Running a small business is a big deal, particularly when it comes to managing your taxes. Business taxes can be quite complicated to understand. At the same time, you cannot just go slack with them because not paying them properly and on time can get you into trouble with the IRS. Knowing tax law basics, thus, makes sense to be on the safe side.
Furthermorr, small businesses are entitled to some incentives in the form of special deductions and tax credits. Therefore, awareness of tax law can help you save dollars as well. Here are the tax basics for small businesses in the US.
Taxes depend on business structure
The type of taxes that you need to pay depends on the legal structure of your business. If you are operating a sole proprietorship firm, you will report the income and losses from the business on your personal income tax return.
Also, the profits are taxed at the personal income tax rate. If you operate a partnership, again the income will be taxed on the partners of the business rather than being subject to corporate tax rates.
C-corporations are subject to “double taxation.” Firstly, they need to pay a flat income tax rate at a rate of 21%. Also, the shareholders of the business have to pay tax on their personal tax returns when they get profits as dividends.
For S-corporations, tax norms are similar to those in sole proprietorship and partnership. Each shareholder has to report business income and losses on the personal tax return. Additionally, their profits are taxable at the personal income tax rate.
Lastly, for LLCs, there is an option to be treated as a C-corporation or S-corporation from the tax perspective.
Tax law 101: Make payments quarterly
For all types of small businesses, it is mandatory to pay taxes quarterly taxes if you owe taxes of $1,000 or more. In other words, you need to pay the estimated tax amount to the IRS four times a year.
Sticking to deadlines is important because you would not want to get an audit notice from the IRS at any cost. It is best to collaborate with tax attorneys who offer tax planning because they will make sure that you never miss a deadline.
If you are filing business tax returns with your personal returns, the due date will the same as that for the personal tax returns. According to the law, this falls on April 15 every year. If the due date comes on a holiday, the next business day is deemed as the tax return due date for that particular year.
If you are paying up four times, the subsequent due dates come in June, September, and January.
Calculation of estimated taxes is complex
While you need to pay the small business taxes on time, calculating them accurately is equally important. However, it is a complex calculation as there are several factors to be considered. To calculate your quarterly tax payment, estimate the expected adjusted gross income, along with taxable income, tax credits, and deductions for the year.
You can use the taxes from the last year as a guide to estimate these values. Once you have the values, you can arrive at a figure of the estimated tax that to owe to the IRS for that particular quarter.
Keeping track of your income, expenditure, profits, and losses through the quarter helps you calculate taxes easily. Also, it is a good idea to hire a small business accountant who can do it for you. If you expect an IRS audit, you can engage a tax attorney instead.
You have to follow a deposit schedule
As a small business owner, you need to deposit the income tax which is withheld from the employer, employees and employee share of Medicare taxes and social security and federal unemployment taxes. While depositing taxes, you gave to follow a semi-weekly or monthly schedule. Besides deposits, you also have to file the related tax forms.
It is vital to follow the norms related to filing the documents and depositing taxes according to schedules to ensure that you are abiding by the state laws. The deposit schedule for your business will depend on the total tax liability that you report during a four-quarter period.
Final words on tax law
Now that you know the tax basics for small businesses in the US, you will be able to stick to the rules and avoid any trouble with the authorities or stress-wise. It is always advisable to be punctual and honest with your business taxes so that you can operate smoothly all the time.