Small businesses generally do not have a healthy relationship with taxes. There are more expectations and demands placed on them than individuals to remain in good standing with the IRS. What makes it even more confusing is that small businesses must deposit taxes on a semi-weekly, quarterly, or monthly basis. How do you know which one applies to you, and how much you need to deposit? It all depends on your type of business and structure.
Questions Every SMB Must Answer
Small businesses have four questions they must ask and answer each year regarding taxes.
- What types of taxes do I need to pay?
- How much do I need to pay in taxes?
- When do I have to pay small business taxes?
- How do I pay small business taxes?
The answers to these questions depend on the structure of your business. Let’s take a look at how things should break down.
A sole proprietorship is a very small business that is owned and operated by one individual. Sole proprietorships are common with freelancers and independent contractors because they give you some protection but are much more straightforward regarding tax purposes compared to other business entities.
Sole proprietorships report their business income and losses on a personal tax return. Thus, the profits are taxed at the personal income tax rate.
Sole proprietors must also pay self-employment taxes and file a Schedule C (or Schedule C-EZ) along with Form 1040. The most important thing is that they pay estimated quarterly taxes, so you deposit taxes to the IRS four times a year, every quarter.
Partnerships are owned by two or more owners. The vast majority of these entities are considered general partnerships, though some are limited partnerships or limited liability partnerships.
These small business owners are required to pay income taxes, self-employment taxes, and quarterly estimated taxes like sole proprietorships. Form 1065 is required for a partnership. It shows the income, deductions, gains, and losses from the business operations.
There are two types of corporations: C-corporations and S-corporations. C-corporations are legally separate from the owner of the company. As a result, they get subjected to what is known as “double taxation.” First, they must submit to a flat income tax rate of 21 percent. Secondly, the shareholders are taxed on their personal returns.
S-corporations are pass-through entities like sole proprietorships and partnerships. Shareholders are responsible for reporting business income and losses on their own personal tax returns. Profits are taxed at the personal income tax rate. S-corporations can avoid double taxation because of Form 1120S.
Though C-corporations and S-corporations are different entities, they are both the same in that they must pay estimated quarterly taxes.
Deadlines for Small Business Taxes
It doesn’t matter what business entity you have; you must pay quarterly estimated taxes if the business plans on owing more than $1,000 in income tax. Meanwhile, corporations only have to pay quarterly taxes if they expect to owe more than $500 in taxes.
Small business owners must pay taxes four times per year, while traditional earners pay the government just once a year in April. The bad news is that there are four crucial deadlines you must remember each year. The good news is you pay off the tax debt in segments, so the lump sum isn’t as extreme.
Quarterly Estimated Taxes Deadlines:
- April 15 (for January 1 through March 31)
- June (for April 1 through May 31)
- September (for June 1 through August 31)
- January (for September 1 through December 31)
Depositing Small Business Taxes
The IRS makes things more complicated for businesses that have federal income tax withheld from employees, federal unemployment taxes, as well as social security and Medicare taxes. If this is the case with your SMB, you need to deposit taxes semi-weekly or monthly. Additionally, there are related tax forms you may need to file, like Form 941, Form 944, and Form 940.
The deposit schedule depends on the total tax liability you report during a four-quarter lookback period. Small businesses that reported $50,000 or less in taxes during the lookback period follow a monthly deposit schedule. On the other hand, those that reported more than $50,000 must follow a semi-weekly schedule.
Small Business Tax Help from Levy & Associates
If it is your first time filing small business taxes, it is easy to get overwhelmed. Levy & Associates can help your small business manage taxes correctly and more effectively. Reach out to us today at www.levytaxhelp.com or call 800-TAX-LEVY.