You finally got your great idea up and running. Congrats! Now it’s time to talk about one of the least fun parts of running a small business: taxes. But never fear, if you plan ahead and take a few minutes to answer the questions in this guide, you should be able to confidently prepare for and file your taxes.

• What’s your business structure?

Most small businesses fall into one of five categories:

• Sole Proprietorship: a business with one owner who receives any profit as their personal income
• Partnership: similar to a sole proprietorship but with multiple owners
• C Corporation: a business owned by an unlimited number of shareholders, each of whom receives a share of profits in the form of a dividend; income tax is paid on both a corporate and individual level
• S Corporation: Similar to a C corporation but income tax is paid by individuals rather than by the company as a whole
• LLC: a business with an unlimited number of owners, with requirements and regulations differing based on state and number of shareholders

Depending on which structure you choose, you will be taxed differently. 

Sole Proprietorship

In a sole proprietorship, the business owner is personally responsible for paying any business debts, since they’re receiving the business’ profits as their personal income. While that can be the downside of structuring your business as a sole proprietorship, there’s at least one benefit: it makes filing taxes much easier. Simply file your taxes in the usual way and report your business expenses using Schedule C (Form 1040).

Partnership

Partnerships are taxed the same way as sole proprietorships, and owners are still personally responsible for any debt the business incurs. A partnership reports business profits and losses using Form 1065, but income tax is paid by the partners, not the business as a whole. The business should provide each partner with a Schedule K-1 so they can report their individual profits and losses on Form 1040.

C Corporation

In a C corporation, each shareholder receives a percentage of the company’s profits as dividends. The owner may also receive a salary, which they report on a W-2 when filing taxes. If this is the case, then the business itself pays social security and Medicare taxes, plus withheld taxes, for the salaried owner. When it comes to filing taxes, the IRS classifies a C corporation and its shareholders as separate legal entities, meaning the business’ profits are taxed and the shareholders’ distributed profits are also taxed (this is known as a double tax). 

C corporations may not be the best choice for a small business that’s just getting off the ground, but they can be a smart choice later on if your business ends up growing from a startup to a well-known brand. Although a double tax may not sound like much fun, a C corporation brings plenty of benefits: including the ability to hold back some of its profits from shareholders in order to be used for other purposes.

S Corporations

In an S corporation, profits and losses are reported via Form 1120-S. The business provides shareholders with Schedule K-1, and each shareholder pays income taxes via Form 1040. The company itself does not pay an income tax.

Limited Liability Company (LLC)

In an LLC with multiple owners, you can generally choose whether you’d like to be taxed as a C corporation or as a partnership. In an LLC with only one owner, you’ll simply pay your taxes the same as you would in a sole proprietorship. Check your state requirements to see if you can structure your business as an LLC.

• Do you know the different types of taxes you may have to pay?

The first step to tackling your taxes is just knowing the difference between all the different types of taxes that are applicable to small businesses.

• Income Tax: a tax on the profits of your business
• Self-employment Tax: a tax paid by owners of a sole proprietorship, partnership, or LLC
• Excise Tax: a tax paid on certain products and services like tobacco, alcohol, and gambling
• Sales tax: a tax built into the price of products by the state in which the product is sold
• Property tax: a tax paid on your business’ brick-and-mortar location (assuming you have one)

Here are a few things to know about each tax.

Income Tax

If your business is not a corporation, you’ll file income tax as part of your personal tax return. If your business is a corporation, it will need to file its own tax return, and all shareholders will also need to report (and pay for a C corporation) income based on the dividends they receive.

Self-employment Tax

As a self-employed individual (if your business is a sole proprietorship, partnership, or LLC), you won’t have your taxes automatically withheld, which means you may need to pay estimated taxes every quarter. (More on this later.) 

Excise Tax

Whatever your business structure, you may be required to pay an excise tax if you deal in products like tobacco or alcohol, or in services like gambling. You may have built excise tax into the price of your products or services, but don’t forget to pay these taxes each quarter via Form 720.

Sales Tax

Check your state and local tax laws to find out what sales tax is in your area. Again, you may build this added cost into the price of your products, but don’t forget to pay this tax to the IRS.

Property Tax

Property tax is determined by your city or county, so check your local property tax laws to find out how much you’ll need to pay. Obviously, if your business doesn’t have a brick-and-mortar location, you won’t have to worry about this tax.

• Which tax deductions do you qualify for?

As a small startup business, you can take certain deductions on your tax return.

Business Startup Deduction

The main one to know is the business startup deduction. As a new business owner, you can deduct up to $5000 of your startup costs, plus $5000 of your organization costs—but only if your total startup costs are $50,000 or less. If this isn’t the case, you can still take a deduction, but instead of taking it all this year, you’ll deduct it over 15 years in a fixed amount each year.

Other Deductions for Startups

Other things you can deduct include:

• Business insurance
• Real estate
• Business supplies
• Business loans
• Professional fees
• Business assets
• Home office

But what if your business isn’t a startup? If you’ve been running your business for several years, there are still some deductions you may be able to take.

Qualified Business Income

Are you self-employed? If so, you can deduct up to 20% of your qualified business income, on top of your other standard or itemized deductions. Use Form 1040 to claim this deduction.

Other Deductions

• Business insurance
• Property rent
• Utilities
• Repairs
• Business supplies
• Contract labor
• Employee wages

• Do you keep good tax records?

If not, then trust us, you need to start. Keeping records isn’t just good for organizational purposes; it will help you budget enough money for taxes each year. It can also help you more accurately figure out your estimated quarterly tax payments. You are required to pay estimated quarterly taxes if you own a sole proprietorship, a partnership, or an S corporation and if you had tax liability the previous year. Use Form 1040-ES to calculate your estimated taxes.

Part of keeping good tax records includes holding onto things like:

• Receipts
• Invoices
• Bank statements
• Payroll records
• Fees
• Income, tax, and deduction information

There’s no one right way to keep business records, as long as you’re consistent and organized. 

Once you’re able to answer these four questions, you’ll be well on your way to a tax-savvy business. Best of luck!