Tax season is upon us again. For the small business owner, tax time may be one of the most stressful times of the year. If you recently launched your business and haven’t even made money yet, you may wonder if you have to file. The answer is almost certainly "yes." If you’ve been in business for a while you may be considering how the tax code changed this year and how it will affect your bottom line.This article is the first in a series that discusses basic topics for entrepreneurs. The first installment discusses what small businesses should know about taxes.
Understanding the Basics of Small Business Taxes
For entrepreneurs, it’s the season to “pay the piper,” or, at least do some extra paperwork at tax time. How this process works for your business depends on how it is set up, but there are three basic kinds of taxes for small businesses in the US:
- Income taxes, which, just like it sounds, is a tax on the income you made last year. While larger C Corps are taxed at a corporate rate, all other types of businesses are taxed at the individual rate.
- If you are a freelancer, independent contractor, or a small business, you need to estimate and pay quarterly taxes. If you don’t, you will be hit with penalties at tax time. It works like this:
- In 2020 you will pay taxes on what you earned in 2019.
- You should begin paying quarterly taxes this year on what you assume you will earn in 2020.
- Then, in 2021, you will (hopefully) break even on the taxes on your 2020 earned income.
The process of paying quarterly taxes can help you not get hit with a big tax bill next year.
- There are also self-employment or employment taxes if you earn more than $400 each year. If you have employees, you must pay employment taxes including Social Security, Medicare, and unemployment tax. You must also collect the taxes from your employees and send to the IRS.
- There may be excise taxes depending on your type of business.
- If you have a retail business, you must collect sales tax from your customers and remit it to the government.
Each year the tax code changes, but with the Tax Cuts and Jobs Act of 2017, there were significant changes:
- C Corporations now pay a flat 21 percent tax on income
- All other business types can claim a 20 percent Qualified Business Income (QBI) tax deduction, providing they meet criteria.
- You can no longer entertain clients and get a write-off.
- Snacks and meals for the office are now only 50 percent deductible (it was 100 percent previously).
- You can write off more for car depreciation if the vehicle is a business expense.
While taxes are generally complex, you can do a few things to prepare for the season.
Prepping for Tax Time
Prepare for tax season by gathering your business records, including balance sheets and income statements, receipts, and last year’s tax returns. Make sure your bookkeeping is neat and up to date. Every business transaction should have a category and your books should be reconciled with your bank account.
These are just a few of the tips you need to know for tax season this year. Once the taxes have been filed, get ready to scale your business with small business funding from Benetrends. Click here to download Innovative Funding Strategies For Entrepreneurs.