Small Business Tax Responsibilities & Preparation

Small Business Tax Responsibilities & Preparation


Although there are numerous decisions that small business owners must make on a daily basis, from when to hire new employees, how much inventory to stock up on or whether to obtain a working capital loan, one of the choices that might be overlooked involves which business structure to utilize. There are several types of corporate structures, and each one has its own pros and cons when it’s time to pay taxes. It’s important that as a business owner, you understand which structures give you the best opportunity to reduce your tax burden.

Creating or changing a business structure involves filing the appropriate paperwork with the Secretary of State’s office in the state where your company is located. While it is important to always speak with an expert before deciding on whether to alter your company’s business structure, it never hurts to do some initial research before hand.

Sole proprietorship

This is the most basic business type, and it is the default formation if you never actually file for a formal structure. If you have a sole proprietorship, there’s no legal separation between your company and your person, which means you report all business income on an IRS Form Schedule C for your personal tax returns. Business owners who have a sole proprietorship must also pay self-employment tax on the company’s profits, akin to Medicare or Social Security taxes typically taken out of most employees’ earnings.

While this is the simplest and easiest structure in terms of legalities and filings, you will still have a responsibility to ensure your business and personal expenses are separated, and all the appropriate taxes are paid for self employment. Sometimes this can lead to a larger tax burden for the owner.

C Corporation

If you decide to incorporate the business, there are two options, a C Corp and an S Corp. The Corp creates a separate legal enterprise for the business. However, now that the business and you personally are distinct entities, you will be required to file a personal and a business tax return. This can lead to a double taxation scenario, wherein you first pay taxes on the company’s profits and then also pay taxes if you decide to take profits as your personal income. While this can increase the tax burden, you are also able to invest the profits back into the business to avoid the double taxation.

S Corporation

Much like the C Corp, an S Corp is also a separate legal entity. However, unlike the C Corp, this structure is not taxed on its profits, since these are passed through to the owner and other shareholders, who then report the earnings on their personal income taxes. Since the IRS considers this a distribution, you do not have to pay any self-employment taxes on these earnings. While this structure eliminates the double taxation associated with a C Corp, there is considerable paperwork, legal filings and other administrative responsibilities associated with the S Corp structure. Further, there are also restrictions that apply to forming an S Corp, such as the fact that shareholders must be legal residents of the U.S.

Limited Liability Corporation

An LLC is taxed similar to a sole proprietorship, but offers the personal liability protection associated with a corporation. Under this structure, your company does not pay taxes on any profits, however you will need to report any profits on your personal tax return. The structure of the LLC does allow you to choose if you want to be taxed a sole proprietor, a C Corp or an S Corp, which makes it uniquely flexible for tax purposes.

Regardless of which business structure you choose to use, it’s always best to speak with a tax expert before making this major decision. Changing the structure will also not retroactively alleviate a previous tax burden either. If you do not have sufficient capital to pay off back taxes, you should consider obtaining a small business loan from an alternative lender. Since there’s not a lot of paperwork or a cumbersome application process, these loans are quick and easy to obtain.

Filing taxes is rarely a task anyone looks forward to, whether for individual or business taxes. Nonetheless, taxes are a part of life, and every American must address them at some point during the first few months of the year.

It’s fairly common to push this chore off until the very last minute. In fact, 21.5 million individuals waited until the very last week to file their taxes in 2016, FiveThirtyEight reported. While procrastination is tempting, there are a number of benefits that can come from getting an early start on tax season, especially for a small business owner.

Difficult deadlines

Corporations and s-corporations must file their taxes by the 15th day of the third month of your corporation’s fiscal year – that is, March 15, for those businesses that have a fiscal year that’s in sync with the calendar year.

Sole proprietorships, partnerships and limited liability companies have another month; they have until the 15th day of the fourth month of their fiscal year.

Remember, after you take care of your business taxes, you still have to tackle your individual ones. The sooner you file business taxes, the less likely you’ll accidentally miss your deadline, and the more time you’ll have to focus on your personal taxes.

Give yourself time to get it right

The concept of paying taxes is simple. Every person and company contributes a certain amount of money to the government, based on how much they make. To determine this amount for your business, you’ll need to analyze your income, losses and expenses.

However, the actual communication of this information is complicated. Mashable pointed out that, depending on what type of business you have, you’ll have to seek out a different form:

  • If you’re a partnership, use Form 1065.
  • If you’re a sole proprietorship, attach a Schedule C to your personal tax file.
  • If you’re a corporation, file Form 1120 separately from your individual tax return.
  • If you’re an s-corporation, file Form 1120S separately from your individual tax return.
  • If you’re an LLC, you’ll either file your taxes like a sole proprietorship or a corporation.

Given the complex nature of tax season, it’s not out of the question for you to make a mistake your first time around. Start early so that if you do make a mistake filling out a form, or try to use the wrong paperwork, you have time to go back and remedy the problem before the deadline.

Get your return faster

The sooner you file, the quicker that tax return will come your way. If you want your tax return as soon as possible, consider filing electronically. Century Link, a communications solutions company, pointed out that filing taxes electronically is fast, easy and convenient. Plus, when you enter your direct deposit information, your return will make its way into your bank account even faster.

More attention

Tax preparers know how much people tend to procrastinate on their taxes. When the calendar finally turns to April, their offices begin to fill up rapidly. When you come in early, there’ll probably be less demand and your tax professional may have more time to help you through the process.

Extensions are for paperwork only

If you find yourself strapped for time, you can always request an extension. But there’s a catch: You’re only asking for an extension on the process of filing, Mashable explained. If you think  you’re going to owe money, that payment is still due on the 15th day of the third or fourth month of your fiscal year. Of course, you won’t know exactly how much you’ll owe, so you’ll have to make your best guess. When you complete the paperwork portion of filing, you can correct any discrepancies.

Tax season isn’t exactly the most fun season, but that’s no reason to put it off. Remember, the sooner you get it done, the sooner you can stop stressing.