Taxes And Small Businesses: What You Need To Know – Part 2

Whether you’re a newly divorced mom looking to generate some income to support yourself and your family or a long-time businesswoman looking to build your own business instead of working for someone else (or maybe both) you’ll need an approach to managing – and paying – taxes for your small business. There are a few basics every small business owner should know. These include:

• What kind of business are you?
• What kinds of taxes do you need to pay, and when?
• What kind of support do you need?

We covered the first question in a previous article; we’ll address the other two questions below. (Note: this information applies to US-based businesses.)

What kinds of taxes do you need to pay and when?

There many kinds of taxes small businesses need to consider, including:

• Sales tax – taxes you pay on sales of products, typically paid to state and local revenue authorities (not covered in this article)
• Income tax – taxes paid on income earned, either by you as an individual or by the business (in the case of corporations)
• Payroll and unemployment taxes – these taxes apply if your business has employees; the include both the employer’s share and withholding of employees’ shares and related reporting
• Self-employment tax – because a business isn’t paying the employer’s portion of your payroll taxes, self-employed moms pay this tax in lieu of payroll taxes

There may be other taxes and licenses that apply (these can vary depending on your location and industry). State and local forms vary, so check with your tax accountant or bookkeeper for more information. US federal tax requirements for the three most common small business structures are described below. 

Sole Proprietorship

No special tax requirements to get started. You may need a business license or to register your business in your state and/or locality. If you sell products or tangible goods, you will need to collect sales tax. You may need to register with the state or city/county to report and remit sales taxes collected.

Key tax forms and filing frequencies include:

• Income tax:
• Form 1040 – annual (due April 15 following the end of the calendar year)
• 1040 Schedule C, Profit or Loss from Business (sole proprietorship) – annual with 1040
• 1040 Schedule SE, Self Employment Tax – annual with 1040
• 1040-ES, Estimated Tax Voucher – quarterly (Jan. 15, April 15, June 15, Sept. 15)
• Payroll and unemployment taxes:
• Form 941, Employer’s Quarterly Federal Tax Return – quarterly
• Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return – annual

Form 1040 and supporting schedules are probably the most familiar tax forms. This is the form most of us file annually on April 15 for the preceding calendar year. Schedule C is the specific form for small business income and expenses; the net income from your business becomes part of the 1040. Schedule SE is also part of the 1040 and is used to determine the amount of self-employment taxes you need to pay.

Estimated Taxes – If you don’t have a job where taxes are being withheld, you’ll need to pay estimated taxes, usually quarterly. You can pay by check, or you can set up an account with the IRS and pay electronically at www.eftps.gov. States also require estimated quarterly tax payments; check your state’s website for more information.

Helpful Hint: If you have never paid estimated taxes before, they can take a big dent out of your income. I recommend setting aside 25% of whatever revenue you earn in an account set up specifically for taxes so the money will be available when you need it.

Employer Taxes: You only need to worry about payroll and related employer taxes if you have employees. If you hire someone on contract you’ll need to provide them with a 1099-MISC at the end of the calendar year if you paid them more than $600, but you don’t have to withhold and file payroll taxes. You’ll need to know the guidelines for employees versus contractors to stay out of trouble with the IRS (more info here on the difference).

Limited Liability Company (LLC)

The federal government doesn’t recognize LLCs as separate entities, so the tax forms you need to file depend on how the LLC is categorized. If you are a sole proprietor LLC, you file the same tax forms described above. A partnership files Form 1065 (partnership return), and a corporation files Form 1120 or 1120S (for S-corps, below). Some states tax LLCs, so you’ll need to check on the specifics where you live.

Members (owners) of the LLC pay taxes on LLC income, generally using Form 1040, including Schedule C. LLC members must pay self-employment taxes, which are reported using Schedule SE.

S-corporation (S corp)

The S-corp structure allows you to avoid double taxation (i.e., taxes on both the corporation and its shareholders). S-corp profits and losses get reported on shareholders’ Form 1040s; as a result, shareholders who work for the company must be paid a salary.

S-corps have many benefits, but they also have more paperwork and operational requirements than other business types. Once you register as a corporation with the IRS, you then file Form 2553 to register as an S-corp. Then your business will need to obtain required licenses and permits and register with state and local revenue authorities. You’ll also need a Tax ID number from the IRS, which requires a separate application for an Employer Identification Number (EIN). More information and online application available here.

Key tax forms and filing frequencies include:

• Income tax:
  • Form 1120S, US Income Tax Return for an S-Corporation – annual
  • 1120S Schedule K-1 – annual
  • 1120-W, Estimated Tax for Corporations – quarterly
• Payroll and unemployment taxes:
• Form 941, Employer’s Quarterly Federal Tax Return – quarterly
• Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return – annual

Income tax: Form 1120S is filed annually to report the company’s financial results. This form is due earlier than the 1040 (i.e., March 15 rather than April 15 for a business using the calendar year as its tax year). Schedule K-1 reports each shareholder’s portion of the corporation’s income and goes to both the IRS and each shareholder. On your personal income tax return (Form 1040), you’ll prepare Schedule E to report this income and pay the related taxes.

The IRS has an excellent overview of the tax requirements for S-corps at this page where you can find more information and links to the forms and instructions.

Employer taxes:This topic requires more space than available here. See the IRS guide on employment taxes for more information.

 What kind of support do you need?

If you’re not comfortable with taxes and finances, I strongly recommend you hire an accountant or bookkeeper to support you. However, you’ll want to know enough to ask questions, understand where your business stands, and not be taken advantage of.

The Small Business Administration (SBA) website is a good place to start. It has a wealth of information about starting a small business and high level information on business taxes. From the overview page you’ll find links to tax requirements and more for each type of small business.

Note: I’ve run my own small business for over 10 years, and I handled the basic taxes for my former husband’s small business for about 15 years, so I know the basics. However, I’m not a tax accountant, so please consult your CPA or tax professional for guidance on your specific circumstances.