,500 for agricultural vehicles) during the reporting period, you can claim a suspension. However, if the vehicle goes over that mileage, you must pay the taxes.
  • If a vehicle is destroyed, stolen, or sold, you can claim a credit for taxes paid on it.
  • If you are approved for and take part in a state vehicle replacement incentive program, you could be eligible for a tax credit or refund.

5. Be charitable (even to your yourself)

Giving is good for business, especially at tax time. You can take deductions for donating money, supplies, equipment, or property. In certain cases, gifts to employees, like bonuses, can be deducted. Also, money spent on personal enrichment for the sake of your business (classes, seminars, training), may be deductible.

6. Use a tax professional

Although the tips listed above helps with small business taxes, a tax professional offers additional expert assistance. Even if you have done your personal taxes your entire adult life, business tax returns are very different and more complex. As a result, it may be wise to use the services of a professional tax preparer.

When choosing a professional to help you with your small business taxes, check out their history and qualifications. Also, be sure to ask about their fees for preparing small business taxes. Once you choose a tax pro, you will need to hand over any records and receipts. In addition, always review any forms the tax preparer asks you to sign. Lastly, never sign a blank tax form.

Avoid an IRS small business audit.

How to avoid an IRS audit

Few things strike fear in the heart of small business owners like the words IRS Audit. Although the government has every right to audit small businesses, it rarely happens. However, if you still have a nagging fear, here are tips to avoid an IRS audit:

  • Check the numbers - Making mistakes is easy, especially if you are a new small business owner and are unfamiliar with business taxes. Double check your numbers or a have a professional review them.
  • Maintain good records - Document everything and keep all business receipts.
  • Don’t take illegitimate deductions - To claim the home deduction, you need a dedicated room that’s used for business. Also, claiming excessive expenses could cause an audit.
  • Keep business funds separate - Consider opening a separate bank account dedicated to business expenses and income.
  • Pay your small business taxes - You should make quarterly tax payments if your business taxes exceed $500 by year’s end.

IRS penalties and how to avoid them

If the IRS finds you noncompliant or negligent with your small business taxes, you could face a number of penalties, depending on the infraction. All of the following result in IRS penalties:

  • Underpaying - Paying less than 90 percent of your current tax bill.
  • Failure to file (late filing) - Not filing taxes by the due date brings a 5 percent monthly penalty which can add up to a maximum 25 percent penalty. Avoid this penalty by filing on time, even if you know you cannot pay all your small business taxes.
  • Failure to pay your penalty (late payments) - The IRS adds a penalty of 0.5 percent to 1 percent for every month that your tax bill is not paid on time.
  • Payroll tax penalties - Unpaid payroll taxes can bring three major penalties - failure to file, failure to deposit, and the failure to pay. These three could add up to about 33 percent (plus interest).
  • Inaccurate payments - Claiming invalid deductions that cannot be documented or failing to report all income can result in a 20 percent penalty.
  • Deduction errors - Making deduction claims you can’t back up can bring a 25 percent penalty. Avoid this by keeping good records.
  • Tax fraud (civil fraud) - If the IRS believes you purposely and fraudulently underreported income, you will face a 75 percent penalty of the underpaid amount.

One of the easiest ways to avoid penalties is to double-check everything before filing your small business taxes. If you are still not confident that your business tax return is correct, consult a tax professional.

Small Business Tax Scams

 

Perhaps no time of the year brings the cyber-thieves out quite like tax season. These crooks come prowling for your personal information, and if you let them, they’ll take everything from you. Fortunately, it’s possible to defend against them. Here are some tips on how to avoid the scummiest small business tax scams.

The Unexpected Refund

You get an email, phone call, text message, or letter telling you that you that the IRS owes you a tax refund. The message looks official. If it’s a phone call, the caller ID might show “IRS” because the scammer is using phone spoofing tools.

To get your refund, you have to give the scammer some of your most sensitive personal data, like your bank account information and Social Security number. They use this information to ruin your life.

Their primary goal is to get enough information from you to drain your accounts. Some of the time, these people are calling you from another country. It’s very low risk for them.  Even if you catch them in the act, there’s little chance anyone will be able to trace it and find them.

Speaking of refunds, sometimes these crooks will use your personal information to file a return in your name and then pocket your refund for themselves. You can stay a step ahead of this scam by getting an identity protection PIN (IP PIN).

The Unveiled Threat

In this one, the scammer poses as the IRS, but instead of tempting you with a refund, they try to scare you into divulging your information. The scammer will tell you that you owe a certain amount of money to the IRS. For added legitimacy, he might even rattle off some of your personal information. Don’t be fooled.

If you send any money, you’ll never see it again.

According to irs.gov, here’s a list of what the IRS will not do (so if someone calls you and does one or more of these, then they are not from the IRS):

  • Request immediate payment over the phone
  • Not let you appeal the amount you owe
  • Make you pay your penalty through a particular payment option (e.g., prepaid debit card)
  • Inquire about your debit card or credit card numbers over the phone
  • Threaten to have you arrested if you do not pay your penalty

The scammers can be incredibly intimidating. It’s up to you to keep your bearings and know when to hang up.

If someone calls you and claims to be from the IRS, you should end the call immediately and reach out to the IRS directly.

The Unaffordable Care Act

Everyone knows you need health care or you’ll get penalized on your taxes. So, when a “tax preparer” calls you up and says you’re in trouble for not having health insurance, you might just believe them.

The scam happens when they aren’t authorized to accept the penalty money. And most of the time you probably don’t owe a penalty in the first place.

Once again, the best way to deal with this situation is to hang up the phone. If you already have a tax professional, you can ask them to take care of it. He or she should be able to steer you away from the scammers. If you are filing your taxes, then you’ll need to be careful.

Our list of tax scams certainly isn’t comprehensive. So stay vigilant and keep an eye out for those scammers.

Getting Started on the Right Foot

Fraud isn’t the only annoying thing about taxes. If you don’t make the right preparations, the entire process can be very frustrating. As you work toward your filing date, keep these prep tips in mind:

  • Decide right now when to set your personal due date. (By the way, it shouldn’t be the day they are legally due.)
  • Figure out if you want to have a professional do it. Last year we made our case for why you should never file your small business taxes on your own. We stand by that.
  • Be ready for an audit even if you don’t get one. You should file your taxes like you’re planning on the IRS knocking on your door the next day to look at the books.

Most importantly, get started now. A lot of these scams require the victim to be a little out of touch with their current tax situation. If you’ve already filed and got your refund, then you won’t fall for half of the tax scams out there.

Tax season is stressful, but less so when you keep your finances separate from fraud. Hopefully, these tips will help keep your personal information safe.

If you think the scammers already got to you, then reach out to the IRS immediately. You can call them at 800-829-1040. You can also stay up to date on the latest tax scams and consumer alerts here: https://www.irs.gov/uac/tax-scams-consumer-alerts.

Mike Abelson   Lendza Marketing Manager
Digital Marketing
Mike enjoys helping entrepreneurs and startups succeed through smart and innovative marketing strategies. He’s partnered with CEOs and executives to grow businesses from the ground up. Mike believes that the customer is a company’s most valuable asset. When he’s not traveling for work, he enjoys reading adventure and science fiction novels.

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