What are the different types of taxes that my small business may be required to pay?
All small businesses are required to file an income tax return. The type of income tax return that your business is required to file depends on the type of business that you formed. At the federal level, C-corporations file Form 1120, S-corporations file Form 1120-S, Partnerships file Form 1065 and Sole-Proprietors file a Schedule C (which is included with the owner's individual income tax return). In addition to filing a federal income tax return, most states also require a business to file a state income tax return. A Tax Prep Checklist is useful for organizing your tax documents and learning about tax filing deadlines.
If you have employees, there are some additional taxes related to your employees. The main payroll taxes are:
- Social Security tax.
- Medicare tax.
- Unemployment tax.
- State and local payroll taxes.
It is important to understand how to calculate and withhold payroll taxes before you hire your first employee because you are required to start withholding payroll taxes the first time you run payroll. If you are self-employed, it is recommended to learn some best practices around filing Social Security and Medicare taxes for your self-employment income.
If you hire independent contractors for your business, you are typically not required to withhold taxes from those contractors. However, you may be required to submit a Form 1099-NEC or a Form 1099-MISC to the IRS and the contractor to report the amount that you paid said contractor.
Depending on the type of business you operate, you may be required to collect and remit sales tax to your state or local taxing authority. With the increase of ecommerce businesses, sales tax compliance has become increasingly complicated.
Some states require businesses to file franchise tax returns. Don't be confused by the name though; franchise tax returns are not just imposed on franchisors and franchisees. Depending on your state, you may be required to file a franchise tax return even if you are not associated with a franchise.
How do I figure out which tax forms to fill out and file for my business?
The income tax return that your business is required to file depends on the type of business that you operate. Below are the various types of business income tax returns:
- Schedule C: This is filed by sole proprietorships. This type of income tax return is also filed by LLCs that have only one member and have not made an election with the IRS to file a different type of tax return.
- Form 1065: Partnerships file this type of tax return.
- Form 1120-S: S-corporations file this type of tax return.
- Form 1120: C-corporations file this type of tax return.
If your business has employees, you are required to file a Form W-2 for each employee and a Form W-3, which summarizes your Form W-2 data. Form 940 is required to report your federal unemployment tax liability. Form 941 or Form 944 is required to report federal income and FICA taxes. Businesses that hire independent contractors may be required to file Form 1099-NEC with the IRS. Depending on your business and the state that you operate in, you may be required to file sales tax forms.
There are a number of other less common tax documents that your business may be required to file. Consult with a tax professional to verify the tax forms that you are required to file or if you need help completing your business tax filings.
What records am I required to keep for tax purposes?
Regardless of the type of business that you have, it is important to retain documentation that proves your business income and expenses. It is recommended to retain receipts, credit card and bank account statements, canceled checks, invoices, purchase orders, tax documents (such as Forms 1099-NEC and 1099-K), and sales contracts. You'll also want to keep a copy of all financial records, such as your profit and loss statement and your balance sheet, that were used to prepare your tax return.
If you deduct automotive expenses, it can be helpful to keep a detailed mileage log that tracks all business travel, including travel dates, locations, mileages, and business purposes. Similarly, log all business meals and entertainment to record who attended the meal or event with you and what the business purpose of the meal or event was. For travel expenses such as hotels, flights, and taxis, keep a travel log that lists the travel expense and the purpose of the business travel. These types of records are extremely helpful if your business taxes are ever audited.
Taxpayers are often confused with regard to how long they need to keep their business records. It is best to consult with your tax professional to determine how long to retain the various types of business and tax records that you have. You may have to hold on to some types of records for longer periods of time than others. If your tax return is being audited, or if you need help determining how long to keep business records, reach out to a Rocket Lawyer network attorney for assistance.
When and how do I pay taxes for my business?
The due date for business income tax payments depends on the type of business you operate and whether you are on a fiscal year or a calendar year. Most businesses operate on a calendar year. For Schedule C filers and C-corporations, the income tax due date is typically April 15 of each year (or the 15th day of the 4th month following the end of the fiscal year for businesses that operate on a fiscal year). For Partnerships and S-corporations, the income tax due date is typically March 15 of each year (or the 15th day of the 3rd month following the end of the fiscal year for businesses that operate on a fiscal year). State income tax returns generally have the same due date as federal returns, but there are some exceptions. Check with your accountant to verify the specific deadlines for your business. There are also various deadlines for other filings such as Form W-2, Form 1099, and unemployment reports.
If you have employees, you are required to withhold certain amounts and to remit those amounts by making tax deposits with various taxing authorities. Generally, these tax deposits occur on either a monthly or semi-weekly schedule. Collecting and remitting payroll taxes can be complicated, so it is wise to consider consulting a tax professional to set up a deposit schedule.
If you have questions about your legal obligations as a business owner, reach out to a Rocket Lawyer network attorney for affordable legal advice. If you'd like help getting your taxes prepped and filed, get matched with a tax pro via Rocket Tax™ to save time and money filing your returns.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.