What Small Businesses Need to Know About Taxes

If you run your own business, it’s important to understand how taxes work, the implications of not following proper tax guidelines, and how taxes can affect your livelihood. Below are some of the most important points to consider when it comes to taxes for small businesses.

Business Structure

Choosing the right business structure is essential when it comes to taxes. Different types of businesses, such as sole proprietorships, limited liability companies (LLCs), or corporations, have different tax obligations. It’s important to talk to an accountant or financial advisor to determine which structure is best for your business.

For instance, if you are a sole proprietor, you will need to file your taxes using Schedule C. If you are an LLC, then you will be filing a partnership return.

Self-Employment Tax

When you are self-employed, you will owe a self-employment tax on the net earnings from your business. This includes income from freelance work as well as any other form of self-employment. The self-employment tax rate is currently 15.3%, and you must pay this tax each quarter to the IRS in order to avoid penalties and interest.

Unfortunately, many business owners who are self-employed don’t realize that they are required to pay this tax and end up being penalized as a result. It’s best to set money aside and speak to a financial advisor for help determining how much you need to save come tax time.

Income Tax

No matter what type of business structure you have, you will owe income tax on your business’s profits. The amount of taxes owed depends on how much profit your business generates as well as the type of business you have and your tax filing status.

It’s important to keep track of all income, deductions, and expenses. In addition, if you sell your business, this income will also be subject to income tax. For instance, if your business earns $100,000 annually, you can sell it for $200,000 to $300,000. This money will be taxed as ordinary income.

Tax Credits

In some cases, you may qualify for tax credits that can help reduce your overall tax burden. For instance, many small businesses can qualify for the Small Business Health Care Tax Credit if they offer health insurance to their employees. You may also be eligible for certain credits, such as the Work Opportunity Tax Credit, which can provide additional tax savings.

It’s important to speak to a financial advisor or accountant to determine which credits you may qualify for and how to best utilize them.

The IRS Can Audit Your Taxes

The IRS can audit any business tax return within three years of filing, we well as collect as much as a decade’s worth of back taxes. The auditing process is not fun, but it is necessary to ensure that you are compliant with all tax regulations.

It’s important to keep thorough records of all your income, expenses, and deductions and be prepared to present them in the event of an audit. Additionally, make sure that you are up-to-date on all your tax filings and payments. One of the best ways to prevent an audit is to be informed and prepared.

You Might Owe Back Taxes

In 2020, the IRS reported that American business owners and regular employees owed more than $114 million in back taxes, interest, and penalties. If you have failed to pay taxes or file tax returns, the IRS will assess penalties and interest on any back taxes due. These penalties can add up quickly if not paid in a timely manner, so it’s important to stay current on all your taxes.

If you are unable to pay what you owe, the IRS offers payment plans and other options for taxpayers who cannot meet their full tax obligation.

The bottom line is that when it comes to taxes for small businesses, knowledge is power. Knowing what types of taxes apply and understanding your business’s obligations can help ensure that you remain compliant with all federal and state regulations.