Paying taxes may be the last thing on your mind as a new small business owner. After all, you need to order stock, market your business, hire employees, serve customers, and so much more. As much as we understand your position here at Juvo Business Advisors, the Internal Revenue Service (IRS) won’t let you off so easy. You will need to file a tax return and potentially pay income tax regardless of the size of your new small business.
Pass-Through Entities and Federal Income Tax
C-Corporations are the only type of business entity that pays income tax at the corporate level. The owners and shareholders of all other types of business entities pay income tax at the individual level. The IRS refers to this as pass-through taxation. You should report your business income and losses on your personal tax return if you have structured your company in one of the following ways:
- Sole Proprietor: Operating as a sole proprietor means that you have no employees and are the only owner of your business. Be sure to separate your personal and business financial records from the start to avoid huge hassles at tax time.
- Partnership: You may form the company as a limited partnership or limited liability partnership with at least one other person. Only one partner bears responsibility for business debts in the first scenario, which can ultimately cause tension with the other business partners. A limited liability partnership protects all partners from personal liability for business debts.
- Limited liability company: This entity offers protection of your personal assets and pass-through taxation. Since the IRS considers partners in an LLC self-employed, you will need to pay self-employment taxes in addition to regular income taxes.
- S-Corporation: Establishing your company as an S-Corp protects you from the double taxation of a C-Corp but comes with several restrictions. You cannot have more than 100 shareholders, must follow strict operating guidelines from the IRS, and cannot allow anyone who is not a natural or legalized citizen of the United States to be a shareholder.
You should plan to pay income taxes four times per year if you operate your business under one of the above entities. After determining your estimated tax, make sure to send your quarterly payment to the IRS by April 15, June 15, and September 15 of the current calendar year. Your fourth quarter taxes are due by January 15 of the following year. Any business that expects to owe more than $1,000 on their federal tax return should make estimated quarterly payments.
Determine Your Net Income by Using Schedule C
The IRS allows all business owners to deduct expenses incurred to operate the business. Some examples include manufacturing costs, employee salaries, mortgage or rent, and the cost to operate a home office.
Whether you bring your business taxes to an accountant or file your own, you need to include Schedule C to claim your income and rightful deductions. You only need to pay income tax if the bottom line on Schedule C is a positive number. We also encourage you to look for the Qualified Business Income on line 10 of the standard 1040 tax return form. If eligible, you could save up to 20 percent on your business taxes.
The IRS requires all business owners to pay self-employment taxes if they earned more than $400 during a calendar year. This payment covers your contribution to social security and Medicare. You also need to pay the employer’s portion of social security and Medicare if you have employees along with a contribution to your state’s unemployment fund. Lastly, you must withhold federal and state taxes from each employee’s paycheck and submit them to the proper taxing authority along with a payroll report.
Confused? Juvo Business Services is Here to Help
Now that you know which taxes to pay as a new small business owner, you still need to determine how much to pay. We can help you with that as well as developing a tax strategy to minimize your future tax burden. Please contact us today to learn more.