Tax season is underway and it is time to make sure your finances are in order. Taxes can be a stressful, yet necessary, part of any business.
With the Tax Cuts and Jobs Act (TCJA) recently going into effect, businesses face adjustments in deductions, depreciations, and tax items. With all the changes, many are wondering how filing business taxes will look different this year. “It will be a year of confusion,” said David Donnelly in a conversation with The Houston Chronicle. Donnelly is a partner at accounting firm Carr, Riggs & Ingram in Houston. There will certainly be a learning curve, but businesses don’t have to be overwhelmed.
With a simple checklist, businesses can feel confident that they are paying the right amount of taxes — and on time. Here is a tax preparation list to make filing business taxes easier.
Filing Business Taxes: A Preparation List
Many people feel overwhelmed by taxes, but if you break it down step-by-step, taxes don’t need to be difficult. These are the major items that need to be on your tax prep to-do list.
1. Identify Your Business Structure
Your business structure determines which income tax return form you file with the IRS. If you have been running your business for years, you already know your classification. But for those just getting started, identifying the right business type can be complicated.
There are several different business structures to file under, but there are two main categories:
A C Corporation (C Corp) is a separate legal entity from owners and shareholders. It is its own “legal person,” and taxes are paid separately from its owners’ personal taxes. Shareholders own parts of the C corp and choose a board of directors who decide on business practices. A major benefit for shareholders is that they have limited liability for the corporation, unlike other business entities.
Pass-through entities are made up of several different business structures, such as:
- Sole proprietorships
- S Corporations
- Limited Liability Companies (LLCs)
These business structures differ from C corps because income that comes from the business is added to the owners’ personal income on their tax returns. Each one of these business structures has unique liability and state regulations.
As you are forming your business, it is necessary to determine which structure your company will be labeled as for tax purposes. Once you have determined your classification, it’s time to learn about all the different forms and schedules you must adhere to based on which business model you run.
2. Organize Your Records Throughout the Year
Keeping organized throughout the year is the key to having everything in place when tax due dates come around. The most important items to keep track of are your income and expenses. Many businesses use finance software and tax programs to keep track of income and transactions in a centralized system.
To prove that you actually paid the expenses you report, keep sales receipts, bills, invoices, and deposit slips organized by year and type of income or expense. Some categories to break down transaction records into are: gross receipts, expenses, assets, and employment taxes. Travel, transportation, entertainment, and gift expenses should also be separated from general expenses. You do not need to keep endless records stored in filing cabinets. Expense management software solutions allow you to automatically categorize your expenses, upload, and store pictures of receipts.
Tax preparation and tax compliance software can help businesses automatically calculate their local, federal, and international tax liabilities. They integrate with other tools like ERPs, accounting and payroll systems, eCommerce platforms, and POS systems to automate income and expense tracking, plus tax calculations, report creation, and filing. These tools can automate sales tax, VAT, employee income taxes, custom tariffs and more.
Though most people who have their taxes withdrawn from their regular checks only have to worry about taxes one time a year, businesses have to be thinking about taxes every day. Every transaction your business makes impacts what you owe in taxes. Using accounting software can make tracking profits, losses, and expenses much simpler.
3. Speak with Your Tax Accountant
Though financial software solutions make paying the right amount of taxes much simpler, they cannot fully replace the counsel of a professional tax accountant. Tax professionals can explain how filing business taxes works, what your legal requirements are, and what changes are made in the law. It is important to speak with tax professionals to make sure you are making appropriate payments on time and fulfilling your legal obligations to your employees (collecting and sending forms, withholding taxes from their paychecks, etc.).
It is normal for C corporations to already have accountants and tax professionals on their staff, because laws and regulations that apply to these entities are more complex. Smaller companies might think that paying for a tax professional is an unnecessary expense, especially with all the digital tools available to them. It is true that professionals do charge for their services, but their expertise can save you headache, risk, and future penalty fees if you fail to do your own taxes properly. They will also know loopholes for additional deductions that you might not be aware of.
Tax professionals will advise you on all the deductions and tax credits your business can claim, while guiding you on how to implement the financial software that will best equip you to comply with tax laws.
Should You Choose a Tax Accountant or Tax Program?
