If you started a small business venture this year, there’s a lot of excitement—but also new responsibilities and requirements, one of those being filing small business taxes. In the event that this is your first time filing small business taxes, don’t let the challenge of filing take away the excitement of finally being your own boss.
Instead, read further, because this article tells you all you need to know about filing small business taxes for the first time, including how to file your return, what the tax forms mean, and how to simplify the record-keeping process for your business.
What Does it Mean to File a Business Tax Return?
Simply put, filing taxes means that you report the money your business made or lost during the year to the IRS. Tax returns must be filed every year, and they are required for both individuals and businesses. Missing a tax filing date can cost you more money in penalties and interest.
The IRS has a tax calendar for small businesses that shows the monthly, quarterly, and annual filing dates. Whether you file early or at the last minute, the IRS has deductions and credits, which we’ll discuss in depth below, that may reduce your tax bill and even get you a refund.
Why Your Business Structure Matters
Most small businesses are set up as limited liability companies, or LLCs. They are simple to set up, can have multiple owners, and can also protect your personal assets if your business faces a lawsuit.
A single-member LLC must report business income on your personal tax return.
For tax purposes, a business can also be:
- a sole proprietorship
- S Corporation
- C Corporation
Each has its pros and cons when it comes to taxes. For example, C Corporations are taxed twice—at a corporate level, and the dividends are taxed on the level of a person.
Your business structure also determines your tax filing deadline. If you have an LLC, the deadline to file your business tax return is April 15 whereas corporations must file business tax returns by March 15.
It’s important to establish tax planning strategies when you first start your business so that you don’t have to make changes later, which can be costly and inconvenient.
Do You Need to Hire Help?
Filing small business taxes for the first time can be challenging. Most people think they will have a huge tax bill, but also the sheer complexity of the U.S. tax code is enough to stress anyone out, including confusing documents and forms (Form 1040, 1120, Schedule E, K, A and more).
Hiring an accountant may help you because they know about the tax laws and can advise you on what’s best for your business.
Don’t let the cost of an accountant scare you—in the event that it saves you money, it can be one of the best investments you make. An accountant can help with other small business topics beyond taxes, too. Plus, the fee you pay for your accountant is tax deductible!
Be sure to hire an accountant who is well-versed in small business taxes and has enough experience to handle your specific situation.
What You Need to File Your Federal Tax Return
First, you need copies of your financial statements for the tax year. This includes:
- Profit & Loss Statement
- Balance Sheet
- Cash Flow Statement
Don’t have these statements? You can get them generated automatically—keep reading to find out how.
When you tell your preparer that you are filing small business taxes for the first time, they will want to know about your company’s products, industry, the State your business is located in, and a list of owners.
When filing your tax return, here are some forms you will use:
- Sole proprietor & Single-Member LLC: Schedule C for business profit/loss
- Multi-member LLC & Partnership: Form 1065 for the LLC or partnership. Each member or partner will include a Schedule K-1 with their personal tax returns.
- S-Corporation: Form 1120-S
- Corporation: Form 1120
Using a small business accounting system will help keep track of sales and expenses. Many systems are cloud-based where documents are sent and received from virtually anywhere. This is beneficial if you’re an on-the-go entrepreneur because you can upload receipts right from your phone or share financial information with others.
Another benefit is being able to check key business status indicators like overdue customer invoices or bank balances from a real-time dashboard on your mobile device. Cloud accounting saves money on printing costs, creates an eco-friendly environment, and makes it easier for your accountant to access information—which makes the tax filing process easier.
Whether you’re filing small business taxes for the first time or not, submitting your company’s wage statements is an annual requirement as long as you have employees and contractors.
Employees receive a Form W-2 that shows wages earned and deductions for taxes and benefits. Any non-employee who has earned more than $600 as a contractor must receive Form 1099-MISC. You as the business owner must file all W-2 and 1099-MISC forms with the IRS no later than January 31st of each year.
Basic Tax Calculation
Your business income minus your expenses is your profit (or loss). In most cases, your portion of business profit is included on your personal returns, along with any personal income, deductions and credits. This determines filing your taxable income.
The IRS has a tax table that tells that amount of taxes you owe depending on your taxable income. The tax is compared to taxes you pay throughout the year.
If you paid more than you should have though personal deductions or quarterly business payments, you will receive a refund. If the tax is more than what you’ve paid or had withheld from personal income, you will owe.
So, How Much Do You Owe?
This is the first question most business owners ask. You may not always owe. In fact, many taxpayers who are filing small business taxes for the first time usually have more expenses than revenue.
This is because of startup costs and one-time costs like computers and equipment. There are many small business expenses that are deductible. Deductions lower your taxable income, and lower income means less income taxes to pay.
It’s important that your accountant or tax professional knows about small business tax laws because overlooking these can cause you to miss out on savings and extra money to put back in your business.
Deductible Business Expenses
As a small business owner, you will pay for many expenses to start and keep your business going. Your marketing, office supplies, phone bill, and in some cases, your rent or mortgage can add up and fortunately, many of those costs are tax deductible.
Deductible business expenses include:
- Business insurance
- Office supplies (staples, pens, notepads, etc.)
- Computers and equipment (can also include with home office)
- Home office expenses (rent/mortgage, utilities, maintenance, office furniture & HOA fees)
- Phone bill (only business use portion is deductible)
- Web hosting/mobile apps
- Professional fees (legal/accounting)
- Employee wages and benefits
- Self-employment taxes (50%)
- Marketing/advertising (flyers, promotion)
- Tax preparation fees
- Bank fees
- Car expenses (only business use portion is deductible)
- Professional dues and education (associations, professional education)
- Travel (only business travel is deductible)
- Conference fees (conferences, trade shows, networking events)
- Meals (50% deductible; must be business purpose)
Startup costs are deductible for entrepreneurs who are filing small business taxes for the first time. For IRS purposes, startup costs are defined as “any amount paid or incurred in connection with creating an active trade or business.”
You may deduct up to $5,000 for amounts you spend up to $50,000. An added benefit is amounts more than $5,000 can deducted over the next 15 years.
Things that you pay for to create a corporation or partnership are organizational costs and also deductible up to $5,000.
This includes legal and accounting fees, training employees, board meetings, and state incorporation fees. You may claim these deductions, along with others mentioned above by including them in the appropriate sections of your income tax return.
If You Want to File Your Own Tax Return
If you decide to file your own small business taxes, there are tons of DIY tax preparation programs available. You will enter your personal information and answer questions about your business. The software will then select the right forms and schedules you need to complete your federal and state tax returns.
Just like going to an accountant, you still need to have your documents ready to upload or copy information from. You will have the option of electronic filing or mailing your tax return to the IRS. When going the DIY route, it’s important to check that your software is both secure and IRS-approved.
Take The Stress Out of Filing
Filing small business taxes for the first time does not have to be a stressful experience. Tax planning is an ongoing effort in your business.
It’s important for you to have a basic understanding of business taxes, that way you can make decisions that help you pay less taxes. Keeping your records organized is also important. If you aren’t ready for an accountant, most tax preparation software has the guidance to help you complete your first small business tax filing.
After you have it completed your first small business filing, just know the process the second and third time—if you’re prepared—can be easier.
An accounting expert, CPA exam review instructor, and champion for WERKin’ Mommas, Nicole Winston advises companies from startups to global organizations on the financial statement impacts of business decisions.