Ultimate Guide to Tax Law for Small Business Owners
What Taxes Does My Small Business Have to Pay?
Small business owners may have to pay additional taxes on top of income taxes depending on if you have employees, how you classify your business, and your business expenses.
The various taxes your small business may have to pay include:
- Income taxes
- Employment taxes
- Estimated Quarterly Taxes
- Self-employment taxes
Everyone who is either a 1099 worker or a W-2 employee who made any type of income files income taxes for the previous year. This rule also applies to small businesses because the government uses income taxes to fund federal programs. Failure to pay income taxes will lead to fines, penalties, and potentially jail time.
Determining your small business tax rate depends on the amount of income you receive, and which tax bracket you then fall into. The seven brackets are: 10%, 12%, 22% 24% 32% 35% and 37%.
Remember that there are federal income taxes and state income taxes. All states require state income taxes, with the exception of Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
The Internal Revenue Service (IRS) offers a six-month extension for business owners who need extra time to file their taxes. Although IRS may grant an extension, that doesn’t always mean your business won’t be subject to late-filing penalties. Use the extension only when necessary.
Businesses with employees are required to pay various employment taxes:
- Federal Income Taxes – taxes withheld from the employee’s wages using their W-4 and withholding tables. Business owners/employers deposit withholdings.
- Federal Unemployment Tax – taxes only paid by the employer.
- Social Security & Medicare Tax – the employee has this amount withheld from their paystub and the employer must match the amount withheld.
Estimated Quarterly Taxes
For most employees, estimated taxes are automatically withheld, however, this is not the case for small businesses. Each quarter, as your business earns money, you’re expected to pay estimated taxes. Use IRS form 1040-ES to find estimated quarterly taxes.
Those who do not file quarterly taxes are subject to fines, penalties, and interest.
Quarterly taxes are due on the same day each year with the exception of weekends – in which case the due date falls on the following business day. 2022’s quarterly taxes are due on:
- April 18th
- June 15th
- September 15th
- January 15th
Self Employment Taxes
Self-employment taxes are used for business owners who are, self-employed. Those who run their own businesses don’t automatically have taxes withdrawn from their paycheck.
Only those who meet one of the following criteria must pay the self-employment tax:
- Net earnings are $400 or more
- Earnings from a church or church-controlled organization exceeded $108.27.
Taxes and your Business Structure
Each type of business structure has different tax implications. Understanding your specific business structure and the tax payments associated with it is essential to filing your taxes properly.
An unincorporated business, with one sole owner, is automatically classified as a sole proprietor. In the U.S over 23 million businesses are considered sole proprietorships. As a sole proprietor, you assume all financial and legal obligations of your business.
Filing taxes as a sole proprietor is fairly simple. You report your business income and losses on your personal tax return through a Schedule C, therefore your company profits are added to the income on your personal tax return.
This business structure also allows you to deduct 20% of your business’s net income from your taxable income, which, in turn, reduces your tax liability.
If your business is structured as an S Corporation, you limit the risk of double taxation by passing income to shareholders. These shareholders report the business income, expenses, losses, and deductions on their tax returns.
As one of the most common business structures for small businesses, it allows for similar advantages to a traditional corporation, with additional tax flexibility.
This business structure is also eligible to make use of the 20% tax deduction mentioned above.
This business structure, also known as a traditional corporation, is made up of a shareholder, board of governors, officers, directors, and employees. C corps are the only business type that pays taxes on the company level. Shareholders of these corporations must pay personal taxes on dividends.
Limited Liability Companies (LLC)
An LLC is one of the most popular business structures among small business owners. LLCs are only taxed on the individual level. Members of the LLC only pay taxes on the individual level, similar to an S Corp or sole proprietorship.
If you have a multiple-member LLC, you have the choice to be taxed as a partnership or as a C Corp. If you choose to be taxed as a partnership, the members of the LLC will report their share of the business income in their personal tax returns.
When are Small Business Taxes Due?
As mentioned above, small businesses owe estimated taxes quarterly. Tax days that fall on a holiday or a weekend will push until the next business day. Merchant Maverick provides a chart, seen below, of when taxes are typically due annually.
How Do I File My Small Business Taxes?
When filing business taxes, you can file them yourself, or use a trusted accountant or CPA. The benefit of working with a tax professional is that their experience will help you file the right forms, and help you avoid unnecessary fines and penalties.
When filing your return, you can use electronic resources to help you organize and file. Let’s break down the different steps to file your small business taxes.
