Federal Business Taxes Guide for Small Business Owners

As a small business owner, navigating federal business taxes can be a daunting task. You're not alone in feeling overwhelmed - the IRS requires businesses to file various tax forms, including the Form 1120, which is used by corporations to report their income and expenses.

The IRS considers a business to be a corporation if it has shareholders and is required to file a Form 1120. This is in contrast to a sole proprietorship, which is considered a pass-through entity and reports business income on the owner's personal tax return.

To file a Form 1120, you'll need to report your business's income, deductions, and credits. This includes income from sales, services, and investments, as well as deductions for business expenses like rent, utilities, and employee salaries.

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Small businesses may be subject to various taxes on both the federal and local levels. These taxes may include income tax, payroll tax, and sales tax, though every small business may not need to pay each of these taxes depending on where they are located and the nature of their business.

Income tax is a type of tax that small businesses must pay on their profits. This tax is typically calculated as a percentage of the business's net income.

Payroll tax is another type of tax that small businesses must pay, which is used to fund social security and other government programs. This tax is typically withheld from employees' wages and paid by the employer.

Sales tax, also known as value-added tax, is a type of tax that is imposed on the sale of goods and services. The rate of sales tax varies by location, with some states and localities charging a higher rate than others.

Not all small businesses need to pay each of these taxes, depending on where they are located and the nature of their business.

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As a small business owner, you're eligible for a variety of deductions and credits that can significantly reduce your federal business taxes. These can include the home office deduction, startup costs deduction up to $5,000, and Section 179 deduction.

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The home office deduction is a great option for sole proprietors who use a dedicated space in their home exclusively for business. This can include deducting a percentage of your mortgage interest, insurance, utilities, and repairs, as well as taking depreciation for that portion of your home.

Tax credits, on the other hand, directly reduce your taxes on a dollar-for-dollar basis. Small businesses can claim credits like the Work Opportunity Tax Credit (WOTC), Employer-Provided Childcare Credit, Small Business Health Care Tax Credit, and Qualified Small Business Payroll Tax Credit for Increasing Research Activities.

Here are some examples of tax credits available to small businesses:

Business expenses, such as wages, rent, utilities, mileage and travel expenses, office supplies, equipment, advertising, internet and wireless services, and state and local taxes, are generally deductible from your company's profits, reducing your taxable income.

Tax planning and compliance are crucial aspects of federal business taxes. Small businesses can make the process less onerous by planning ahead and keeping good records.

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To keep accurate records, small businesses should use accounting and tax software programs, which can help them track income and expenses as they occur. This will save them time and effort in the long run.

Businesses must also make estimated tax payments each quarter to avoid penalties and a large tax bill at the end of the year. They can pay their estimated taxes online, by mail, phone, or mobile device through the IRS's Electronic Federal Tax Payment System (EFTPS).

The IRS has a Publication 509: Tax Calendars that outlines the various filing deadlines for businesses. It's essential to note these deadlines to avoid penalties and interest on unpaid taxes.

Here are some key deadlines to keep in mind:

Businesses that don't file their taxes on time or fail to pay what they owe can face IRS penalties. These penalties can add up quickly, making it essential to stay on top of tax payments and filing deadlines.

You'll want to gather all the necessary documents before filing your small business taxes. This includes the cost of goods sold, business deductions such as business travel and meal expenses, and business assets like vehicles and equipment.

To calculate depreciation deductions, you'll need to know the details of your business assets. This can be a lot of information to keep track of, so it's a good idea to have it organized and easily accessible.

Business assets like vehicles and equipment can be depreciated over time, rather than deducted in the year of purchase. This can result in tax deductions that continue for years into the future.

You'll also want to gather information on how you use your home for your business, as this is necessary for filing a home business space deduction. This can include details on how much space you use for your business, and how often you use it.

Here's a list of the types of information you'll need to gather:

Record keeping is crucial for small businesses, and accounting and tax software can help. You'll want to keep careful records of your income and expenses as you go to avoid scrambling to collect paperwork later.

Small businesses may need to pay estimated taxes each quarter to avoid penalties and a big tax bill at the end of the year. You can pay your estimated taxes by mail, phone, or mobile device, or online through the IRS's Electronic Federal Tax Payment System (EFTPS).

Businesses have various filing deadlines, so be sure to check the IRS's Publication 509: Tax Calendars for the specifics. Failing to file on time or pay what you owe can result in IRS penalties and interest.

