egardless of industry or business entity, every business must pay taxes. However, the type of taxes you’re required to pay—and how often you pay them—varies widely based on several factors. Whether you’re new to the process or simply could use a refresh, here are the top three things to consider when filing your small business taxes in 2022.
1. Business structure is key for small business tax filing
When starting a business, one of the most important things to consider from a legal and tax perspective is what kind of business entity or structure you wish to create. Why? Because it determines the type of income tax you’ll need to file in addition to your tax rates.
The five most common business structures are:
- Sole proprietorships. Contractors, freelancers, and unincorporated businesses typically use this business structure. As a sole proprietor, you are responsible for reporting taxes to the IRS on your personal tax returns.
- Partnerships. A partnership has the same legal structure as a sole proprietorship, but it allows for two or more owners. Instead of paying income tax, a partnership must file an annual information return. Each partner must also report their share of the business’s income and losses on their personal tax return.
- C-Corporations. The IRS recognizes a C-Corporation as a separate tax-paying entity for federal income tax purposes. Profits are distributed among shareholders, and special tax deductions may also apply.
- S-Corporations. An S-Corporation shields multiple owners from liability and allows shareholders to report pass-through income on their personal tax returns. Certain institutions, such as financial companies, are ineligible for S Corporation status.
- Limited Liability Companies (LLCs). The IRS treats an LLC as a corporation, partnership, or disregarded entity (i.e., part of the LLC’s owner’s tax return) depending on elections made and the number of members it has. Given that LLC regulations vary by state, make sure to check the Secretary of State or other business gateway website in the state where you formed your LLC.
2. The amount you owe varies by tax type and rate
Depending on your business structure, you may be responsible for paying some types of taxes and not others.
The most common taxes paid by small businesses include:
- Income tax. Income taxes usually make up the most substantial portion of taxes owed if your business made a profit during the year.
- Estimated taxes. Estimated taxes include income tax, self-employment tax, and alternative minimum tax. Salaried workers can avoid paying the estimated tax by increasing their withholding through their employer.
- Employment taxes (also called payroll taxes). These taxes include social security and medicare taxes, federal income tax withholding, and federal unemployment tax for your employees.
- Self-employment taxes. Self-employment taxes cover your social security and medicare taxes if you work for yourself.
- Excise taxes. Excise taxes vary based on various factors, such as the kind of business you operate, the equipment you use, or the products you sell.
In addition, you may also owe state and local taxes, sales tax for certain products or services, and property taxes on real estate and equipment.
3. Stay organized about your business finances
Next year, set yourself up for a faster and easier tax return by maintaining an organized record of your business transactions. You’ll thank yourself later if you do the following throughout the year:
- Keep your receipts. Keep an electronic or paper record of your receipts.
- Input your invoices on time. Process your invoices and enter them into your general ledger. Using Quickbooks or Xero can make this process easier – and you’re in luck: with a Novo banking account, you can natively integrate your business checking with either software.
- Keep a general ledger. Reconcile your bank statements regularly, ideally on a monthly basis. It’s much more convenient to do so immediately after receiving your monthly banking statement than to attempt to wade through multiple bank statements when tax season rolls around.
- Stay on top of your financials. Maintaining your income statement, balance sheet, and depreciation schedule through the year will enable you to plan ahead and avoid unpleasant surprises come tax time.
- Pay attention to important dates. Mark dates in your calendar, such as when quarterly taxes are due if your income exceeds a certain level. If you have employees, mark the deadline by which they need to have received their W-2s or 1099s.
Looking for more information on how to file taxes for your small business? Be sure to visit the IRS website—and don’t forget to check out your state and local government websites. Knowing how to file your taxes properly will help you avoid getting your business into trouble and can reduce the stress of tax season.