Have you ever thought about starting your own business? Starting a company today is both harder and easier than ever before. It is more challenging because a larger number of opportunities have been capitalized on, and a greater number of people appear to be trying.
If you are thinking of starting a company, then one of the best steps you can take is to understand the structure options you have before you start your own business. Today we are going to introduce the options you have and how to handle the taxes with those structures.
Small Business Taxes Depend on Business Structure
These are the basics of paying your small business taxes:
What types of taxes do you need to pay?
How much do you have to pay in taxes?
When do you have to pay small business taxes?
And how do you pay small business taxes?
When it comes down to it, these four basics depend on your business’s legal structure. Whatever your business entity is, you’ll first need to know how it affects your tax burden.
Small Business Taxes for Sole Proprietors
A sole proprietorship is a business that’s owned and operated by one individual. Because the owner of a sole proprietorship is flying solo, filing taxes under this business structure is relatively simple.
Instead of filing your small business taxes on behalf of the business, as a sole proprietor, you’ll report business income and losses on your income tax return. Business profits will tax at your income tax rate. Sole proprietors must also pay self-employment taxes, which cover the business owner’s medicare and social security obligations.
If you run a sole proprietorship, you’re generally required to file a Schedule C or a Schedule C-EZ with your Form 1040 and pay quarterly estimated taxes.
Estimated tax is the method that all businesses use to pay social security and medicare taxes along with income tax. If you were an employee, you wouldn’t worry about this—your employer would withhold these taxes for you. But as a sole proprietor, you are responsible for making quarterly payments with the estimated tax method.
To figure out what you’ll need to pay in self-employment taxes—and if you have to pay quarterly—use Form 1040-ES, Estimated Tax for Individuals.
Small Business Taxes for Partnerships
Partnerships are businesses operated by two or more owners. Most partnerships are known as general partnerships, but there can also be limited partnerships or limited liability partnerships. Business owners who are a part of the partnership must pay income taxes, self-employment taxes, and quarterly estimated taxes.
If you operate a partnership, the business has to file Form 1065, which is an annual information return that shows the income, deductions, gains, and losses from the business’s operations—but the business itself doesn’t pay any income tax. Partnerships enjoy what’s called “pass-through taxation,” meaning the income is taxed on the owners of the business instead of being subject to corporate tax rates.
To file taxes, owners who are included in the partnership have to file their respective share of the business’s income and losses on their tax returns. Each partner’s share of the business’s income and losses are shown on Schedule K-1.
Small Business Taxes for C-Corporations
If your small business is structured as a C-corporation, your business is legally separate from you as the owner. C-corporations are subject to what’s called “double taxation.” To start, C-corporations are subject to a flat income tax rate of 21%. Then, shareholders are taxed on their tax returns when profits are distributed as dividends. The primary income tax form for C-corporations is Form 1120.
Shareholders who actively participate in the work of the corporation are considered employees. Only the employee’s salary is subject to self-employment taxes. Dividends are subject to a different dividend tax rate. Many corporations save on self-employment taxes by paying themselves a smaller salary and taking more money out of the company in distributions. There are several other tax advantages to C-corporations as well.
Small Business Taxes for S-Corporations
S-corporations are pass-through entities like sole proprietorships and partnerships. This means that each shareholder reports business income and losses on their tax return and profits are taxed at the personal income tax rate. An S-corporation files an informational tax return, called Form 1120S, but the business itself doesn’t pay a corporate tax. This allows an S-corporation to avoid double taxation.
Similar to C-corps, S-corps can also divide business income between salary and dividends. Salary is subject to self-employment taxes, and dividends are not. You can strategically try to save on self-employment taxes by paying yourself a salary. However, the IRS requires you to pay yourself a reasonable salary given your job title, industry, and qualifications. Both C and S-corporations must pay estimated taxes quarterly.
Small Business Taxes for Limited Liability Companies
A limited liability company (LLC) is a business entity that keeps the owners legally separate from the company’s debts or liabilities. As the owner of an LLC, you’ll have the liability protection of a corporation with the tax benefits of a sole proprietorship or partnership.
If you operate an LLC, you’ll be subject to pass-through taxation, just as you would be as a partnership. In other words, you won’t be taxed twice like corporations are. Instead, as an owner of an LLC, you’ll make quarterly tax payments on your income tax forms. On top of that, you’ll also have to submit Form 1065 each year for informational purposes.
LLCs, offer you additional tax flexibility compared to other business entities. From a legal standpoint, you can exist as an LLC. However, from a tax standpoint, you have the option to be taxed as an S-corporation or C-corporation.
When to Pay Small Business Taxes
No matter what type of small business entity you have, you have to pay quarterly estimated taxes if the business owes income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect to owe $500 or more in tax for the year.
Before you owned a business, filing taxes was a one-time thing. But as a small business owner, you’ll have to pay the IRS four times per year. On one hand, that’s four more tax deadlines you might miss. But on the bright side, by the time your yearly tax deadline comes around, you’ll have already paid three-quarters of your tax return.
To make things even more complicated, businesses must deposit federal income tax withheld from employees, federal unemployment taxes, and both employer and employee social security and Medicare taxes. Depositing can be on a semi-weekly or monthly schedule.
Quarterly Estimated Small Business Taxes
To calculate your quarterly payment, estimate your expected adjusted gross income, taxable income, deductions, and tax credits for the year. The best way to gauge these is by just looking at your taxes from the previous year as a guide.
Once you’ve put a number of these figures, you’ll just have to calculate how much you’ll owe in your estimated quarterly small business taxes. The easiest way to do this is to use the IRS’s Form 1040-ES Estimated Tax Worksheet.
These are the deadlines for quarterly estimated small business taxes:
April 15 (covering the period from Jan. 1 to March 31)
June (covering the period from April 1 to May 31)
September (covering the period from June 1 to Aug. 31)
January (covering the period from Sept. 1 to Dec. 31)
Flex Tax and Consulting Group have served and managed all types of tax and revenue collection for the U.S. for more than eight years. Our value-added services and solutions are based on innovative thinking that fits our valuable clients’ needs. If you have any questions, please don’t hesitate to contact us at 415-860-6288 or [email protected].