The IRS can audit individual or business tax returns for various reasons, including random selection. Hang on to your returns and supporting documents for at least two years, as the IRS rarely audits returns more than six years old.

Here are some key compliance requirements to keep in mind:

As a business owner, you'll need to file various tax forms and schedules to report your business income and expenses to the IRS. If you're a solo professional or own a single-member LLC, you'll typically file a Schedule C (Form 1040) to report your business profits or losses.

You can also report losses and income from your multi-member LLC or partnership on Schedule E (Form 1040), using the information on your partnership Schedule K-1. Additionally, you may need to file a Schedule SE to report the amount of income your LLC pays you, so you can pay the proper amount of self-employment tax.

Here's a brief rundown of some common tax forms and schedules:

If you're a solo entrepreneur or independent professional, you'll typically file a Schedule C (Form 1040) to report the profits or losses of your business to the IRS.

This form is used to calculate your business income and expenses, which will then be used to determine your tax liability.

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You'll need to report your business income, including any revenue from services or sales, and subtract your business expenses to arrive at your net profit or loss.

To file a Schedule C, you'll need to keep accurate records of your business income and expenses throughout the year.

You can use the Schedule C form to report both profits and losses from your business.

If you're subject to self-employment tax, you'll also need to file Schedule SE (Form 1040 or 1040-SR) in addition to Schedule C.

You must pay self-employment tax if your net earnings from self-employment were $400 or more.

Here's a quick breakdown of the key points to keep in mind when filing a Schedule C:

You must file Schedule SE (Form 1040 or 1040-SR) if you're self-employed and your net earnings from self-employment were $400 or more. This form is used to report your self-employment tax.

Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. Your payments of self-employment tax contribute to your coverage under the Social Security system, providing you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

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The self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare. This rate is the same for all self-employed individuals, regardless of age.

You must file Schedule SE even if you've already started receiving Medicare and Social Security. There is no age limit for filing this form.

Here are some key points to keep in mind about Schedule SE:

If you're a multi-member LLC or partnership owner, you'll need to report your share of LLC losses and income on your Schedule E (form 1040). To do this, you'll use the information on your partnership Schedule K-1.

You should receive a Schedule K-1 from your LLC, which will help you calculate your share of the business's income and losses. Your Schedule E will then report this information to the IRS.

You may also need to file a Schedule SE to report the amount of income your LLC pays you, so you can pay the proper amount of self-employment tax. The requirements for filing this form depend on the type of partnership your LLC members have.

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Here's a summary of the key points:

It's essential to keep accurate records and follow the instructions for reporting your business income and losses on your tax return.

The PTET credit is a valuable tax benefit, but it's not transferable to or from other entities. Each eligible credit claimant's PTET credit is equal to its direct share of the PTET reported by the electing entity on the entity's annual PTET return.

If you're expecting a PTET credit, be aware that it's not automatically applied to your tax bill. The credits are aggregated if you receive more than one PTET credit.

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Tax entities and requirements can be complex, but understanding the basics can help you navigate the process. For example, sole proprietorships file taxes using simpler forms like Schedule C, while S-corporations use Form 1120-S.

Large businesses, on the other hand, often use more complex forms like Form 1120 for C-corporations, which may require consolidated tax returns for multiple subsidiaries. This can be a challenge for business owners who need to file detailed reporting and compliance.

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Here's a breakdown of the tax entities and requirements you need to know:

Each member of a multi-member LLC must report their own Schedule K-1 information on Schedule E, and file their own Schedule SE and Form 1040.

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As a self-employed individual, you're responsible for paying self-employment tax, which is a Social Security and Medicare tax.

You must pay self-employment tax if your net earnings from self-employment were $400 or more, or if you work for a church or a qualified church-controlled organization and receive $108.28 or more in wages.

The self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare.

To report your self-employment tax, you'll need to file Schedule SE (Form 1040 or 1040-SR), which is an IRS form used to determine your social security benefits.

You must attach Schedule SE to your 1040 or 1040-SR form, regardless of your age, and even if you've already started receiving Medicare and Social Security.

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The self-employment tax is used to cover your coverage under the Social Security system, providing you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Here are the key details to keep in mind:

Employment taxes are a crucial aspect of running a business with employees. As an employer, you're responsible for paying and filing certain taxes.

Social Security and Medicare taxes are two types of employment taxes you'll need to pay. Employees and employers each pay a portion of these taxes.

