Small Business Tax Planning Strategies: How to Successfully Navigate Tax Season
Most people can work through filing an individual tax return. However, when responsible for submitting your small business taxes, a lot more is at stake. Though 93% of small businesses confidently believe in their ability to accurately file taxes, almost one-third also speculate they are overpaying. Tax season is a stressful time for any business, especially new small businesses that are still learning how to file everything accurately while continuing to maintain the company’s daily operations. Below, we provide insight on how small businesses can successfully navigate tax season and prepare for seasons ahead.
Business Classifications: How They Affect Tax Reporting
A successful tax season strategy begins with understanding tax filing components and strategies. If you are new to small business tax preparation, know that how you report your taxes directly correlates with your company’s structure. Your business classification should be confirmed before completing any forms, as each classification requires a different combination of tax forms. You don’t want to find out later that you mistakenly reported your tax information on the wrong documents. Here is a simple breakdown of how taxes are reported based on your business classification.
General Partnership
Small businesses classifying as a general partnership are required to file self-employment taxes and quarterly estimated taxes. Additionally, you must also file Forms 1065 and Schedule K-1 to adequately report the income, profits, and shares of each partner.
Sole Proprietorship
Sole proprietors may report business income profits and losses on their personal tax return. However, you must also account for self-employment taxes and quarterly estimated taxes.
C-corporation
C-corporations are subject to corporate “double taxation” rules and must report income on Form 1120.
S-corporation
S-corporations report income and losses on personal returns – though, unlike C-corporations, they are not subject to corporate taxation rules. Form 1120S must be submitted along with personal tax returns.
Limited Liability Corporation (LLC)
Like sole proprietors, partnerships, and S-corps, LLCs are not subject to corporate taxes. Instead, you’ll report profits and losses on personal income tax reports alongside Form 1065.
Small Business Taxes: The Types You’ll Encounter
After distinguishing the tax documents needed for your business classification, another component to successfully navigating tax season involves understanding the types of taxes you will encounter. Especially for newer small businesses that are less experienced in tax season, knowing the types of taxes will significantly help you while filing. Additionally, recognizing the different tax categories will later benefit you when keeping record throughout the year for future tax seasons.
Below are the six most common types of taxes you will encounter.
Income
Income tax correlates with income, revenue, gains, or dividends.
Employment
For companies with employees, employment taxes encompass federal withholdings, unemployment, and Social Security/Medicare.
Self-Employment
Self-employed individuals must take care to withhold taxes for Social Security and Medicare in absence of an employer.
Excise
This refers to any indirect taxes paid towards specific products or services such as alcohol and tobacco.
Estimated Tax
Estimated taxes pertain to your anticipated taxable income at the end of the year and are usually paid on a quarterly basis.
Property
Your calculated property taxes depend on your property’s appraised value.
Though this list mentions the most common taxation categories, your business will likely face additional types of small business taxes. Therefore, make sure all the bases are covered for your unique business.
Location, Location: Region-Based Taxation Rules
If you want this tax season to be a success, keep in mind that many aspects of your tax preparation will depend on your location. Different states have different mandates regarding taxation protocols and variables, and you are responsible for keeping everything straight.
For example, if your business is in Wyoming or South Dakota, your taxation protocol is unique in that those states do not tax business income. However, all other states do. Additionally, sales tax differs between states. Some states levy taxes based on the location of company’s headquarters, while others levy them based on where the end customer is located.
Right on Time: Important Deadlines to Remember
Before the rush of papers and filing process begins, take a moment to note the tax filing deadlines. Below are three of the most important 2020 tax season deadlines regarding filing your 2019 taxes:
- March 15, 2020: Tax filing deadline for S-corporations and general partnerships
- April 15, 2020: Tax filing deadline for individuals, C-corporations, sole proprietorships, and single-member LLCs
- October 15, 2020: Filing deadline for those who have filed extensions
Working Smarter: Refer to Last Year’s Business Tax Return
Now that you are more familiar with tax season variables, this next tip acts as a launching pad when filing your taxes. Even if your company grew or changed since last year’s tax report, reviewing the previous year’s return provides a head start. Re-examining last year’s return may even remind you of the business expenses you typically report and what expenses you claimed if you have a home office. From that, you can enter most of the required information about your company business, particularly your federal Schedule C.
Keeping it Together: Collect and Organize Key Information
Finally, if you wish to successfully navigate tax season, remember to have all your necessary documents and information. Additionally, organizing the information according to the following categories will allow for a smoother process.
Business Expenses
Gather and evaluate your 2019 business expenses by looking at credit card statements or a digital business accounting program. Remember that your expenses may include office supplies, business equipment, payroll expenses, and proof of retirement plan contributions.
Taxes Already Paid
Both tax software programs and paper tax forms will ask you to report any state/federal estimated or other taxes you’ve already paid. It’s wise to have those figures organized and ready.
Bought, Sold, and Donated Equipment
This information is important to report on your business taxes as you may earn some deductions for doing so.
Client 1099-MISC Forms
These forms typically come in the mail to you after January 31. While you have time before your tax deadlines, take a moment to review the 1099 forms. Do you notice any mistakes? Now is the time to request a corrected form from the issuer.
Bank and Credit Union Information
Collect all records indicating any interest or dividends you earned on business financial accounts. Many financial institutions now post interest statements online, known as either 1099-INT or 1099-DIV forms.
Auto Records
If you use your car for business purposes, keep a detailed log recording your business driving mileage accrued, a list of repairs, and gas costs.
Preparing for the Next Tax Year: Remote Quality Bookkeeping
Once you finish filing taxes for your small business, it’s tempting to breathe a sigh of relief and take a break. However, it’s wise to begin planning how to get ready for next year’s tax season. At Remote Quality Bookkeeping, we will help you! We offer cost-effective, efficient, and accurate bookkeeping services for small businesses and franchises throughout the United States.
Our team at RQB is thorough when taking care of every client. We never throw a client’s entire workload on a single member of our staff. Instead, our staff works as a team for you. Therefore, every customer receives a team of trained and specialized staff to meet individual needs, perfect for conquering tax season.
If you have any further questions, please do not hesitate to reach out at (866) 567-4258 or via our online contact form!
