Basic Tax Tips for Business Owners

Filing taxes can be a daunting task for anybody, but it may be especially stressful for business owners. Between the many different deadlines, types of tax liabilities, and deductions or credits to know, it’s enough to make anyone’s head spin. While it’s always a good idea to utilize the services of a tax professional to help you meet your federal-tax filing responsibilities, avoid late fees, and employ money-saving strategies, understanding some of the basics can make the whole process smoother and less confusing.

Filing and payment deadlines

The typical Tax Day is April 15, but that may not necessarily be your deadline for filing and paying your federal business taxes. For instance, it could be pushed to the next business day if it falls on a weekend or legal holiday, or you could ask for a six-month extension. Here are a few other factors that may influence when your due dates actually fall.

Business structure
The legal entity you chose when forming your business can affect when you file—sole proprietorships and C corporations have the standard April 15 deadline, but the one for S corporations and partnerships comes a month earlier.

Tax year
A company may be able to choose to follow either the calendar year (January 1 to December 31) or a fiscal year—a twelve-month period that ends on a date other than the last day of December. For the most part, those with the latter will have a filing deadline of the fifteenth of the fourth month after the conclusion of their tax year. Be aware, however, that a business’s tax year is set at its formation; adopting an alternative fiscal year later on can be a complex process requiring IRS approval.

Quarterly payments
Rather than one lump sum at the filing deadline, businesses must make quarterly estimated tax payments to the IRS if they expect the total to be at least $500. These are generally due on the fifteenth of every April, June, September, and January (for the last quarter of the previous year). Be sure to make these payments on time—you can be charged a penalty fee if you miss one.

Types of business taxes

In addition to estimated tax payments, there are four main categories of federal business taxes your company may have to pay. You may also be responsible for state and local taxes, including ones for income, property (such as if you own buildings or land), and sales.

Income tax
All businesses owe income tax at the federal level, though how you are taxed can vary according to how your company is legally structured. C corporations, for instance, are taxed on their profits, which are subject to a corporate tax rate of 21 percent. Meanwhile, sole proprietorships, partnerships, and S corporations are considered “pass-through entities” by the IRS, meaning they aren’t taxed separately. Instead, these owners report their net income on their individual returns and are taxed at their personal tax rate.

Self-employment tax
If you own a sole proprietorship or have a stake in a partnership, you’re subject to a self-employment tax, to be used for Social Security and Medicare. The total tax rate is 15.3 percent of your net earnings: 12.4 percent for Social Security (applied just to the initial $168,600) and 2.9 percent for Medicare with no cap. Generally, this tax applies if you have net earnings of $400 or more, and you can deduct 50 percent of it on your income taxes.

Employment tax
For those companies with employees, they must pay employment tax. It includes both Social Security and Medicare taxes, for which your employees pay a portion. It also encompasses the income withheld from their paychecks to cover their income taxes as well as unemployment taxes (FUTA), which are your responsibility. Note that this tax is due quarterly—on the last day of April, July, October, and January (for the fourth quarter of the previous calendar year).

Excise tax
Certain businesses, including merchants, must pay an excise tax at the time of purchase on specific goods and services, such as health-related ones, fuel, tobacco, and alcohol.

Tax deductions and credits

While all these taxes can add up to a hefty payment, you may potentially be able to reduce what you owe by hundreds or even thousands of dollars through applying deductions and credits. The former are “ordinary and necessary” expenses that can help reduce taxable income, while the latter can directly lower your tax liability. Most businesses use a combination of both to maximize their savings. For example, you may be able to deduct what you paid for advertising or utilities or qualify for a credit if you invested in energy-efficient improvements to your building during your tax year.

Understanding your business’s tax obligations can feel complex, but it’s all about breaking down the key pieces of information. To ensure that you don’t miss a deadline or payment, consult with a financial professional, who can help you sort through all the details while also finding ways to possibly minimize your tax liability.

TAKE ACTION:
Consider reaching out to a tax professional to help you plan an effective strategy for meeting your business-tax obligations.