Small Business Taxes for Beginners: A Comprehensive Guide

Managing your small business taxes can be daunting, especially in the beginning. But you don’t have to master every Internal Revenue Service (IRS) code. Having a working knowledge of business taxes and deductions is a good start. This small business tax guide provides a roadmap to help you navigate small business taxation.

Understanding Small Business Taxes

As a small business owner, you wear many hats, including that of a taxpayer. Understanding which taxes apply to your business helps you stay compliant. Here are the primary types of business taxes to keep in mind:

• Income Tax: As a sole proprietor, Limited Liability Company (LLC), or partnership, you typically report your business income on your tax return. C-corporations file separately.

• Self-employment Tax: This tax covers Social Security and Medicare. If you’re a sole proprietor or member of an LLC, you’ll pay this in addition to income tax.

• Payroll Taxes: When you hire employees, you’re responsible for deducting different types of payroll taxes from your employees' paychecks. These include the Federal Insurance Contributions Act (FICA) tax as well as federal and state unemployment taxes.

• Sales Tax: You are required to pay sales tax if you sell taxable goods or services, even if your business operates online. Rules vary by state and sometimes by city and county.

• Excise Tax: Specific industries require you to pay excise tax on the sale of certain goods or services, including fuel and heavy trucks.

How to Register and File Your Business Taxes

Before you can pay taxes, you need to set up your small business to do so legally. Here’s a step-by-step guide to get you started:

1. Choose Your Business Structure

Your tax obligations vary depending on whether you’re a sole proprietor, partnership, LLC, S-corp, or C-corp. Choosing the best business entity for your company is essential, as it affects which forms you file and the taxes you owe.

2. Apply for an Employer Identification Number (EIN)

Even if you don’t have employees yet, the IRS requires an EIN to open a business bank account and file tax returns. You can apply for it on the IRS website. The process is quick and free.

3. Register With Your State and Local Tax Agencies

If your state has income tax or other business tax requirements, you’ll need to register your business. In some states, you may have to register with multiple authorities.

4. Choose a Tax Filing Method

You can file your taxes yourself or hire a tax professional. If you're using tax filing software, check that it’s configured for the states in which you operate or have employees. If you’re using a tax professional, remember that you’re still legally responsible for submitting and paying your small business taxes.

5. Track Deadlines by Tax Type

Aside from the income tax deadline, you'll have to remember the deadlines for quarterly taxes, payroll filings, sales tax remittance, and 1099 filings. Set calendar reminders and revisit them as your business grows and evolves.

Tax Deductions and Credits for Small Businesses

Deductions and credits enable you to preserve cash and fund growth. They can significantly reduce your tax burden. Here are a few ways to leverage them:

Maximize Everyday Deductions

You can deduct expenses like home office use, car use and mileage, software subscriptions, and business meals. The deduction applies only to the portion used for business purposes.

Recoup Some of Your Startup Costs

You may be able to deduct up to $5,000 in startup and organizational costs, including market research, initial inventory, legal fees, and advertising. The conditions are that you’re in your first year of business and that your total startup costs are below $50,000, for example, but other limits may apply.

Lower Your Tax Burden with Credits

Tax credits reduce your tax bill. It's easy to overlook them, but it's worth checking if you qualify. Here are a few examples:

• Work Opportunity Tax Credit: You can apply for this credit if you hire individuals from certain groups, such as veterans, formerly incarcerated individuals, long-term unemployed, or those receiving Supplemental Nutrition Assistance Program (SNAP) or Temporary Assistance for Needy Families (TANF) benefits. You must file IRS Form 8850 within 28 days of the hire date to qualify.

• Small Business Health Care Tax Credit:Look into this credit if you have a business with fewer than 25 full-time employees and annual wages below $62,000. To qualify, you must cover at least half of employee premiums under a qualifying health plan purchased through the Small Business Health Options Program (SHOP).

• Small Employer Pension Plan Startup Costs: This credit helps you offset the cost of starting a retirement plan for your employees. You can claim up to $5,000 per year for the first three years, plus an additional credit for employer contributions.

Be sure to check the IRS website for details and talk to a tax professional about any tax deductions and credits that may apply to your business.

Common Mistakes to Avoid

Many small businesses struggle with tax management. Here are the most common mistakes, and some tips to avoid them:

• Mixing Personal and Business Finances: Commingling funds makes it harder to track deductions. It can also raise red flags. Open a dedicated business account from day one, even if you’re a sole proprietor.

• Misclassifying Workers: It's essential to correctly classify the people who work for you as employees or contractors and understand the risks associated with misclassification.

• Missing Quarterly Tax Payments: Even small business owners must pay estimated taxes every quarter. Set reminders to avoid penalties.

Plan Ahead: Small Business Tips For Tax Time

Effective tax planning is about being proactive and intentional. Here are some small business tax tips to help you stay ahead:

• Set Money Aside: Don’t let a surprise tax bill catch you off guard. Transfer 25%-30% of your income to a separate savings account every time revenue comes in. You can automate this process, and it will help you save time and reduce errors.

• Schedule Quarterly Check-ins: Your business evolves throughout the year. Revisit your budget, income, expenses, and deductions regularly so you’re not playing catch-up in Q4.

• Get Expert Advice: Even if you manage your books, having a professional tax expert review your setup can help identify issues before they become problems.

• Stay Organized: Scrambling at the last minute can lead to missed deductions and preventable errors. Track your income and expenses throughout the year with user-friendly payroll software, such as Justworks payroll.

How Justworks Simplifies Small Business Taxes for Beginners

Managing small business taxes is easier for business owners with simple-to-use tools and resources that guide them through the process. Justworks helps you navigate small business taxes with flexible payroll solutions and HR tools to handle your tax calculations and filings efficiently.

As your business grows, you can streamline your HR tasks further with Justworks' Professional Employer Organization (PEO) platform. It offers solutions such as payroll tax compliance, employee onboarding, HR support, and access to benefits. Get started with Justworks today.