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Filing business taxes may sound like a slog, but it doesn't have to be. If you know which forms to submit, and when the deadlines are, you can have the whole thing wrapped up within a few hours.
The secret to success? Use the right accounting software to track your expenses and income year-round, so you're never scrambling to gather up your paperwork in the last few weeks before a deadline.
We've already ranked the top small business accounting software services. Read on for more tax-specific advice, from the steps you'll have to take to the types of taxes to keep in mind.
In this guide:
- 4 Steps for Filing Business Taxes
- Use Accounting Software to Help
- How to Choose the Right Form
- Type of Tax to Pay
- Tax Deductions & Returns
- Still Need Help with your Business Taxes?
4 Steps for Filing Business Taxes
Handling tax season takes just four steps. You'll need to organize everything early, know which forms you need, fill them out, and submit everything before the deadlines.
Organize your Records
Poor record-keeping is the cause of most tax-related frustration. You'll want to keep a clean log of the three major components behind running a business: Expenses, income, and sales taxes. You'll need to give a full accounting of all three in your tax filing.
At the end of every day or every week, you should take the time to log what money has flowed in, and what has flowed out. Thankfully, the days of physical paperwork are behind us, and many small businesses will use a Point of Sale (POS) system that automatically registers sales and inventory. Most accounting software can keep track of them as well.
Once you've kept your records up, you're ready to figure out which tax forms to file that data with.
Find the Right Form
The IRS segments tax payments into the different forms you'll need to file for each. Here are the top four types of forms you should know when filing your own business taxes.
- Form 1040 — for your personal federal income tax returns
- Form 1065 — for reporting profits, losses, credits, and deductions for a business partnership; used by organizations including LLCs, religious nonprofits, and foreign partnerships with US income
- Form 1120 — for corporations; used for reporting gains, losses, income, deductions, credits, and income tax liability
- Form 1120S — a form specifically for S corporations, the term for corporations that have decided to pass their gains, losses, income, deductions, and credits through to their shareholders
- Schedule K-1 — for business partners to declare their share of the partnership's earnings, losses, credits, and deductions
You'll need to know which forms apply to your business it can easily be more than one.
File Your Taxes (or Fill in Your Forms)
You can file your taxes two different ways: By doing it online yourself, or hiring a tax preparer. Most accounting software will offer tax prep tools that can address all your business needs. You'll be able to track expenses and payroll throughout the year, with all the required information at your fingertips when tax season rolls around.
If that's the case, a tax preparer would just be doing the same work that you can do yourself with the right software and you're better off handling it yourself. With the right preparation, doing your taxes should be painless.
Still, hiring a third-party tax preparer can be very useful. Perhaps you're trying to do a year's worth of accounting at once and are feeling overwhelmed, or you have business needs or expenses that don't seem to fit into the typical categories supported by the most common tax forms.
If that's the case, you can find an IRS-certified tax preparer in your area with a search through the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
Watch out for Deadlines
Different tax forms are due at different times throughout the year. For business filings, the major dates to know are:
- February 1 – the deadline for filing Form W-2 for your employees and Form 1099-NEC for your independent contractors
- March 15 – the deadline for filing Form 1120-S for S corps, or Form 1065 for organizations and partnerships (or an extension for either form)
- April 15 – the deadline for Form 1120, as well as the usual deadline for individuals' tax return, unless it falls on a weekend
- October 15 – the extension deadline for C corps
In addition, some forms are filed quarterly rather than annually. The deadline for Form 941, for federal employment taxes, is set one month after the end of each quarter:
- April 30 – first quarter
- July 31 – second quarter
- October 31 – third quarter
- January 31 – fourth quarter
When applying for an extension, you'll need to submit an extension form by the same date as the deadline of the initial form that you're extending.
An extension will buy you an additional six months, but you'll likely want to avoid using an extension when possible you'll still need to pay the same amount eventually, so you're just adding another form to fill out. As a small business owner, your time is valuable, so you won't want to waste it.
Use Accounting Software to Help
So how can accounting software guide you through the tax process? The core value comes through how the right software tracks each individual expense as it occurs, slotting it into the correct tax category.
Track Your Expenses
As mentioned earlier, accounting software helps you track your expenses on a daily basis, automatically logging all the data you need with little to no work at your end. Common tax-related benefits include:
- Balance sheets
- Statements of cash flow
- Closed invoices
- Cost of goods sold (COGS)
- Customer reports
- Sales tax reports
- Budget overviews
The exact tax benefits behind each accounting solution will vary based on which brand you opt for, so be sure to check what features are offered before you commit to one. Some are better for some industries than for others: We've rounded up the top hospitality accounting software, for example, but other operations may find another solution best.