- Know when your taxes are due – deadlines are not flexible
- Gather business tax information: business name, address, EIN, financial reports, expense records deduction records, payroll documentation
- Organize tax deductions (more below)
- Calculate taxes owed
- File all of the appropriate tax forms for your business
- Double-check your file yourself or with an accountant
Click here for a list of IRS’s most popular tax forms, and their associated instructions.
Small Business Tax Deduction Tips
Taking advantage of tax deduction opportunities can help your business save money. It can help lower tax debt to reallocate resources into growing your business.
In 2018, the Qualified Business Income Tax Deduction went into effect. This tax reform allows small business owners to deduct up to 20% of their total income if they meet certain requirements laid out by IRS.
Various deductions small businesses can claim include:
- Home office deductions
- Startup expenses
- Travel expenses
- Employee salaries, wages and benefits
- Charitable donations
- And more
Will My Taxes Trigger an audit?
There is no guarantee that your business tax files will or will not trigger an audit by IRS. However, they are keeping a more watchful eye this season as the government searches for funding for the remainder of the current administration’s proposed Build Back Better Bill.
Multiple instances can trigger an audit by IRS. Preparing your tax filings ahead of time, and avoiding common red flags that keep you less likely to be audited. Other IRS audit triggers include:
- Failure to report income on a W-2 or 1099 form
- Failure to report all of the income received by your business (under-reporting)
- Amending a tax return to claim a refund
- Businesses who report losses for more than a year
- Businesses that are a hobby instead of a business
- Filing honest mistakes
- Using 501c write-offs
- High business expenses
What happens if I don’t pay my business taxes?
Failure to pay business taxes will result in fines, penalties, and potentially jail time. If your business fails to pay taxes due, IRS will send a notice in the mail that outlines the payment due date, and response due date. Ignoring their notices can increase fines and penalties. Click here for our full guide on do’s and don’ts when receiving an IRS notice.
Late penalties vary, but typically the fees include a 10-25% penalty applied to each month taxes are not paid. Oftentimes, there is an additional $135 penalty with interest.
In certain circumstances, your business could be subject to the Federal Payment Levy program that authorizes the government to suspend certain benefits from businesses (such as military retirement benefits, select federal salaries, and more).
The agency will assess the penalty on a case-by-case basis. In some instances, the government will issue a business tax lien as repayment for taxes owed.
If the government agency decides your business purposefully evaded paying taxes through fraudulent actions like falsifying deductions, this can lead to criminal exposure and criminal charges. This offense can lead to $10,000 in fines and up to five years in prison. At times, both can be implemented.
What is a business tax lien?
A tax lien happens when the government legally claims your property because you did not pay tax debts. IRS will issue your liability and will send a Notice and Demand for Payment. Failure to pay the full amount by the due date will trigger the government to notify creditors that the government now has the legal right to your property. The property the government can claim includes:
- Personal property
- Real estate
- Financial assets
- Intellectual property
Paying your debt in full within 30 days of the notice is the best way to remove a tax lien. Other ways to reduce the impact of a lien include:
- A discharge of property: This removes the lien from a specific property.
- Withdrawal: This removes the public Notice of Federal Tax Lien.
- Subordination: This allows creditors to move ahead of the IRS.
Can I sell my business with a tax lien?
Yes, you can sell your business with a tax lien. IRS will post a public “Notice of Federal Tax Lien,” so all of your creditors will know there is a lien on your business when you are trying to sell.
As of April 2018, the three major credit reporting agencies have agreed not to include federal tax liens on credit reports.
You can sell a property or other business asset with an attached lien as long as the debt is paid. Ideally, your business equity is worth more than what is owed to the government. In this scenario, you can fully satisfy the tax lien with profits from the sale and still pocket a profit.
In some cases, the sale of business assets does not necessarily have to fulfill the entire lien in order to be sold. IRS will release a lien to allow a sale as long as they receive a portion of the remaining equity after senior debts (such as a mortgage), commissions, and other debts are paid.
Selling a property with a lien will require extensive communication with IRS.
Follow these tips for selling a business asset with a tax lien:
- Assess the amount of the tax lien
- If you are not on an installment plan, set one up
- Submit all required paperwork to IRS
- Read IRS Publication 783 to see examples of different types of discharges
- Determine if your business sale will fully satisfy the tax debt
- Consider filing for subordination
- Never try to circumvent your tax lien
- Do not submit incomplete or inaccurate information to IRS
- Be sure to submit information for anyone who is representing you
For more tips on what to look out for this 2022 tax season, read our article here.