Along with the independence of owning your own business comes a greater level of responsibility. One of those responsibilities is paying business taxes. The business taxes you file will depend on whether the business is a sole proprietorship or whether it has corporation status. Many business owners find that hiring tax help is a worthwhile investment, and work with financial advisors to align their tax strategies to manage financial assets and maximize income. Let’s break down your tax obligations, and walk through the tax deductions and credits that can help you save money for your business.
Small Business Tax Obligations
Unfortunately, small business taxes are more complicated than individual income taxes. There is no single “small business tax rate.” Instead, there are different tax regimes based on the type of business you have and how much it takes in.
If you’re deciding whether and how to incorporate your business you’ll want to take taxes into account. For example, C corporations and S corporations are taxed differently. A C corporation files its own, separate tax return using corporate tax rates. An S corporation filters business income through the personal income of the business owner or owners. The IRS assesses S corporation tax liability based on the federal income tax rates for individuals. Sole proprietorships, partnerships and LLCs are taxed in the same way as S corporations.
Whatever the status of your small business, some of your tax-paying steps will be the same. To pay your small business taxes you’ll need your Employer Identification Number (EIN) and records of business income and expenses. You can file your business taxes online or use the services of a certified public accountant or tax lawyer.
As a small business owner, many of your tax obligations are pay-as-you-go. You should have been withholding payroll taxes for yourself and your employees throughout the year. That includes federal income taxes, Social Security and Medicare taxes, as well as Federal Unemployment Tax Act (FUTA) taxes.
Small Business Tax Deductions
The government offers a range of tax deductions to small business owners and the self-employed. These small business tax deductions can save you big bucks, so it’s important to make sure you claim all the deductions you’re eligible to claim.
Remember that you can write off a range of business expenses at tax time. Think business equipment, business travel and accommodations, furniture and office supplies. You can also deduct the premiums you pay for health insurance coverage for yourself if you’re self-employed and don’t have access to health insurance through your spouse.
Good small business tax preparation, whether in software (like TurboTax or TaxSlayer) or human form, will empower you to find the best small business tax breaks. A small business tax calculator can help you estimate how much you’ll owe to the IRS. If your tax bill from last year seemed high, you may not have been getting all possible small business tax write-offs.
Related Article: Is a Solo 401(k) a Good Choice When You’re Self-Employed?
Small Business Tax Credits
Did you know that there are small business tax credits, not just small business tax deductions? Certain qualified small business owners who provide their employees with healthcare can claim the Small Business Health Care Tax Credit to offset the cost of insurance. That particular tax credit is a product of the Affordable Care Act.
Interested small business owners should join what’s called SHOP, the Small Business Health Options Program. It’s a marketplace that, like the individual health care exchanges, lets you shop around for health insurance with the coverage and price that works for you. If you’re self-employed and have no employees, you probably should use the individual Health Insurance Marketplace, not SHOP.
In addition to the health insurance credit, there are several business tax credits available to business owners. These tend to serve as rewards for behavior that the government considers to be beneficial to society.
Some of them have to do with making your business more sustainable. There are tax credits for using renewable energy, biodiesel and alternative fuels. There’s also a credit for employer-provided childcare facilities and services. There’s the Orphan Drug Credit, which gives pharmaceutical companies an incentive to develop new treatments for diseases. There are some obscure business tax credits out there, too. Who knew there was a Mine Rescue Team Training Credit?
Related Article: What Can Happen If You Don’t File Your Taxes?
Getting Ready for Tax Season
The best way to prepare for tax season is to keep good records throughout the year. When you’re a small business owner, keeping clear, organized and detailed “books” should be a high priority. Even if you don’t have time to read up on “small business taxes for dummies” before tax season, having an accurate record of your business income and expenses will make tax season go much more smoothly.
Tax accountants and tax software work best when you can give them the inputs they need. Think of it this way: the better your records the more easily you can claim those deductions and credits.
And if this sounds like a lot to handle on your own, don’t hesitate to hire professional help. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of financial advisors to up to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
Tips for Managing Other Small Business Needs
- Hiring a financial advisor to help manage your financial assets, retirement, insurance, and maximize income can be a worthwhile investment for you and your small business. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors who can help you achieve your financial goals, get started now.
- Running a small business can give you flexibility, freedom and control over how much money you make. But while the perks are good, working for yourself also means that you don’t have the safety net of an employer-sponsored retirement plan. SmartAsset’s guide will walk you through the most common small business retirement plans.
- If you need a financial boost, SmartAsset’s 2021 roundup of best banks for small business can help you find a good business loan opportunity for your needs.
- Because you run your small business for profit, you can likely deduct your costs of running it. SmartAsset’s small business tax deduction guide can help you identify common tax deductions to help reduce your business taxes.
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