How to pay taxes as a small business

Why do small business owners need to pay taxes?

Paying taxes is one of the many steps that go into managing a business. It’s important for small business owners to understand their tax obligations, keep accurate financial records, and comply with tax laws. Doing so ensures that you and your business are in good legal standing and keeps you safe from fines, penalties, and other legal consequences. Taxes also help you contribute to the overall well-being of the business and the community you work for.

Paying taxes as a small business owner

How you pay your taxes will depend on where you live and what type of small business you own. Here is a general guide to help you navigate the process.

Identify what taxes you owe based on your organization type

Small businesses come in many organization types: sole proprietorships, partnerships, limited liability companies (LLC), or corporations. Your business will fall into one of these categories, and the way you pay taxes will differ based on which category your business is in. If your business is a nonprofit and is granted tax-exempt status by the IRS, you may be exempt from paying state or federal income taxes on your profits.

Get an Employer Identification Number (EIN)

If your business is not a sole proprietorship, you’ll likely need an EIN from the IRS. An EIN is used for tax reporting and is necessary if you have employees or operate as a corporation or partnership.

Keep detailed records of your finances

Maintain accurate and organized financial records, including income, expenses, receipts, and invoices. Good record-keeping is essential for preparing accurate tax returns.

Understand your tax obligations

Familiarize yourself with federal, state, and local tax requirements that apply to your business. These may include income taxes, self-employment taxes, employment taxes, sales taxes, and property taxes. As a small business owner, you also may need to make estimated quarterly income tax payments to the IRS. This typically applies to sole proprietors, partners, and S corporation shareholders. Be sure to use Form 1040-ES to calculate and pay estimated taxes.

File annual tax returns

Most small businesses are required to file an annual federal income tax return. The type of return you file depends on your business structure:

• Sole Proprietorship. Use Schedule C or C-EZ to report business income and expenses on your personal tax return (Form 1040).
• Partnership. File Form 1065 and provide each partner with a Schedule K-1.
• Corporation. File Form 1120 for C corporations or Form 1120-S for S corporations.
• LLC. Depending on how it’s classified for tax purposes, an LLC may file as a sole proprietorship, partnership, or corporation.

Familiarize yourself with deductions and tax credits

Be aware of potential deductions and tax credits available to small businesses, as they can help reduce your tax liability. Consult a tax professional or use tax software to maximize your tax benefits.

Stay compliant with the law

To avoid penalties and legal issues, stay current on all tax filings and payments. Set up reminders for tax deadlines and make sure to report any changes in your business that could affect your tax obligations.

Remember that tax laws can vary depending on your location and business structure, so it’s essential to stay informed and consult with tax professionals to ensure you meet all your tax obligations while maximizing your tax benefits as a small business owner.

Get budgeting tips from professionals

Understanding tax obligations, keeping accurate records, and complying with tax laws are not optional for a small business. Discuss your unique situation with tax professionals and/or accountants so you can navigate the complexities of tax regulations and optimize your strategy.

In the meantime, you can use our budgeting tips to learn how to save money, invest, and eliminate debts to help you manage your money as a small business owner. Getting started the right way will pay big dividends as your company grows.