Even the more limited solutions should track sales tax, however, and a lot of software will automatically generate end-of-year reports that hold the exact data you'll need to enter in your tax filing. This includes your profit and loss statement, which will calculate your business's net profit (or loss) for the year.
Separate Out Business from Personal Expenses
The phrase “don't mix business with pleasure” has never been more true. You'll want to make sure no purchases for your own personal needs are written off as business expenses. If you're tracking both expenses simultaneously, the right accounting software can separate both.
One big issue is your home office. Particularly with the coronavirus pandemic, many people are working from a room in their home. But if the sole purpose of that room isn't for your office (do you eat there, too?), it can't legally be claimed. Remember these immortal words: You don't have to claim a home office if it means you'll go to jail.
Get all Your Deductions
So if you can't claim personal expenses, what can you claim? A lot more than you might think. Business owners can deduct a broad range of business expenses from four core categories:
- Office Office furniture, rented or owned equipment and supplies, utilities, telephone system, software subscriptions, and office rent
- Travel expenses Mileage, car repairs, ticket costs, hotel rooms, and business meals
- Home office Make sure you don't multi-task; keep your office for work activities only
- Insurance premiums
Your accounting software is unlikely to fully help you here: A tax preparer will be able to fill you in on which deductions apply to you. Once you have a full understanding of which deductions to claim, you can feel confident when filing for them in future years.
Stay Ready for an Audit
The IRS may audit your business at any time. If they do, your accounting software's automatic log of your day-to-day income and expenses will be incredibly useful.
Be sure to export the key annual or quarterly reports from your accounting software in order to have an easily searchable format on hand. We recommend saving them as .CSV files, although .PDFs are also common.
Integrate with Payroll Processing
Payroll software handles a small business's paychecks for its employees. Common features include support for pay stubs, auto-calculated taxes, end-of-year forms, and an online employee portal. More advanced services may include an option for same-day direct deposit, and even tax penalty protection.
This software isn't quite the same as accounting software, but the two go hand in hand. One popular accounting solution, QuickBooks, offers its own payroll solution as an add-on, while many others include third-party integrations that will centralize both services so that you'll have all the data in one location.
This comes in handy when you're filing, as you'll need to send each employee an accurate W-2 form by February 1 in order to ensure they're able to file their own taxes on time.
How to Choose the Right Form
If you don't know which tax forms to use, consider checking with a tax preparer who's familar with freelance or small business needs (whichever applies).
If you fall into one of the five categories below, however, you'll likely have between one and five specific forms to file directly with IRS. Read on for more information.
Self-employed individuals in the US must file Form 1040, for their individual tax return, and/or Form 1099-MISC, for miscellaneous income. Individuals must file form 1099 if they've earned a total of $400 or more from all sources that have paid them miscellaneous income and if you're self-employed, that's very likely you. Don't forget Schedule SE to Form 1040, which records your self-employment tax.
One additional form might apply to you as well: Form 8829, for a home office.
One-person businesses will need to file Schedule C to Form 1040 this covers their profits or losses from a sole proprietorship. The Form 8829 home office filing is even more likely to apply, too.
Form 1065 is the main form for business partnerships. You'll likely have a Limited Liability Company (LLC), which Form 1065 covers, although it also applies to religious nonprofit organizations, as well as any partnerships that have earned US income even if those partnerships are themselves located outside the US.
The forms required for a small business can vary depending on what type of business you're running.
If you have employees, you'll have to prepare a Form W-2 for each of them by February 1. And if you hired freelancers at any point during the previous year, they qualify as independent contractors, and will need a Form 1099-NEC filed for each by the same deadline (February 1).
You'll also need to pay the IRS all federal taxes withheld from employees' paychecks on a regular basis, along with a quarterly Form 941 filing.
The previous categories we've covered might fall under the “small business” umbrella, which means we've already mentioned which forms will be needed: Any LLC partnerships will require a Form 1065, while a sole proprietorship requires Form 1040‘s Schedule C. The other options are the two types of corporations.
A C corporation files Form 1120, while an S corporation files Form 1120S.
There's a big tax difference between the two: C corps pay the tax on their income, while S corps pass the tax on to all of their owners, who report it as personal rather than business income. In other words, C corps get taxed twice, while S corps get to pass their taxes through to be taxed once.
