Owning a business requires taking on complex tax responsibilities. Unlike an employee whose taxes are automatically withheld, business owners need to estimate the amount they’ll owe, set it aside, and make quarterly payments. But how much should you be saving and what kind of taxes do you need to pay? Here’s what you need to know.
How much do you need to set aside for taxes?
The amount you need to set aside for your business’s taxes will depend on a variety of factors. The IRS recommends you use the worksheet in Form 1040-ES if you’re a sole proprietor, partner, or S Corporation shareholder. Additionally, it can be helpful to refer to your tax return from the previous year (if you have one) and consult a tax professional. Accuracy is important because you can face penalties if you underpay when making quarterly estimated tax payments. All that said, a common rule of thumb is to set aside 30% to 40% of business revenue for taxes.
What types of taxes do small businesses pay?
Small business owners can be responsible for several different types of taxes, such as income taxes, self-employment taxes, employment taxes, and more.
Income Taxes
The federal government, many state governments, and some local governments require businesses and individuals to pay taxes on their income. When filing federal taxes, your taxable income is your adjustable gross income (AGI) minus your deductions.
However, the way you’re taxed will depend on your business’s structure. For example, sole proprietors report business income on their personal tax returns and it’s taxed according to their personal tax rates. On the other hand, corporations are independent entities that file corporate income tax returns and pay taxes based on a corporate tax rate.
Self-Employment Tax
Self-employment (SE) tax is a tax that covers Social Security and Medicare taxes for people who work for themselves. You’ll be liable if you’re self-employed as a sole proprietor or member of a partnership and make more than $400 in a year. The current tax rate is 15.3%, which accounts for 12.4% toward Social Security and 2.9% toward Medicare.
Employment/Payroll Taxes
If your business has employees, you’ll be responsible for federal employment taxes. They include:
- Withholding and depositing federal income tax from employees’ wages
- Withholding and depositing Social Security and Medicare wages from employees’ wages
- Paying your share of your employee’s Medicare wages and Social Security
- Withholding and depositing the Additional Medicare Tax from qualifying employee wages
- Paying the Federal Unemployment (FUTA) tax
You may also have employment tax liabilities at the state and local levels.
Other Taxes
Depending on your business type and how it operates, you could also be liable for other taxes such as sales tax, fuel tax, property tax, excise tax, and capital gains tax.
What factors impact how much you owe in taxes?
The amount your small business owes in taxes will depend on factors, such as:
- Gross income: The amount of gross income your business generates
- AGI: The amount of income left over after subtracting your qualifying adjustments
- Deductions: The total amount of costs you incur in the ordinary course of business which qualify as deductions
- Credits: The total amount of credits for which your business qualifies
- Employees: The number of employees you have, if any
- Business structure: The structure of your business (e.g. sole proprietor, partnership, S Corp, C Corp).
- Personal tax rate: If your business income passes through to your personal tax return, your personal tax rate
- Your business home: The tax requirements in the state and city where your business is located
These are just a few examples. The tax code is more than 7,000 pages long and includes many nuances that apply to small business owners.
When do you need to pay taxes?
Tax deadlines vary depending on your business’s structure and where it’s located. Here are the main dates to know.
Federal Taxes
Federal taxes must be filed and paid for by the following dates:
- Sole proprietors: April 15
- Partnerships: March 15
- S Corporations: March 15
- Corporation: April 15 if using the calendar year or the 15th day of the fourth month after your fiscal year ends if using the fiscal year (unless your fiscal year ends on June 30, then September 15)
If you file and/or pay late, you can face penalties and the accrual of interest. However, the IRS does allow you to apply for a free six-month extension. If you foresee needing more time to file, avoid a failure-to-file penalty by requesting the extension before your original tax filing deadline.
Federal Estimated Payments
The IRS splits the year into four quarters and requires an estimated payment at the end of each quarter. Here’s how it’s broken down:
- January 1 to March 31: Payment is due April 15
- April 1 to May 31: Payment is due June 15
- June 1 to August 31: Payment is due September 15
- September 1 to December 31: Payment is due January 15
If any federal due date falls on a holiday or weekend, it’ll be pushed back to the next business day.
State Taxes
In the states that charge income tax, the due dates vary. Many align with the federal due date of April 15 or the next business day, but a few don’t. You’ll need to check the deadlines that apply to you on the state and local levels.
How do small business owners file taxes?
Filing federal taxes requires filling out the forms the IRS requires for your business type, such as:
- Sole proprietors: Form 1040, U.S. Individual Income Tax Return; Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship); Schedule SE (Form 1040 or 1040-SR ), Self-Employment Tax
- Partnerships: Form 1065, U.S. Return of Partnership Income, Schedule SE (Form 1040 or 1040-SR), Self-Employment Tax
- S Corporations: Form 1120-S, U.S. Tax Return for an S Corporation
- Corporation: Form 1120, U.S. Corporation Income Tax Return
- Limited Liability Company (LLC): File the form according to your entity type
Note that this is not an exhaustive list. Additional federal forms may be required depending on the details of your business operation. For example, if you run an S Corp and have employees, you’ll also need to file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. Additionally, you’ll need to file any forms that are required by your state.
Tips on lightening the load at tax time
Filing taxes as a business owner can be intimidating. However, there are steps you can take to make it less stressful. When it comes time to file your taxes, you or your accountant will need proof of your income and deductible expenses. Being so, preparing throughout the year can help. How?
- Open a business bank account and keep your business and personal finances separate.
- Use accounting software to track your income and expenses.
- Organize deductible expenses into tax categories as you go.
- Automate your tax savings deposits.
- Create a system for filing expense receipts.
Want help streamlining your small business taxes?
Lili’s platform takes the work out of tracking and categorizing your deductions. As soon as you make a transaction, it’ll automatically be filed into a tax category. You can also attach scanned copies of your receipts to each transaction in your account and automatically send money to a dedicated tax bucket. Further, when tax time rolls around, Lili will send you pre-filled IRS tax forms based on your transaction categorization. Cue a big sigh of relief.
Learn more about Lili’s tax preparation services.
*The Annual Percentage Yield (“APY”) for the Lili Savings Account is variable and may change at any time. The disclosed APY is effective as of September 1, 2023. Must have at least $0.01 in savings to earn interest. The 4.15% APY applies for portions of balances of up to and including $100,000. Any portions of a balance over $100,000 will not earn interest or have a yield.
