What Do I Need To Know About Taxes As A Business Owner?Aug 18, 2021
This is the sixth post in our "Starting a Business Series". This series stemmed from a conversation I had a bit ago with a brand new business owner. They were completely lost and no idea where to start.
That got me thinking that we should do a series on this specific topic so I ran it past everyone in our Free Facebook Group and with overwhelming support, everyone wanted it. So here we are!
Taxes are by far the most confusing and stressful part of being a business owner, which is exactly why this Podcast exists. My goal in this post is to hopefully break that confusion and stress down into small, easy to understand bites.
What Do I Need To Know About Tax, From A Basic Level?
If you remember back from episode 1 of this series, we talked about this idea of "profit". We discussed how profit is essentially your sales minus your expenses and is what you eventually get taxed on.
We also brought up this big question, how much should I put away for taxes? I mentioned how I never like to give a number because every situation is different. However, in the same breathe I said that a very rough "guide" you can use is to put 30% of your profit aside for taxes. For some it may be much less, which means you'll get an extra "paycheck" or refund at year-end. For others it may be a little more but at least you've got the vast majority of the bill saved away.
By putting this money away, it will help avoid a major problem we see with new small business owners. They often come to us after year 1 with a profit from their newly opened business but did not save anything for taxes. Now we go to file their tax return and they do not have the funds for the taxes due which spirals into future years, always playing catch-up.
How Is My Business Taxed?
For the vast majority of businesses there is no tax on the corporate level. Instead the profits from your business flow through (aka "pass through") to your personal return, as the business owner, where those profits are then taxed at the personal level.
Note: If you are organized as a C Corporation (with no S Corporation election) then you WOULD pay taxes on the profits of the business at the company level.
Basic Concept: If you have a pass through entity your income and expenses related to the business are reported on the business tax return (Schedule C, Form 1065, Form 1120S). The profit from those businesses are then reported on your personal return where the taxes are paid.
Pass through entities include: Sole Proprietors, Partnerships, Single Member LLC's and S Corporations.
If you are operating as a Sole Proprietor or Single Member LLC your business activity would be reported on a Schedule C which is simply a supplemental form on your personal tax return.
If you are operating as a Partnership, Multi-Member LLC, or S Corporation your business activity would be reported on a separate business tax return where you would then get a K1 from which would bring that activity to your personal return. Partnerships and Multi-Member LLCs are filed using Form 1065 and S Corporations are filed using Form 1120S.
We also have an article we did last year on pass through entities that you can check out here.
What Is This S Corporation You Talk About?
As we have been discussing throughout this series, if your business is profiting $50,000 or more per year you will definitely want to be researching an S Corporation.
An S Corp is simple a way to be taxed, it is not an entity type at the state level. In order to be an S Corporation your business must be an LLC or Corporation. You then elect for that business to be taxed as an S Corp.
An S Corporation is a way to help reduce the amount you pay in self employment taxes. We did an entire six part series on S Corps last year so if you are in that profit range of roughly $50k+ per year, be sure to check out that series here.
How Often Do I Need To Pay Taxes?
Business owners all the time think that all they have to do is pay taxes at year-end when they file their tax return. However, that is not true.
The United States federal income tax is a "pay as you go tax" which basically means that you owe taxes as you earn income throughout the year. Think of it as a W2 employee. You earn gross wages and then an employer will take taxes out and submit them to the government throughout the year on your behalf.
This is the same for a business owner except you do not have someone withholding those taxes for you, you are responsible for that piece. Even though you do not file your official tax return until year-end that does not necessarily mean that taxes are not due until then.
The year-end tax filing is simply a reconciliation of what occurred throughout the year to see if you paid too much (and you'll receive a refund) or did not pay enough (and have an amount due). If you have an amount due, you may have to pay interest or penalties on that amount.
This is why estimated taxes are important to think about as a business owner. Estimated taxes are pretty self explanatory, but basically you take your expected profit and personal situation and estimate what your tax bill will be so that you can make payments towards that eventual tax filing that happens at year-end.
Again, if you pay too much in estimated taxes you'll get that back as a refund at year-end. If you did not pay enough in estimated taxes you'll have an amount due at year-end and potentially have interest and penalties.
We are going to be doing an episode on its own specifically for estimated taxes.
When Are Tax Returns Due?
- March 15
- S- Corporation Tax Returns (or extensions) Due
- Partnership Tax Returns (or extensions) Due
- Multi-Member LLC Tax Returns (or extensions) Due
- April 15
- Personal and Single Member LLC Tax Returns (or extensions) Due
- C-Corporation Tax Returns (or extensions) Due
What Other Business Taxes Do I Need To Consider?
- Payroll Taxes (If Necessary)
- These were discussed in part 5 of this series, How Do I Hire Employees In My Business?
- Sales Tax (If Necessary)
- We did a blog and Podcast on this earlier in the year, What Do I Need To Know About Sales Tax?
- Property Taxes (If Necessary)
- This would be on a more local level.
Hopefully this was helpful for you to gain a better understanding of how taxes work for small business owners and what you need to know as you get started down this journey.
Finally, I highly recommend you sign-up for our Tax Minimization Program (w/ Stress-Free Bookkeeping Training) as not only will you get a bunch of in depth training, templates, group coaching but you also have unlimited access to our team for general tax and accounting questions. How sweet would it be to have an accounting professional by your side for those questions that pop up in this crazy journey of being a business owner?
The Time Is NOW To Start Paying Less In Taxes. Join Our Tax Minimization Program (w/ Stress Free Bookkeeping Training)!
What you'll get:
- Library of Tax Strategies, Implementation Guides, Videos, Downloads, etc.
- Stress Free Bookkeeping Training Program
- Ask A Pro - Unlimited email access to our team, it is like having an accountant in your back pocket!
- Monthly Group Trainings
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