Type of Tax to Pay
One useful way to think about taxes is to divide them into the different types. You may have filed your business income, but you'll need to include your employment tax as well. Here's each tax type to know.
Income tax is the most common form of tax. All taxpaying US individuals, whether self-employed or employed by others, must report their personal income tax on a yearly basis wages, salary, and one-time payments that together add up to more than $400 are all included.
Similarly, all corporations, partnerships, and small businesses must report their business income taxes each year.
With some exceptions, businesses with employees must withhold employment taxes (Social Security, Medicare, and income taxes), sending them to the IRS regularly along with a quarterly filing using Form 941. This should be sent one month after the end of each quarter (so, April 30, July 31, October 31, and January 31).
The excise tax is a specific tax limited to a set list of goods, and is typically included in the full price when sold. The sellers then pass the tax along to the federal or state government. Taxes on motor fuel are the biggest example of excise tax, although liquor taxes and tobacco taxes are two other significant examples.
For this tax, you'll need to file another quarterly federal form: Form 720. Excise taxes can be imposed on the federal, state, and local level, so if you plan to sell gasoline, liquor, or tobacco products or any other goods or services taxed in your region you'll have to check which additional tax forms are needed.
Property taxes refer to any taxes paid on the assessed value of personal real estate, or personal property such as boats and cars. Property taxes are typically levied at the local level and sometimes on the state level, but are not part of federal taxes. You'll have to learn how your local government handles them if you're a homeowner.
Tax Deductions & Returns
Tax returns: They feel like free money, but they're really just the government giving you back all the withheld payments that you'd deserved the whole time. Look, we'll take what we can get.
What deductions do I qualify for?
Personal deductions can be claimed with the 1040 form. Business deductions can be claimed with the 1065, 1120, and 1120S forms, depending on your business type.
The list of possible business deductions is too long to get into fully, although we've covered the four main areas to consider: Office, home office, travel, and insurance premiums. Work-related education is another possible category, and personal deductions can include charitable contributions, as well as medical and dental expenses.
The term “tax relief” refers to government policies aimed at reducing the burden of paying taxes either by reducing the taxes themselves, or by giving individuals or businesses more time before their taxes are due.
An exemption allows individuals or businesses to remove a portion of their taxable income they still get the same income, but pay fewer taxes on it. For personal income tax forms, every dependant who lives with an individual qualifies that individual for an exemption.
Some businesses are tax-exempt organizations on a federal level, but many more fall under more limited state and local exemptions. These exemptions vary, but could mean that a small business in a certain publically beneficial industry or in an economically suppressed geographic location will qualify for exemption from local property taxes or state sales taxes.
Filing Tax Returns
Federal tax returns can be filed electronically and completely free of charge from the IRS.gov website. You can also use a variety of online tax submission services, or if you have a complex situation that you need guidance with, a third-party text prep service. Just make sure to start the process before your deadline starts to really loom.
Still Need Help with your Business Taxes?
The IRS website is a little formal, but it holds a lot of clear explanations and directions, as well as all the tax forms any business or individual will need in order to file a federal return. And if you still aren't sure which forms apply to your business needs or if you benefit from talking out your issues with a flesh-and-blood person you should schedule a visit with a local tax preparer.
Once you've figured out your taxes for this year, you're not entirely done: Keep in mind that you'll just have to do it all over again next year. Take the time to set up an easy process now, and your future self will thank you. Take notes on all the forms and deductions that you used, and consider trying an accounting software QuickBooks or FreshBooks both offer great functionality at a fair price.
With the right accounting software solution, you can track each and every sale from today until you hit the enter button on your final tax return submission in 2022.
- February 1 – Form W-2 and Form 1099-NEC are due
- March 15 – Form 1120-S and Form 1065 are due. This is also the deadline for filing an extension for either of these forms
- April 15 – Form 1120 is due, and on most years, so are employees' tax returns
- October 15 – extension deadline for C corps
That said, a third-party tax preparer can be helpful if you have a particularly complex challenge: Perhaps you incorporated or partnered, and don't yet understand how to proceed. In these cases, a tax preparer can bring you peace of mind, and we'd recommend talking to one.
You'll likely want to find a full breakdown of your state's approach to business taxes, as each one may be different, but that's beyond this article's scope. You're best off checking out your state on the IRS's roundup of state government websites.
The solution: File them anyway. You'll face an annoying penalty fee, but it's better than not filing at all, as you'll eventually get the IRS knocking on your door otherwise.
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