eing a small business owner is always a tough venture, not just because your business has to compete with other, larger conglomerates, but because a small business usually has only a few owners or a single person to do the daily work that a committee would normally be doing for a successful business. This includes doing the taxes for your business yourself and ensuring that your employee’s taxes are filed (from your end, at least) properly.
This is one of the unexpected trials that a small business owner runs into when they finally get their dream off the ground, but that’s why this article is here to give you information you need for your small business taxes!
Understanding Estimated Taxes
Your business may be a sole proprietorship (meaning there is only one owner of the business), or there may be multiple business owners involved. Regardless, it is important to note that you pay taxes for your business through your personal tax return – as the sole owner you can do this yourself, but if you are one of multiple owners you will have to file jointly or separate your specific taxable income from theirs.
Though you are generally expected to make tax payments throughout the year, no income taxes are taken out of your business earnings until the end of the year when you file. To avoid underpaying your estimated taxes and incurring penalties, use a tax software or the worksheet from Form 1040-ES to know your estimated taxes that you need to pay on each quarter.
Know your personal tax situation before calculating estimated tax
As a business owner, there are certain terms and actions that you are aware of that the average employed individual is not. A lot of these terms can help you determine your tax liability. Business owners must consider things like their business expenses, tax deductions, and tax credits when filing their tax return. You should know about these things as you go about the normal running of your business – certain actions taken by businesses to support charities are tax deductible, for an example.
And don’t forget your employment taxes! Also called the payroll tax, it is paid for partially by any employees you have during the year in their payroll deductions, and partially by you based on your employee’s wages at the end of the year. This is a tax specifically related to employing others for your business, making it something that a self-employed individual or regular employee wouldn’t have to worry about.
Calculating estimated taxes
Based on your personal tax situation, and after taking into account your business expenses and revenue, you can estimate what you need to pay for your quarterly taxes. A simple way is to take what you paid in total taxes in the previous year and divide it by four to know your quarterly tax rate for the current year. You can even pay monthly so it's easier to manage and you pay less quarterly. This way, you’ll follow the IRS’s rule to pay at least 90% income taxes including self-employment taxes in a given tax year so there will be no underpayment penalty.
Other Tips For Managing Your Tax Payments
Just be sure to remember that despite being a business, you as the owner have to file your taxes on your personal return using all the forms and calculations that come with running a business. If you are not the sole owner of your business, make sure to discuss beforehand whether you will file together or what portions of the business’ profits and expenses each of you will take on when filing.
If you have someone else working on the finances of your business, it might be a good idea to consult them when filing your taxes at the end of the year, to ensure everything is correct or answer any questions you may have about the daily expenses of your business that must be taken into account on your tax return.
Now that you have all this information under your belt, it’s time to file those taxes! Don’t be afraid to ask a professional for tax advice if you’re unsure about any terms or forms you are filling out for your return. Better to be safe and pay more in taxes that you can later get back than to pay less in taxes and owe the government unknowingly! You can always have someone prepare your tax return for you, but at the very least a tax calculator and an estimate of your taxes for the year should be used to help you understand how to pay taxes as a small business owner.