If you own a business, you have different responsibilities when it comes to your taxes. Each year, business owners have to file and pay taxes.
Doing taxes as a business can be a bit complicated, but with a bit of preparation, you can make your life a lot easier. Let’s take a closer look at tax planning for business owners.
Table of Contents
EIN numberCorrect business classificationSeparate accounts for business and personal expensesOrganized income recordsBreakdown of business expensesReceipts for write-offsQuarterly tax remindersOther tax planning tips
EIN number
As a business owner, you need to have an Employer Identification Number (EIN) to file taxes. Your EIN is a unique number that represents your entity. Think of it like a social security number for your business.
If you don’t have an EIN, you can complete Form SS-4 or apply for an EIN online. If you mail in your Form SS-4, it typically takes about four weeks to receive your EIN by mail, so make sure you apply early so you can file your taxes on time. If you apply online, you will get your EIN immediately.
If you already have an EIN but don’t remember it, you can look for your EIN notification, or you can call the IRS Business & Specialty Tax Line at 800-829-4933 to recover your EIN.
Your EIN isn’t just used for filing taxes. You may also need your EIN if open a bank account or apply for a business loan. Keep your EIN information somewhere you can easily find it.
Correct business classification
When you form a new business, you need to choose a business classification. Choosing the right business classification depends on how many employees you have and how your business is structured.
Sole proprietorship
If you own a business by yourself, you can form a sole proprietorship. Sole proprietorships often face higher taxes because you have to pay the employee and employer share of Social Security and Medicare taxes.
LLC
Limited Liability Companies (LLCs) offer legal protection and added flexibility. Your LLC may be treated as a sole proprietorship, a partnership, or a corporation, depending on the number of business owners. Taxes vary based on how the IRS treats your LLC.
C-corporations
C-corporations can sell shares of stock and enjoy special tax benefits. However, C-corps are double taxed, which means business profits and shareholder profits are taxed. If you’re an owner and shareholder, you’re essentially taxed twice on any dividends distributed to owners.
S-corporations
S-corporation businesses are like C-corps without double taxation. S-corporations also pass through the profit and losses to the shareholders instead of being taxed on the S-corporation return. If you meet the requirements, you can submit Form 2553 to apply for S-corp status. You may need to pay quarterly taxes as an S-corp if the company anticipates having estimated tax of over $500 for built-in gains, excess net passive income tax, or investment credit recapture tax.
Partnerships
Partnerships don’t pay federal taxes — instead, profit and losses are passed through to personal tax returns. Any partners are equally liable for the business debts of a partnership.
When you start your business, take the time to carefully consider the pros and cons of each business structure.
Separate accounts for business and personal expenses
Each year, you can write off certain business expenses to reduce your business’s tax bill. The easiest way to keep track of everything is to set up separate bank accounts for business and personal expenses.
Use your current bank account for personal expenses. You can’t write off personal expenses, so keeping them completely separate helps to ensure you’re using accurate information on your taxes. It also cuts down on the math you have to do, and who doesn’t love that?
You can start a new bank account for your business expenses. When you need to purchase new equipment or pay invoices, it will come out of this account and make it easy to see how much you spent over the course of the year. This will give you a clear starting point as you figure out your write-offs.
Organized income records
When you file business taxes, you have to report your business income to the IRS. To do that, you need to keep accurate income records throughout each tax year. Let’s talk about how you can do that.
As we mentioned, separate bank accounts are a good place to start. Using a digital document management system can also help you keep income records organized in one place. When you go paperless, it’s easier to maintain records, and you don’t have to worry about physically losing or damaging documents.
Generally speaking, the IRS recommends keeping records for at least three years. You can keep income records from previous years organized in a separate folder so you don’t confuse them with current income records.
Keeping track of your income is easier when you have software that can help. Most accounting and payroll software will automatically generate income and expense reports, so you don’t have to manually track your income.
If you’re keeping digital income records, back them up. Whether you have an external hard drive or backup cloud storage, make sure you’re saving the latest info regularly.
Breakdown of business expenses
Keeping track of your business expenses benefits you in several ways. You can deduct some expenses on your business taxes, but you can also get a better understanding of what you’re spending and how it affects your bottom line.
According to the IRS, business expenses have to be ordinary and necessary to be deducted on your business taxes. This means the expense is appropriate for your business and common in your trade or industry. But you might be surprised what all qualifies–from your home office set up to professional services.
Some accounting and payroll software will automatically generate income and expense reports, making it easy to keep track of your business expenses.
Receipts for write-offs
If you want to save money with tax write-offs, start by keeping receipts and invoices for your expenses throughout the year. You can keep receipts, paid bills, invoices, deposit slips, and more. By keeping track of these records, you’ll have the records you need to back up what you claim.
There are a handful of apps that allow you to snap photos of your receipts and add them to a digital collection. Some apps even allow you to sync with TurboTax and QuickBooks for complete integration.
With time, keeping receipts for business expenses will become second nature. The more receipts and detailed records you keep, the easier it will be to file your business taxes.
Quarterly tax reminders
If you’re a freelancer or small business owner, you may be required to pay quarterly taxes. Quarterly taxes are paid four times per year — but you still have to file your yearly income tax return.
Quarterly tax due dates are:
- April 15
- June 15
- September 15
- January 15 (of the following year)
Once you get set up through the Electronic Federal Tax Payment System (EFTPS), you can quickly and conveniently make quarterly tax payments online.
If you’re not sure whether you’re required to pay quarterly taxes, talk to an expert. A tax expert can help you navigate how to go about filing small business taxes and what your obligations are.
Other tax planning tips
Doing your taxes can be stressful, but planning ahead can help you feel more confident. Now that you know the basics, let’s talk about a few tax planning tips that can benefit you when it’s time to file business taxes.
Keep track of IRS filing deadlines
From the April 15 filing deadline to the quarterly tax deadlines, you need to file and pay your taxes on time. You can add important tax deadlines to the calendar on your phone — or import dates directly to your calendar app through the IRS.
Failing to file or pay on time can lead to penalties, increasing the total taxes you owe. Stay on top of filing and payment deadlines and don’t hesitate to contact the IRS if you need to request an extension.
Implement tax strategy
A well-planned tax strategy can make filing business taxes more manageable. For example, saving more for retirement can be part of your strategy. This is because contributions you make to your various accounts may be tax-deductible, so you can grow your savings while reducing your taxable income.
What tax strategy comes down to is looking at your financial situation and maximizing tax breaks that apply to your business.
Know how you’re filing
Before tax season arrives, think about how you’re going to file your taxes. Are you filing online or by mail?
Knowing how you’re filing business taxes helps you prepare for when you’ll need to submit your documents, what process you’ll follow, and more.
Research your state’s tax laws
Every state has different tax laws. For example, some states collect income tax while others don’t. Take the time to research your state’s tax laws so you understand how they affect your business.
You can also talk to a tax expert to learn more about local and state tax laws.
With TurboTax Live Business, get unlimited expert help while you do your taxes, or let a tax expert file completely for you, start to finish. Get direct access to small business tax experts who are up to date with the latest federal, state and local taxes. Small business owners get access to unlimited, year-round advice and answers at no extra cost, maximize credits and deductions, and a 100% Accurate, Expert Approved guarantee.