It’s that dreaded time of year again, tax season. For new and experienced small business owners alike, business taxes tend to bring about uncertainty and late-night stress.
Fear no more! We created this comprehensive guide for your 2023 business tax return. We’ll answer all your questions, including “what forms do I submit” and “how do I prepare my records,” so you can save time and money.
Do I have to Pay Taxes for My Small Business?
The short answer is yes. Your small business owes taxes to the federal government which then gets invested in major health programs, social security defense, and security. Some businesses also have state and local tax requirements.
Your federal taxes are sent through the IRS to confirm your tax liability. By filing business taxes accurately you are less likely to be targeted for a tax audit which is an extensive and painstaking review of your business’s financial records.
However, you’ll find that there is no one path that fits all small businesses. There are a number of factors, including the legal structure and business type that determine what you need to pay.
Know Your Legal Structure
When forming your business, you should have determined what legal structure to operate under. Your business is either a sole proprietorship, S corporation, C corporation, or limited liability corporation (LLCs). Each has unique tax laws.
Here is a great video from Quickbooks explaining each legal structure and how it impacts taxes.
When are Taxes Due?
The legal structure you operate under determines when your business taxes are due.
March 15, 2023
This is the deadline for multiple-member LLCs and S corporations.
April 18, 2023
Sole proprietors, single-member LLCs, and C corporations follow this deadline.
How to File for a Tax Extension
As a small business owner, you are able to apply for an extension if you need more time to file your taxes. As long as you submit a tax-filing extension by your deadline (March 15th or April 18th) you will automatically be granted an extra 6 months unless contacted by the IRS.
- Sole proprietors and single-member LLCs use Form 4868
- Multi-member LLCs, S corps, and C corps use Form 7004
Everything You Need Before You Get Started
- Get your business and personal information organized
The information you’ll need includes your Employer Identification Number, payroll information, bank statements, and the previous year’s tax return.
- Financial reports
You’ll have to prove to the IRS your financial status with a balance sheet and income statement.
Your balance sheet records your business’ current assets, liabilities, and equity. For an accurate balance sheet, you must claim your inventory balance as an asset. That means calculating your ending inventory value using your business’ beginning inventory, net purchases, and the cost of goods sold.
Submit your profit gained or lost value with an income statement. This shows how much money your business made and spent last tax season.
Inventory management systems, like Shopventory, automatically track ending inventory and sales reporting with accurate stock counts between all your sales channels and locations.
- Organize receipts
Gather receipts for business expenses like supplies, travel, repairs, etc. We recommend making digital copies so it’s easy to organize and search for what’s needed during tax season.
- Clean books
It’s essential to make sure your bookkeeping records match your bank statements. Now is the time to cross-reference transactions so you don’t accidentally submit a false claim. Many small businesses use accounting software, such as Quickbooks. Shopventory integrates with Quickbooks for easy income account attribution and reconciliation.
Tax Payments for Small Businesses
Federal Income Tax
If you are the sole proprietor or single-member LLC of your store, congrats! Filing for you is relatively easy. Using Schedule C, report your business profit and losses. Then attach it to your personal tax return which is Form 1040.
S corporations avoid double taxation by passing your store’s income directly to shareholders. If this is you, fill out Form 1120-S. If you classify as an LLC that is taxed as S corp, then this is what you need to submit as well.
This business structure is unique in that you pay taxes on the company level. Shareholders must also pay personal taxes on company profits, known as dividends, resulting in double taxation. C corporations must return Form 1120. If you classify as an LLC that is taxed as C corps, then this is what you need to submit.
Multi-member LLCs can also be taxed as a partnership. You must file using Form 1065 as a business then each partner must complete Schedule K-1 for their individual tax return.
Quarterly Estimated Tax Payments
If your business earns more than $1,000 each year, you owe the government estimated taxes each quarter. Use Form 1020-ES for individuals or Form 1120-W for corporations to calculate what that means for your business. There are several ways to pay your estimated tax including IRS Direct Pay, IRS Pay By Card, or over the phone.
Quarterly Tax Deadlines
- Q1: April 15
- Q2: June 15
- Q3: September 15
- Q4: January 15 (the next tax year)
Check out Bench’s estimated quarterly tax calculator to determine how much you’ll owe.
State and Local Taxes
Just as you pay federal income taxes, some states have their own tax requirements. Many states have sales taxes in place, where consumers pay a tax at the point of purchase. As a small business owner, you must report these numbers to state and/or local governments. Not sure if this applies to you? This is a great resource for finding the income tax rate for your state.
If you’re an e-commerce business, don’t skip ahead quite yet. Do you have a physical presence in a state, like a warehouse or pop-up shop? You may qualify for ‘nexus’ which means state taxes apply to you. Read this article from Shopify and we recommend connecting with a tax professional to determine if your e-commerce store follows state sales guidelines.
If your business has any staff, you have to pay taxes on their earnings with Form 944. This includes federal income tax withholding, Social Security and Medicare taxes, as well as unemployment taxes. For simplicity, you may choose to work with a payroll service, like Quickbooks and Gusto, to manage the process for you.
Excise Tax Credits
Industries, such as smoke shops, have to pay a federal excise tax on a quarterly basis using Form 720. Most products that fall under this category have the tax included in the product’s pricing but you are responsible for reporting them to the IRS.
Like estimated income taxes, you’ll make payments each quarter based on what you anticipate owing at the end of the year.
If you own a building or property for your store, warehouse, manufacturing facility, etc you need to pay a property tax to the city or county where it’s located.
Claim Your Tax Deductions
While it may seem like a hassle, properly deducting expenses can reduce your tax bill. We’ve listed out some of the most popular business tax deductions but for a comprehensive list, head over to Bench’s article for more.
- Home office
- Business insurance
- Company vehicle
- Online service fees (like Shopventory)
- Web hosting and themes
- Shipping costs
- Contract expenses
- Professional services (like Quickbooks)
- Marketing costs
- Phone and internet bills
It’s important to note that new businesses can deduct up to $5,000 for costs prior to opening if total costs are under $50,000.
Ways to File Your Small Business Taxes
While filing for a sole proprietorship or single-member LLC isn’t too complicated, we always recommend working with a tax professional for more complex legal structures. The benefit of working with a professional is that they’ll do their job so you can do yours. They’ll make sure you’re up-to-date with new tax laws, count all your deductions, share any local tax credits, and educate you on business structures.
The more work you do throughout the year completing cycle counts and filing electronic receipts, the less work you’ll have to do each tax season. Not only will it keep your business running smoothly and prevent being audited, but it means you’re more equipped to meet your customer’s needs on a day to day.