Small business taxes

Knowing what taxes you'll need to pay and when can be confusing. Generally, self-employed individuals and small business owners need to pay quarterly estimated business taxes. If you don't pay or if you underpay, you may end up paying penalties and a large tax bill when you file your yearly taxes. The general guideline is that if you expect to owe over $1,000 in taxes by the end of the year, you should pay estimated quarterly taxes. Corporations are expected to make quarterly tax payments if they expect to owe $500 or more in taxes at year end. Additionally, if you paid more than zero the year before, you may also be expected to pay quarterly taxes.

To be on the safe side, you should pay quarterly taxes unless it is your first year of business and you do not expect to make a profit. You can pay your estimated taxes online or by mail.

• To configure your estimated taxes, use Form 1040-ES
• Corporations can configure estimated taxes using Form 1120-W

If your state requires sales tax and you sell taxable items, you'll need to pay the collected sales tax. Many tax experts recommend that you pay these taxes quarterly. The task is easier if you use sales technologies that will configure and track collected taxes for you. If you sell products to individuals or businesses located in other states, you may be required to collect and remit sales tax for those states as well.

Steps for collecting sales tax

• Determine what taxes you may need to collect (usually your state tax agency has that information available)
• Apply for a sales tax permit if required
• Discover which products or services that you offer are taxable
• Collect taxes
• Keep meticulous tax records and make quarterly tax payments

Collecting the proper amount of taxes is easier than it has ever been. Often point-of-sale systems can be used to collect and track your sales records for you. If you sell online, often the e-commerce service can configure and collect sales taxes for you. Contact applicable state and local tax authorities to determine how to remit collected sales taxes.

If your company has employees, you need to pay their employment taxes. If you are self-employed, you need to pay your own employment taxes. Employers should make these payments monthly or semi-weekly. Self-employed people should pay estimated taxes quarterly.

Employers remit these taxes to the IRS for each employee:

• Withheld federal income tax
• Social security
• Medicare and additional Medicare tax, if applicable
• Federal unemployment tax

Self-employed persons are responsible for paying both the “employer” and “employee” portion of these taxes:

• Social security
• Medicare

Under IRS rules, small business owners may deduct expenses that are both ordinary and necessary. Ordinary expenses are those which are common and accepted for the type of business being conducted. 

Only business expenses qualify for tax deductions. In other words, an entrepreneur may not deduct personal expenses. For items used partially for business and partially for personal reasons, taxpayers may generally deduct the business portion of the expense. 

Some common business deductions you may be able to claim as a small business owner include:

• Business start-up and organizational expenses

• Business use of a vehicle

• Home office expenses

• Business-related travel and entertainment

• Expense of renting office space or other property used for the business

• Utilities used by the business, including telephone and internet expenses

• Office supplies

• Interest on money borrowed for business purposes

• Taxes attributable to the business

• Business insurance premiums

• Self-employed health insurance premiums

• Employees’ pay and fringe benefits

• Business retirement plan

This list represents just some of the most common deductible expenses. Depending on the type of business you own, you may be eligible to claim other tax deductions. The rules surrounding tax deductibility can be complex; when in doubt, seek guidance from a qualified tax professional.

You may still need to file a tax return even if you don’t believe you owe any taxes to the IRS. The filing requirement depends on the amount of income you earned during the year, the type of income you earned, and whether taking the standard deduction would make your earned income fall below taxable levels. In general, if your gross income was greater than the standard deduction you are eligible to take based on your filing status, you may need to file a return. 

Self-employed individuals must file tax returns if their earnings from self-employment are $400 or more for the year. If you paid more in estimated taxes throughout the year than you actually owe because your earnings were lower than expected, you may be entitled to a tax refund – which you can only obtain by filing a return with the IRS. 

Note that your state’s income tax filing requirements may differ from IRS rules. Seek professional guidance if you need help determining your filing obligations.