Small business owners face a multitude of decisions and responsibilities. Those range from deciding on vendors to basic brand building and advertising choices.
If you have employees, it gets even more complicated as you go through the hiring and training process. Then, you get to deal with the joys of payroll and fielding all the questions your employees will inevitably ask you.
Yet, lurking behind all of this frenzied activity is the specter called taxes. It’s also unfortunately easy to make mistakes on your taxes. If you’re worried about doing your taxes, keep reading for our small business tax guide.
Sole Proprietorships
Believe it or not, sole proprietorships make up the vast majority of small businesses at a little over 70 percent. On the tax front, there is good news and bad news.
Let’s start with the good news. When your run a sole proprietorship, you file it once a year as part of your personal taxes. That spares you some of the hassles you’ll see later with other types of small businesses.
The place in your personal taxes that you list all of the business information, such as profits or losses, is a Schedule C.
Don’t let the simple name fool you. It’s a fairly extensive form that includes:
- Address
- TIN or social security number
- Gross income
- Expenses
Now, the bad news. You must pay self-employment taxes of 15.3 percent.
There is also no legal separation between your personal assets, like your home, and your business assets. That means you can potentially lose your personal property if your business loses in a lawsuit.
While that has no immediate tax implications, it will if you lose everything.
Partnerships
Partnerships are a little trickier and, more often than, only apply to people in a handful of specific professions. These business structures are common in the legal profession, accounting, and engineering.
Partnerships come in two main forms: limited partnerships and limited liability partnerships.
In limited partnerships, there is one person who retains overall control of the business. This is the general partner. Everyone else is a limited partner who typically makes a financial investment and gets a piece of the profits in return.
In limited liability partnerships, all partners get a voice in the business decisions.
On the business taxes front, the business issues a K1 form to everyone. You typically file your taxes in the same way the owner of a sole proprietorship files their taxes, except you report on a Schedule E.
General partners must typically pay self-employment taxes as well. Limited partners may become subject to self-employment taxes, but only for guaranteed payments.
Limited partners generally enjoy the protection of their personal assets if the business gets sued. A general partner can still lose their personal property.
Limited Liability Company
Another popular business structure for small businesses is a limited liability company. These companies operate as pass-through entities in terms of taxes.
That means that the LLC members — which may only be you — report earnings and losses on their personal taxes. If you are the only member of the LLC, the IRS treats you like someone who runs a sole proprietorship. You report your taxes on a Schedule C.
If there is more than one member to the LLC, the IRS treats it much as it would a partnership arrangement. You’d report the profits or losses on a Schedule E.
Unlike partnerships, all members of an LLC must pay self-employment taxes on their income from the LLC.
LLCs do, however, shield everyone’s personal assets in the event of a lawsuit or if the business goes bankrupt.
S Corporation
An S corporation differs from an LLC in a number of meaningful ways, but it also works as a pass-through entity. That means the company doesn’t pay any company taxes on the profits.
You report your income from the business once a year on your personal taxes. S corporation profits and losses also go on the Schedule E form when filing.
S corporations provide similar liability shielding to personal assets.
C Corporation
Of the approximately 30 million small businesses in the US, only 1.4 million of them are C corporations. Part of that stems from the more complicated and expensive tax requirements.
A C corporation must pay income taxes as an entity. The federal tax rate for C corporations is 21 percent. You file a Form 1120 with the IRS.
If your corporation pays out dividends, those dividends are also taxable. You report ordinary dividends on your 1040 in the provided box 3b for anything under $1500. For anything over $1500, it goes on a Schedule B form.
All qualified dividends go right into box 3b.
State Taxes
State taxes can vary a lot for the different business structures. Some states are tax-friendly to things like sole proprietorships, LLCs, and S corporations. Others are less tax-friendly.
Make sure you understand your state tax obligations or get tax advice from a tax pro.
Employees
Things get trickier when you get employees. It’s on you to deal with withholdings like income taxes and FICA taxes.
Tax Preparation
Sole entrepreneurs and single-member LLCs can often get away with handling their taxes with help from tax prep software. If you run a multi-member LLC, S corporation, partnership, or C corporation, you’ll almost certainly want help from tax preparation pros.
If your business has employees, the taxes can get tricky. Again, you’ll want help from a tax pro if only to help set things up.
Using this Tax Guide
Tax codes are extremely complex and easy to misinterpret. This tax guide offers you a starting point for understanding what kinds of taxes and forms you must keep in mind. It’s not the final word on taxes, since tax codes change on regular basis.
If you’re in doubt about what taxes you owe or which forms you should use, get help from a tax professional. They’ll know what forms you need and can calculate what taxes you owe.
Looking for more business finance advice? Check out the posts over in our Business section.
