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by Nikita Medvedev
May 14, 2020
by Nikita Medvedev
May 14, 2020
Tax season is an annual headache. For a small business owner, navigating the taxation minefield can be an agonizing exercise. It takes financial know-how, organization, and commitment. If mismanaged, the results can be crippling. Mistakes caught during an audit might tank your business and, at the very least, an incorrect filing could mean you make less on your tax return.
That's why it's imperative that you, as a small business owner, do everything in your power to file your taxes correctly.
Let's face it, you have a business to run! Time spent working on your taxes could inhibit you from running your business. Additionally, it's likely that if you handle your taxes personally you won't navigate them with the dexterity needed. And, being that your business is small, you probably don't have the help of a finance team.
There's no shame in hiring outside help. If you feel like you don't have a firm handle on the situation, seek sales tax consulting services. A professional will be able to steer your ship in the right direction, ensuring that you don't run into trouble with the IRS. Further, they'll be able to lay out a game plan for the following year, one that will better help you prepare for tax season.
This is particularly true if you're an e-commerce platform that makes out of state purchases. Understanding different state tax laws is no easy endeavor. But that's why there are professionals that do exactly that.
In 2018, the Tax Cuts and Jobs Acts passed. As a small business owner, it benefits you immensely. If you make less than $260,000 a year, then you probably haven't felt the benefits but as your company scales and revenue increases, you'll be happy to know that the corporate tax rate will remain a flat 21%.
To that end, let's define exactly what kind of small businesses benefit:
Sole proprietors – This means you report your business losses in your personal income. This also means that you pay self-employment tax, in which case you'll need to file a form 1040.
Partnerships – For a partnership, no matter how much your business grows, you'll file a form 1040 and form 1065. The great benefit here is that each party files profit and losses on their own personal income tax return, rather than the business'.
C-Corporations – While it may seem like a partnership, it's not. The business now files taxes as its own entity. This means you won't be taxed for self-employment. Instead, you'll default to the aforementioned 21% corporate tax.
S-Corporations – S-corporations do not pay income tax. Instead, the shareholders are taxed individually. And yes, they're exempt from self-employment tax. The form used to file for an S-corp is form 1120S.
LLC – For an LLC with one owner, defer to "sole proprietors." For a multimember LLC, defer to "partnerships." It's important to note that an LLC is in itself its own entity, meaning the members are not responsible for the company's debts. But they must pay tax on the income made (personally) and, in some cases, as a pass-through (single member), they will pay both corporate income and self-employment tax.
If you ever have a bad tax year, or if you're blindsided by your tax bill, it's likely that your CPA or anyone with taxation know-how will tell you "next time, pay estimated taxes." Estimated taxes are quarterly payments made to the IRS based off what you think you will owe. Of course, this doesn't just mean coming up with a number and running with it. It takes careful consideration, a deep look into your revenue and profit margin, and—if you've operated for more than a year—an analysis of last years' taxes.
Preparation is an integral component of success. You'll need to keep your records in order to ensure that you file your taxes correctly and, in a worst-case scenario, that you can rectify an audit. That's why it might be wise to employ professional help. Even if you only use a service once, they can create the infrastructure that will keep you out of tax trouble for the years following.
Lastly, don't fear tax season. Clear your head before you dive in. Take it as a time to reflect upon your business. If something is to go wrong, know that the IRS has programs that can assist. Generally, they want to work with you to find a solution.