Federal income tax withholding is another employment tax you'll need to handle. This is the income withheld from an employee's pay to cover their income taxes.

Unemployment taxes, also known as FUTA, are another type of employment tax. The employer pays FUTA taxes in their entirety.

Employment taxes are typically filed using Form 941, 943, or 944, except for FUTA taxes, which are filed with Form 940.

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Here's a breakdown of the employment taxes you'll need to pay:

Remember to also explore tax credits available to your business, such as the Work Opportunity Tax Credit or the Employer-Provided Childcare Credit.

Excise taxes are a type of tax that applies to specific goods and services, such as fuels, air transportation, and certain vaccines. These taxes can be imposed by both the federal government and the states.

Manufacturers, retailers, importers, and consumers may be responsible for paying excise taxes, depending on the good or service involved. Sole proprietors, partnerships, C corporations, and S corporations may all be subject to excise taxes.

Excise taxes can be used to discourage certain activities or make them more expensive, such as indoor tanning services. Companies file their excise taxes on forms like 720, 730, 2290, and 11-C.

Here's a breakdown of some common excise taxes:

If you manufacture or sell certain products, operate a business that uses specific equipment or facilities, or receive payment for certain services, you may need to file Form 720 or one of the other excise tax forms.

LLCs are a popular business structure because they're normally easier to form and run than corporations, but they can provide more legal protection than sole proprietorships and partnerships.

If your LLC has only one member, the IRS treats it like a sole proprietorship, meaning the business's owners report their business income on their personal income tax returns.

You probably don't need an Employer Identification Number (EIN) to pay your federal small business taxes unless your LLC or sole proprietorship has employees or engages in certain financial activities.

Your LLC income taxes are usually due the same day as your personal income taxes (normally April 15).

Dealing with the IRS means you're probably going to have to file a lot of paperwork on a regular basis.

The following forms are staples in a single-member LLC's tax filing requirements:

Even if your business doesn't require an EIN because it doesn't employ other people, you need to pay employment taxes on the business income you pay to yourself.

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If your LLC has more than one member, the IRS normally taxes your business as a partnership, and your multi-member LLC likely needs an EIN.

Each member of the LLC must report their own Schedule K-1 information, and they must also file their own Schedule SE and Form 1040.

Here's a quick rundown of the forms and information multi-member LLCs need to submit to the IRS:

If you're claiming the PTET credit, you'll need to make an addition modification to your federal adjusted gross income or federal taxable income on your New York State personal income tax return.

The amount of the addition modification is equal to the PTET credit you're claiming. See Form IT-225-I for more information.

You'll also need to make an addition modification when claiming the resident tax credit. This is equal to the amount of pass-through entity tax paid to another state, local government, or the District of Columbia on your behalf.

For tax years beginning on or after January 1, 2021, resident partners, members, or shareholders will be allowed a resident tax credit against their New York State personal income tax for any pass-through entity tax imposed by another state, local government, or the District of Columbia.

The credit claimant's New York State personal income tax return must include an addition modification to their federal adjusted gross income or federal taxable income for an amount equal to the PTET credit they are claiming.

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Businesses of different sizes face unique tax considerations due to differences in size, structure, and resources. Small businesses and large businesses, for example, have distinct considerations when it comes to taxes.

Small businesses have limited resources and often lack the infrastructure to handle complex tax matters, whereas large businesses have more resources and can afford to hire specialized tax professionals. This difference in resources affects how they approach tax planning and compliance.

Small businesses may be eligible for special tax deductions and credits, such as the home office deduction, that are not available to large businesses. Large businesses, on the other hand, may be subject to more stringent tax regulations and reporting requirements.

The tax implications of business size are a key consideration for entrepreneurs and business owners.

Sole proprietors must file a tax return if their net income from the business was $400 or more. This is true even if they show a loss for the year and face no tax liability.

To determine if you must pay self-employment tax, you must consider your net earnings from self-employment. If they were $400 or more, you'll need to file Schedule SE.

If you're a sole proprietor or individual partner in a partnership, you're subject to self-employment tax for Social Security and Medicare. You'll need to attach Schedule SE to your 1040 or 1040-SR form.

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If your multi-member LLC is taxed as a partnership, each member will need to file their own Schedule K-1 information, as well as their own Schedule SE and Form 1040.

Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.

Here's a breakdown of who must pay estimated taxes: