Guide To Running A Business

12. How to Manage Your Business Taxes

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Business Finance

How to Manage Your Business Taxes

May 05, 2023 • 9 min read
Japanese man working on taxes at desk
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      If there’s one thing that’s certain about running a small business, it’s that your taxes will become much more complicated.

      Not only do your income taxes increase in complexity, but you also have to deal with additional types of taxes you’ve never had to deal with before.

      However, regardless of the increased complexity of the taxes you now face, it’s still your responsibility as a business owner to understand your newfound tax obligations and manage them efficiently.

      Types of business taxes.

      Here are the major types of small business taxes that you’ll have to manage as a business owner:

      Income tax

      Business owners and non-business owners alike pay income taxes, but income taxes are generally more complicated for business owners.

      This is because business owners have to track and self-report all their business income and losses on their tax returns. This is different from an employee, who simply has to input the information from their W-2 into their tax software.

      Of course, business owners could be issued 1099s reporting all or some of their gross business income, but no one is keeping track of their business deductions for them.

      Additionally, since business owners are self-employed, they have to make sure that they’re paying enough money to the government throughout the year in the form of quarterly estimated tax payments. While employees automatically have taxes withheld from their paycheck every pay period, the IRS expects business owners to make estimated tax payments on their own every quarter.

      Self-employment tax

      On top of income taxes, business owners who are sole proprietors—meaning they report all of their business income and expenses on the Schedule C attached to their own tax return—are subject to the self-employment tax on their net business income.

      The self-employment tax is the combination of the 12.4% Social Security tax and the 2.9% Medicare tax. While employees split this tax burden with their employers, business owners have to foot their entire Social Security tax and Medicare tax bill—92.35% of their net self-employment income.

      Of course, the larger Social Security component of the self-employment tax is only assessed on your self-employment income up to the Social Security wage base for the year. This base is $160,200 for 2023.

      Payroll tax

      If you have employees working in your business—and that includes you, if you’re on payroll—you’ll have to withhold and pay payroll taxes on their wages.

      Here are the federal payroll taxes:

      • Social Security Tax – 12.4% on the employee’s wages, up to the Social Security wage base for the year; split equally between the employer and the employee
      • Medicare Tax – 2.9% on all of the employee’s wages; split equally between the employer and the employee
      • Additional Medicare Tax – 0.9% on employee’s wages over $200,000; paid by employee
      • Federal Unemployment Tax – 6% on employee’s first $7,000 in wages; paid by employer

      Employers may also have to withhold federal income tax, state and local income tax, and other state- or local-level taxes as part of their payroll tax obligation.

      Sales tax

      If your business sells goods to the public and your state imposes a sales tax, you will likely be responsible to collect and remit sales tax to the state.

      Don’t be tempted to withhold sales tax from your customers at point of sale and then fail to remit it to the government. State taxing authorities take this very seriously and could shut down your business if you attempted something like this.

      Note that in some states, the sale of services, as well as goods, is subject to sales tax.

      Filing and paying business taxes.

      In general, staying in tax compliance for any given tax has two major components: filing a tax return and paying the tax. If you fail to do either one of these, you could be looking at significant penalties and interest from the IRS on top of the taxes you owe.

      Of course, note every business pays tax in and of itself. Passthrough entities such as partnerships and S corporations, for example, are typically not liable for any federal income tax because they “pass through” their income to their owners, who pay tax on this income on their personal return. However, partnerships and S corporations must still file a federal income tax return every year.

      The table below shows the major federal tax and payment deadlines for small businesses.

      Tax return or formFiling deadlinePayment deadlineWho must file
      Schedule SE (attached to Form 1040 or Form 1040-SR)April 15 of the following year with possible extension to October 15Quarterly estimated payment deadlines throughout the year; all tax due by April 15 of the following yearAll businesses taxed as a sole proprietorship, as well as some partners in partnerships
      Form 1120, U.S. Corporation Income Tax ReturnApril 15 of the following year with possible extension to October 15Quarterly estimated payment deadlines throughout the year; all tax due by April 15 of the following yearAll businesses taxed as a C corporation
      Form 1120S, U.S. Income Tax Return for an S CorporationMarch 15 of the following year with possible extension to September 15None, since S corporations generally do not pay federal income taxesAll businesses taxed as an S corporation
      Form 1065, U.S. Return of Partnership IncomeMarch 15 of the following year with possible extension to September 15None, since partnerships generally do not pay federal income taxesAll businesses taxed as a partnership
      Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax ReturnJanuary 31 of the following yearQuarterly deadlines throughout the yearBusinesses that paid wages of $1,500 or more in any calendar quarter or that had at least one employee for at least some part of a day in any 20 or more different weeks during the year
      Form 941, Employer’s Quarterly Federal Tax ReturnQuarterly deadlines throughout the yearMonthly, semi-weekly, or (rarely) next-dayBusiness that paid any wages subject to federal income tax withholding, the Social Security tax, or the Medicare tax

      Keep in mind that the table above shows only the major federal tax and payment deadlines. 

      There may be other federal tax requirements based on your specific business—for example, if you own an indoor tanning salon, you’ll have to collect and remit the 10% indoor tanning services excise tax and file Form 720 quarterly.

      And of course, your business may be subject to state and local tax filing and payment deadlines, as well.

      How to manage your business taxes.

      The first step in managing your business taxes is to determine what taxes you and your business are liable for, along with the filing and payment deadlines for these taxes.

      To do this, set aside some time to understand the tax rules as they pertain to your particular business and make a list of all the taxes your business is subject to—whether income, self-employment, payroll, sales, or some other tax—along with the following information for each of these taxes:

      • The tax return form
      • The tax return form instructions
      • The tax return deadline
      • The tax payment deadline
      • The tax payment instructions

      Take the time to review each of these tax forms with their instructions and familiarize yourself with the process of completing the required returns and making the required payments.

      I’d recommend that you make reminders to yourself of all the tax deadlines you have throughout the year, so you don’t miss them. And of course, when you see one of these tax deadlines coming up in your calendar, carve out time in your schedule to file the required return or make the required payment before that deadline.

      Of course, this is easier said than done. If doing your own small business taxes sounds overwhelming, consider reaching out to a tax professional who can manage your business taxes for you, so you can focus on your business.

      While a good tax professional won’t be cheap, they can take the headache out of the process for you and ensure that you avoid the nasty penalties that come with failing to comply with your business tax obligations.

      Save Money On Your Small Business Taxes

      Get $50 off professional tax services from Block Advisors

      Lendio may receive compensation from H&R Block for referring you to their services.

      About the author
      Logan Allec

      Logan Allec is a CPA and owner of tax relief company Choice Tax Relief, which negotiates with the IRS and state revenue departments on behalf of business owners who have fallen behind on their individual, corporate, or payroll tax obligations. With over a decade of experience consulting with business owners about their tax issues, Logan has seen almost everything when it comes to tax negotiations with the IRS and state tax authorities. Prior to starting his own tax resolution practice, Logan was in a managerial capacity at a Big 4 professional services firm, handling tax issues for billion-dollar companies. In addition to running Choice Tax Relief, Logan also owns the personal finance blog Money Done Right, which educates thousands of readers a day about making, saving, and investing money. Logan also runs a YouTube channel on which he publishes weekly videos about what everyday Americans need to know about taxes and tax relief. He has been a licensed CPA since 2010 and holds a master's degree in business taxation from the University of Southern California. Logan lives in the Los Angeles area with his family. When he's not working, he enjoys playing basketball, taking his kids to Disneyland, and discovering new hot sauces to enjoy.

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