Understanding Small Business Taxes

02/07/2023 | Inspire Results
Image of a small business owner using a calculator to do their taxes.

Running a small business is challenging, but throw in the complexities of managing your finances and accounting, filing and paying taxes correctly, and operating your business successfully becomes even more daunting. How do you know where to start?

Read on to learn more about different types of small business taxes and get small business tax guidance.

Different Types of Small Business Taxes

The form of business you operate determines what taxes you’re required to pay and how you pay them. There are four general types of small business taxes:

Income Tax

All businesses except partnerships must file an annual income tax return. Partnerships file an information return.

Self-Employment Tax

Self-employment (SE) tax is a social security and Medicare tax primarily for individuals who work for themselves.

Employment Taxes

When you have employees, you have certain employment tax responsibilities you’re required to pay, such as Social Security, Medicare, and Federal Unemployment.

Excise Tax

You may be required to pay excise taxes if you manufacture or sell certain products, operate certain kinds of businesses, or use various kinds of equipment, facilities, or products.

Small Business Tax Credits

Small business tax credits are only available for certain very limited situations and can carry over from previous years. Some tax credits cover:

  • Certain types of taxes.
  • Benefits of the disadvantaged.
  • Green activities.
  • Certain types of investments.

Small Business Tax Deductions

Business expenses are usually deductible if your business is operated to make a profit.

Find out from your accountant or tax professional if you can take advantage of the following deductions:

  • Healthcare tax credit
  • Business use of personal vehicles
  • Business travel and entertainment expenses
  • Home office deduction
  • Start-up costs
  • Professional fees and training costs
  • Equipment and software purchases
  • Moving costs
  • Hiring veterans
  • Charitable donations
Small Business Finance -Image of an accountant looking through paperwork with a small business owner.

Small Business Tax Guidance

Running a small business is challenging enough without adding the responsibilities of filing taxes every year. The key to making filing taxes a breeze is to work with your accountant throughout the year instead of waiting until it’s time to start preparing your taxes.

Below are some best practices for your small business when it comes to tax preparation and small business accounting:

Hire the Right Accountant

Your accountant should do more than just prepare financial statements and file your taxes. Hiring the right accountant means partnering with a professional that works with you throughout the year to track income and spending to prevent cash flow mistakes and monitor your gross and net profits. By partnering with an accounting professional from the beginning, you can build a wealthy future for your small business.

Claim All Income Reported to the IRS

The IRS gets a copy of the 1099-MISC forms you receive and matches your reported income against them, so it’s important to make sure your reported income matches the amount reported on your 1099s. If a client doesn’t send out a 1099, you’re still required to report income you received from them.

Keep Adequate Records

Keeping thorough, accurate records of your finances throughout the year helps ensure that your tax returns are accurate. Consider investing in user-friendly accounting software to help your small business accountant keep track of income and expenses.

Separate Your Business From Personal Expenses

If the IRS audits your business account and finds personal expenses in the mix, they can move their search over to your personal accounts due to commingled money. Make sure to have a separate account and credit card for your business to avoid mixing business and personal expenses.

Classify Your Business Correctly

Incorrectly classifying your business can result in overpaying taxes. How much you pay in small business taxes depends on the following business classifications:

  • C Corporation
  • S Corporation
  • Limited Liability Partnership
  • Limited Liability Company
  • Single Member LLC
  • Sole Proprietor

Make sure to consult with an attorney and accountant to determine how to classify your small business.

Seek Advice From Your Accountant

Ask your accounting professional for advice on financial matters that ensure a successful future for your business, such as how much to contribute to your retirement fund and whether you should take a bonus or delay it a year.

You can implement tax strategies and market-based wages to improve your business’s cash flow.

Helping You With Business Tax Management and Accounting

At Inspire Results Business Coaching, our proven coaching methods help small businesses with their business tax management and accounting processes. Using our methods, our team of expert coaches can help you:

  • Identify product profitability
  • Create the financial reports you need for your specific business
  • Create a budget (we’ve created a lot of budgets)!
  • Implement market-based wages
  • Calculate labor productivity and your break-even level
  • Pay off business debt, including lines of credit
  • Create a capital safety net and manage cash flow
  • Maintain a 10-15% pre-tax profit during growth
  • Effectively utilize profit and build wealth

Contact us today to learn more about our accounting and finance solutions.