Taxes. Sure, maybe they aren’t an aspect of your business that inspires you to leap with excitement and proclaim that you’ve finally fulfilled your entrepreneurial dreams (unless, of course, you’re running your own accounting firm). But, let’s face it—love ‘em or hate ‘em, they still need to get taken care of.
Ideally, you’ll not only handle this task, but you’ll handle it right. Knowing how to stay organized and file your taxes correctly will save you plenty of headaches—not to mention, cue the horror music, the threat of an audit!—down the line.
Are you feeling overwhelmed by needing to wade through the seemingly endless piles of paperwork and file your taxes for the very first time as a newbie business owner? You aren’t alone. Fortunately, there are plenty of tips, tools, and resources that can make the process a little more painless.
Step 1: Decide If You’ll DIY
Before you roll up your sleeves and go cross-eyed looking at a bunch of digits, it’s smart to first decide what method you’ll use to tackle your taxes: Will you do it yourself, or will you enlist the help of an expert?
Yes, it’s definitely possible to file your taxes on your own—as long as you’ve kept your records organized and are prepared to do the necessary work.
However, consider this your warning: The tax code is complicated. And, because this is your very first time filing your taxes as a business owner, you might feel more comfortable having a professional walk you through the process. Most accountants will provide you with a worksheet that you can fill out to prepare for your appointment, which turns the complex tax process into more of a straightforward, paint-by-numbers task.
Working with an accountant will involve spending a little bit of money, but—here’s the good news—your accounting fees are actually tax deductible.
If you do decide to work with an expert, you’ll want to make sure to find someone you trust. Here are a few tips to choose the best accountant for you:
- Ask Your Network: Chances are, you know a few other fellow small business owners. Ask around for any referrals.
- Pay Attention to Credentials: Even though someone typically only needs a relevant college degree to work as an accountant, you’ll want to look for credentials. Find someone who is a Certified Public Accountant (CPA).
- Look for the Right Expertise: Filing taxes as a small business is much different than filing them as an individual. While tax accountants should be able to handle both, you’ll want to look for someone who has some expertise in working with small businesses. This is your first time filing your business taxes—it shouldn’t be your accountant’s too!
- Don’t Be Afraid to Shop Around: You don’t need to stick with the first accountant you meet. Set up a few initial meetings to find someone you like.
Step 2: Collect Your Documents
Paperwork, paperwork, paperwork. There are seemingly endless piles of forms and documents you need when filing your taxes.
Even if you’re working with an accountant, you need to ensure that you have all of the correct ones to make your tax filing process as seamless as possible.
Forms for Employees
If you have people working for you—whether they’re employees or independent contractors—you’ll need to provide them with the documentation they need to do their own taxes, as well as send those forms to the IRS yourself. Providing these sorts documents late or failing to provide them at all can come with a pretty hefty fine, so you want to make sure you get them out of the door on time (more on tax timelines a little later!).
The rules for who gets what form are pretty simple:
- Employees get a W-2
- Independent contractors get a 1099
Not sure which camp your workers fall into? Use our handy calculator to figure it out.
Other Tax Forms You’ll Need
You’ll need documentation for things other than just your employees. The exact forms will vary depending on what sort of business entity you have established. For example, are you an LLC or an S Corporation?
But, in general, there are some standard taxes you should be prepared to pay as a small business owner:
Income Tax: All businesses—except partnerships, which file an information return—must file an annual income tax return. At tax time, you’ll submit Form 1040, Form 1120, or Form 1120-S with your tax return to report your total income and expenses.
Income tax is a pay-as-you-go tax, which is paid through your estimated payments each quarter. When submitting estimated tax payments throughout the year, businesses should also file Form 1040-ES (for individuals including sole proprietors, partners, and S-Corporation shareholders) or Form 1120-W (for corporations) with their payments.
Self-Employment Tax: Individuals who work for themselves are required to pay a self-employment tax to cover social security and Medicare tax. This tax also uses Form 1040.
Employment Tax: If you have employees, you must pay an employment tax, which includes social security and Medicare taxes, federal income tax withholding, and federal unemployment tax. These forms are referred to as the “94-series” and include Forms 940, 941, 943, 944, or 945. Which ones you’ll need to fill out depends on your specific business.
Excise Tax: Very specific types of businesses need to pay excise tax. To find out if you need to be concerned with these forms, check out the requirements that the IRS outlines.
Step 3: Organize Your Expenses
One of the greatest benefits of being a small business owner is the ability to deduct your business-related expenses. In order to write-off an expense, the IRS says that it must be both “ordinary and necessary.”
As the IRS website explains, “An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
Generally, business-related expenses fall into three categories:
- Expenses Used to Figure the Cost of Goods Sold: Think raw materials or labor costs.
- Capital Expenses: Think start-up costs or improvements.
- Personal Expenses: Think use of your car or a home office.
From office supplies and education costs to mileage and travel, there are plenty of tax write-offs you can take as entrepreneur. You’ll just want to make sure you keep your expense records and your receipts organized, so you can easily report this information on the appropriate form at tax time.
Speaking of forms, remember that this information will all be reported on your Form 1040, 1120, or 1120-S—which we just discussed above. Whew, one less form you need to worry about!
Curious what other deductions you can take? Take a look at our illustrated guide to tax deductions.
Step 4: Stay on Time
Of course, there are plenty of deadlines you need to keep track of to ensure you get all of your relevant tax information submitted on time.
Be forewarned that the IRS will occasionally move dates around from year to year, so it’s best to refresh yourself on the relevant deadlines at the beginning of every year.
Want to know when everything is due? Check out our small business tax calendar to get a grasp on when all of your 2016 tax forms are due, as well as when you should plan to make quarterly payments in 2017. Get out that red pen and mark your calendar!
Step 5: File for an Extension If Needed
Let’s face it—sometimes life happens. Despite your best intentions to stay ahead of the game and get all of your tax information submitted by the deadline, you’ve realized there’s no way you’ll be able to make it happen. And, failing to meet that dreaded end date can result in some pretty costly penalties.
Fortunately, the IRS is willing to cut you some slack every now and again—meaning you can file for an extension to give yourself a little more time to look everything over.
Curious about how to buy some time for your business? Here’s everything you need to know about how to file for a tax extension.
Tax time can be enough to strike fear in the hearts of business owners all over. In fact, it probably wouldn’t be tough to find entrepreneurs who would rather zip themselves into sleeping bags full of fire ants than have to deal with their taxes for yet another year.
No, taxes might not be the stuff of entrepreneurial dreams. But, they need to be done—and they need to be done right. Leverage this information to your advantage and you’re much more likely to tackle your first tax time as a business owner with organization, strategy, and as few headaches as possible.