How to Do Taxes for Small Business – Have you ever wanted to learn about how to file taxes for your small business? Or are you currently paying someone else to do it? But you don’t want to? Check out these how to do taxes for small business list of information.
How to do taxes for small business is something oftentimes people ask about. Tax experts are difficult to find these days. Business owners have to know how to do taxes for small business themselves. That being said, I’ve put together this article for you that outlines some of the commonly asked questions about how to do taxes for my small business.
Here are nine best practices for small business when it comes to tax preparation and small business accounting, and working with an accountant or financial professional.
Table of Contents
1. Hire the right accountant
Your accountant should offer to do more than just prepare financial statements and do your taxes, says Chandra Bhansali, co-founder and CEO of Accountants World. If that’s all they offer to do, then they aren’t the right accountant for a small business, Bhansali says.
Your accountant should work with you throughout the year to track income and spending, to make sure you don’t have a cash flow problem, and to monitor your gross and net profits, Bhansali says. Work with your accountant from day one of opening your business, not just in March and April for tax season. “Most small businesses don’t understand the importance of accounting for the survival and growth of their businesses,” he says.
2. Claim all income that is reported to the IRS
The IRS gets a copy of the 1099-MISC forms you receive so they can match the income you’ve reported against what they know you’ve received. Make sure the income you report to the IRS matches the amount of income reported in the 1099s you received, Blake says. Not doing so is a red flag for the IRS. Even if a client doesn’t send out a 1099, you still need to report that income. The same rules apply with state taxes, he says.
3. Keep adequate records
Keeping thorough and accurate records throughout the year will ensure your tax return is correct. With inadequate record keeping, Blake says, you could be leaving deductions on the table or, worse, you could be putting yourself at risk for an audit. Blake recommends every business invest in a basic version of an accounting software because it is user friendly, inexpensive, and helps you keep track of all your income and expenses.
4. Separate business from personal expenses
If the IRS audits your business and finds personal expenses mixed with business expenses, regardless of whether you reported business expenses correctly, the IRS could start looking at your personal accounts because of commingled money, Blake says. Always get a separate bank account and credit card for your business and run only business expenses through those accounts.
5. Understand the difference between net and gross income
If your product costs more money to make than you charge for it, you will lose money regardless of how many units you sell. Small business owners often forget to take into account the difference between their net and gross income, Bhansali says.
For instance, if it costs $100 to make your product and you sell it for $150, your gross income is $50. But, he says, after you deduct your expenses, your net income might drop to $10. “It’s important to know what your gross and net profits are so you can be more profitable and grow your business,” Bhansali says.
6. Correctly classify your business
Failing to properly classify your business could result in overpaying taxes, Blake says. Deciding whether to classify your company as either a C Corporation, S Corporation, Limited Liability Partnership, Limited Liability Company, Single Member LLC or Sole Proprietor will have a different effect on your taxes. It’s important that small businesses consult with an attorney and accountant to determine how their businesses should be classified.
7. Manage payroll
Blake recommends hiring a company to assist with payroll – but be sure that the company is reputable. To save money, some business owners will hire a lesser-known payroll service, only to find out later the service wasn’t remitting payroll taxes for the company. If that happens, Blake says, the business owners are on the hook for the payroll taxes. The IRS typically checks every quarter to see if payroll taxes have been paid.
8. Seek your accountant’s advice on your business plan
A good accountant gives you advice on how to grow your business, Bhansali says. Seek their advice to determine how much to contribute to your retirement fund and whether you should take a bonus or delay it a year. Your accountant can tell you if buying a small space for your store or business – rather than renting – could save you money.
9. Take advantage of capitalization rules
If you acquire a tangible piece of property or equipment for your business, you may be able to take a significant deduction. Make sure your accountant understands the rules around capitalization.
How to do taxes
Step 1—Collect your records
Gather all business records. Before filling out any tax form to report your business income, you should have all records in front of you that report your business earnings and expenses.
If you use a computer program or a spreadsheet to organize and keep track of all transactions during the year, calculating your income and deductions is much easier than trying to remember every sale and expenditure that occurred during the year. TurboTax works with programs like QuickBooks and Quicken, so you can import information directly into your tax return.
Step 2—Find the right form
Determine the correct IRS tax form. You always need to report your business earnings to the IRS and pay tax on them, but choosing the right form to report earnings on depends on how you operate your business.
Many small business owners use a sole proprietorship which allows them to report all of their business income and expenses on a Schedule C attachment to their personal income tax return. If you run the business as an LLC and you are the sole owner, the IRS also allows you to use the Schedule C attachment. However, if you use a corporation or elect to treat your LLC as one, then you must always prepare a separate corporate tax return on Form 1120 (or Form 1120S if you are an S-Corp).
When you use TurboTax Home & Business (sole proprietors and contractors) or TurboTax Business (corporations, LLCs and partnerships), you just need to answer simple questions about your business income and expenses, and we’ll fill in all the right forms for you.
Step 3—Fill out your form
Fill out your Schedule C or Form 1120. If you will be reporting your business earnings on Schedule C, you can search the IRS website for a copy or use TurboTax to generate the form for you after you input all of your financial information.ALSO
Schedule C is a simple way for filing business taxes since it is only two pages long and lists all the expenses you can claim. When complete, you just subtract your expenses from your business earnings to arrive at you net profit or loss. You then transfer this number to your personal income tax form and include it with all other personal income tax items.
However, if you use a Form 1120, you calculate your taxable business income in the same way, but the form requires more details that may not always apply to a small business. The biggest disadvantage of filing a Form 1120 is that it is separate from your personal income tax return.
Step 4—Pay attention to deadlines
Be aware of different filing deadlines. When you use a Schedule C, it becomes part of your Form 1040 and therefore, no separate filing deadlines apply. It is generally subject to the same April 15 deadline.
If you are taxed as a C-Corp, you need to file a Form 1120, you must file it by the 15th day of the forth month following the close of the tax year, which for most taxpayers is April 15. If you are taxed as an S-Corp, you need to file a Form 1120S, you must file it by the 15th day of the third month following the close of the tax year, which for most taxpayers is March 15. You cannot send this form to the IRS with your personal income tax return.
Conclusion:
The process of learning how to do your own taxes for small business can be tough. I know, because I used to help complete people’s taxes. But once you learn how to do your own taxes for small business, you’ll never have to be dependent on the expensive cost of an accountant to complete your paperwork.