Tax programs can greatly assist individuals with their IRS payments. Popular tax programs are known to help individuals, especially those who have a traditional, 40 hour per week, salaried position. For employees with this situation, personal taxes aren’t as complicated as business taxes. Tax programs like TurboTax and H&R Block can be a valuable resource.
Tax programs can help businesses as well, but taxes get more complicated as you have more to account for. Whether you are a self-employed individual or a corporation, having a human conversation can help clarify any questions you may have about your financial obligations. They can advise you on what business tax software will work best for your company and any other doubt you may have about your responsibilities.
4. Deliver the Appropriate Paperwork to Staff at the Right Time
As a business owner, you are responsible not only for your personal income and business taxes, but for facilitating the tax payments of your employees.
You have the legal responsibility to collect certain forms from employees and to deliver other forms to them. It is necessary for you to be aware of the schedule for sending out the documentation your workers need for their own personal taxes. This includes their W-2s or 1099s. For partners and shareholders, they need to receive their Schedule K-1s to report their shares of income, deductions, and credits.
Employers must send W-2s and 1099s by January 31st so that employees have these required forms to file their taxes. If employers fail to send these forms, they may face penalties from the IRS.
5. Ongoing Estimated Tax Payments
Unlike most individual taxpayers who have to file their returns by April 15 (or the next business day, if April 15 falls on a weekend/holiday), self-employed individuals and business owners must pay taxes quarterly. These payments are calculated based on the prior year’s income or what they’ve earned from the past quarter. Make sure to double-check all deadlines on the IRS website.
It is a legal requirement to pay these quarterly payments, and if they don’t business owners may face additional tax penalties. If businesses under-calculate their tax payments throughout the year, they will also be charged an additional fee. The IRS says that this penalty can be generally avoided if you pay at least 90% of your taxes throughout the year. Using the IRS withholding calculator can help you make accurate payments.
It is important for people who have income-earning side gigs to make quarterly payments as well. Landlords and real estate investors might also need to pay quarterly payments. If you have income that is not automatically withheld and expect to owe over $1,000 in taxes, you should make quarterly tax payments.
There is flexibility with these rules. You can pay all of your estimated taxes for the year by April 15 (of the same year), or you can make more than four payments.
Taxes are pay-as-you-go whether you are a freelancer, a business owner, or a salaried employee. It’s just a matter of whether these payments are automatically withheld from your paycheck or if you have to set your own taxes aside each month. For more information on estimated taxes, read Form 1040-ES.
6. Filing Business Taxes and Making Payments
After going through all the previous motions, the next step is to find the right forms you need to file your taxes. These forms depend on what type of business you have. There are five types of business taxes:
- Income Tax
- Estimated Tax
- Self-Employment Tax
- Employment Taxes
- Excise Tax
Most small businesses and sole proprietorships fill out Schedule C. Corporations and LLCs typically fill out Form 1120. Because there are so many different types of taxes and business structures, it is best to talk with your tax preparer to make sure you fill out all the right forms. You don’t want to miss any ot the taxes that apply to you because that could lead to expensive penalties in the future.
Businesses and those who owe a large amount of taxes can pay through the EFTPS — which facilitates electronic payments or payments over the phone. This can be used for all federal tax payments, including estimated taxes. This way of paying taxes is free.
Electronic Funds Withdrawal (EFW) is another way to pay online. This is available only when you file your taxes through a tax preparation software or via a tax professional. This can be a direct transfer from your bank account.
7. What Happens If I Can’t File on Time?
If your businesses will not be able to file a tax return on time, you can request an extension. It is important to clarify that businesses can ask for an extension on their return, but not on their payment. Taxes are still due on the regular payment days. Your business is only allowed one extension per year.
The paperwork you submit to apply for an extension depends on your business structure. The application for an extension must be submitted by the tax return due date — not a day later. Typically, extensions last for 6 months. Talk with your tax consultant for more information.
Managing Your Taxes Is Not a One-Day-A-Year Event
Self-employed individuals, business owners, and corporation executives all alike need to plan ahead to make sure they are paying their taxes properly. They also need to provide the right documentation for their employees and ensure that their payroll system is tax compliant. If not, they may find themselves facing steep penalties later down the road.
Tax professionals can give you guidance on how to reserve your funds for your quarterly estimated payments and how to file your annual returns. They can also be involved in choosing tax compliance software that will best fit your business. To learn more about tax compliance software, read user reviews to learn how these solutions have benefited other business professionals.
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