s a small business owner responsible for filing your own taxes, the first thing you should know is that tax laws change every single year. This means you cannot just calculate your business taxes based on last year. You need to stay updated on the tax laws for 2020. This guide walks you through everything you need to know about filing your taxes in 2020, from the types of taxes you are required to pay to how and when to file your business tax returns.
5 Main Types Of Small Business Taxes
All small businesses pay taxes at 3 different levels – federal, state and local. The federal tax laws remain the same for small businesses located anywhere in the U.S. However, the state and local laws vary in different states and municipalities.
Understanding the tax laws in your particular location is important.
1. Income tax
All businesses with the exception of partnerships are required to file annual income tax returns. This is the tax you pay on the income your business earns. Partnerships are required to file an information return.
2. Self-employment tax
Small business owners are considered to be self-employed. The self-employment tax is deducted from your net earnings and goes towards your Social Security and Medicare commitments.
3. Employment tax
This applies only if you have employees. It is the tax that you deduct from your employees’ paychecks related to their federal income taxes, Social Security and Medicare taxes, and federal unemployment taxes.
4. Excise tax
This tax is only applicable if your business is associated with certain categories of goods or services, such as air transportation, heavy trucks, fuel, alcohol or tobacco.
5. Estimated taxes
You are liable to make quarterly estimated tax payments if you have zero or an insufficient amount of taxes withheld from each paycheck.
How Your Business Structure Affects Your Small Business Taxes
The exact types of taxes you are responsible for will vary, depending on your business structure:
You file sole proprietorship taxes if your business is owned and operated by you alone. In this case, filing your taxes is fairly straightforward. You pay quarterly estimated taxes and report all business related income and losses on your personal income tax return. As a sole proprietor, you need to file a Schedule C or Schedule C-EZ with your Form 1040 and are also required to pay self-employment taxes. This is to cover your Medicare and Social Security obligations.
If your business is owned and operated by two or more individuals it is considered a partnership. With partnerships, the business itself is not subject to corporate rate taxes. Instead, taxes are imposed on the business owners’ income. Every partner has to show their share of the business income and losses on a Schedule K-1 Form 1065.
In the event that your small business is structured as a C-corporation, both you and your business are considered as separate entities and double taxation is applicable. You first pay tax at a flat rate of 21%. In addition, after profits are distributed as dividends, shareholders need to pay tax on their personal tax returns. Form 1120 is the main income tax form for C-corporations. If you expect to owe $500 or more in business taxes for the year 2020, you are required to pay estimated quarterly taxes.
In an S-corporation, every shareholder reports their business income and losses on their personal tax return and personal income tax rates are imposed on the profits. As an S-corporation, you file Form 1120S. This is an informational tax return form that allows S-corporation businesses to avoid double taxation. Here too, you are required to pay estimated quarterly taxes if you expect to owe $500 or more in business taxes for the year 2020.
Limited Liability Companies
If you own a limited liability company or an LLC, you’ll enjoy the tax benefits of a sole proprietorship or partnership with the liability protection of a corporation. As an LLC owner, you are required to submit Form 1065 every year for informational purposes. You are also required to pay quarterly estimated tax on your personal income tax forms.
Timeline For Paying Your Small Business Taxes In 2020
If your business owes more than $1000 in income taxes during the financial year, you need to pay quarterly estimated taxes. This applies to all small businesses regardless of structure. The exception is for C-corporations and S-corporations, where the limit is $500. To comply with this regulation, you will need to keep track of 4 deadlines:
Deadline for 1st quarterly estimated tax payment: April 15, 2020
Deadline for 2nd quarterly estimated tax payment: June 17, 2020
Deadline for 3rd quarterly estimated tax payment: September 16, 2020
Deadline for 4th quarterly estimated tax payment: January 15, 2021
Small Business Tax Deductions That You Should Be Aware Of
The small business tax deductions you can claim for include but are not limited to:
- Office rent - home office rent is also included if you have a dedicated workspace in your home
- Travel expenses, including hotel stay, provided you can show that the travel was for business purposes
- Marketing expenses, including the cost of digital marketing, business cards and fliers
- Cost of utilities associated with running the business such as electricity, phone, internet and water
- Cost of running and maintaining a vehicle provided you can show that it is used for business purposes
- Employee salaries and perks including education and retirement benefits
Tax season doesn’t have to be stressful. Staying on top of your income and expenses throughout the year will make it easier for you to file your tax returns without the unnecessary last-minute stress.
These are some of the documents you should make it a habit to save as you get them:
- All expenses including office rent, utility bills, gross receipts, professional fees, office supplies, contractor payments, travel expenses, advertising costs, phone and internet bills
- Interest on checking and savings accounts
- Sales records
- Employee wages
- Insurance premiums
- Unclassified income
One Important Tip For A Stress-Free Tax Season
As a small business owner, there’s no end to the number of things you need to do to grow your profits. Calculating your taxes can take up a whole lot of your time, time that is better spent on growing your business. Instead of trying to do it all yourself, it makes far more sense to hire a tax professional to file your taxes. Tax professionals have a lot of experience in this field and will calculate your personalized tax returns correctly based on your business structure with minimum disruption to your schedule.