The choice of a different tax classification for your small business could save you thousands of dollars in taxes, no joke. If your company is an LLC, you may have the option of having your taxes treated as an S-Corp.
The S-Corp allows you to take a “reasonable” wage that is subject to payroll taxes, but anything that remains as profit doesn’t incur payroll taxes. So as your business becomes increasingly successful and profitable, the difference will quickly add up—I saved myself over $5,000 just in the first year after switching.
When you have completed your business tax return, you can commence filing your personal tax return; many people dread this part of the process. It will follow the same general process as it would for a person who did not own a business; however, you will also need to complete more forms as you file.
If you are an S-Corporation, you will need to complete and file Form 1040 along with a number of schedules (Schedule 1, Schedule E, and possibly Schedule SE).
If you are not an S-Corp, you will need to file the same forms above along with Schedule C and keep filing on that way.
You will want to use the same form/method to file your business return as you are using for your personal return, whether it be through tax software, a tax professional, or DIY forms. Switching between types will only lead to confusion.
If you do not know which form to file, you cannot file your taxes.
If you are in a partnership, you will file using Form 1065 and a K1, but the process is fairly similar to filing as an S-Corp. Because the IRS enjoys complexity, there are some forms that are only applicable in certain situations—for example, Form 1125-A for cost of goods sold or Form 4562 for depreciation. If you do not enjoy dealing with this level of complexity, this is why accountants (CPAs) exist!
Before you can even file, you need to have an idea of what your bookkeeping will look like; otherwise, you are going to be completely lost when it comes time to file your business taxes!
As you prepare for tax time, you need to take two IMPORTANT STEPS!
- Get Your Books Ready for Tax Season
You should review all of your business records for the previous 12 months when January arrives. You need to have accurate income categories, accurate expense categories, and all transactions must exactly reflect what has occurred in your bank account. This process is called “Reconciliation” and is NOT optional.
If your business income and expenses are combined in your personal bank accounts, congratulations! You have done it again! You have created the fastest path to inadvertently committing tax fraud. You should open a business account to separate these two types of transactions.
- Take Care of Your Employees and Contractors
For each employee that you have on payroll, they each receive a W-2 for employment purposes.
For each independent contractor you engaged and paid over $600, they each receive a 1099-NEC for other income payments.
You will need a W-9 to prepare the 1099.
And as an added note from my previous experience: Always obtain the executed W-9 before making payment. Many payees suddenly forget all their previous email inboxes after they receive their payment.
The deadline for sending out tax forms is January 31st. If you miss that date, continue to send them out. Being late sending out those forms is uncomfortable, but not sending them out at all is worse.
Where You Go To Get Your Taxes Done
When it comes to preparing taxes, there are three methods:
- By yourself using paper forms. If you really enjoy suffering.
- By using computer software. Good option if your taxes are pretty straightforward.
- By using a Certified Public Accountant (CPA). Once your business becomes a real operation, it’s well worth the investment.
As someone who appreciates saving money, I can tell you that having a CPA offers absolute peace of mind and keeps you from receiving any unexpected letters from the IRS.
Most entrepreneurs find their new business ventures to be exhilarating and creative and experience a sense of freedom. However, during the tax filing season many people become disheartened as the prospect of dealing with all of the paperwork causes them to even contemplate going back to working in a cubicle for 60 days in order to avoid the hassle.
The truth about small business taxation is that it is not difficult; however, you do need to have good organizational skills and an understanding of which forms to use at what time.
After going through the entire small business taxation process once, you will know there is nothing about the process that should intimidate you. You will need to organize your records properly, meet deadlines for submitting your tax returns, and ensure that you use the proper forms. Take the time to learn about S-Corp taxation if you qualify; it could potentially save you thousands of dollars.
