Launching a new business can be full of opportunities and struggles, but most are unaware of the process for filing taxes. When, how, and where do we have to file taxes? These questions are all too common, and as the year draws closer to tax season, they can get overwhelming due to the many terms and processes that many people are unfamiliar with. Your company’s success depends on your ability to handle its taxes, and this article will help break that complex procedure into manageable steps.
Choose Your Business Structure
Understanding your business entity is the first and most crucial step in determining the tax filing process. The structure of your company will determine how small business taxes are calculated and paid. Examples of different business structures include:
- Partnerships: Involves at least two owners who then file it on their tax returns.
- C-corporations: A distinct legal entity that submits its tax return. Owners pay taxes on dividends received, while C companies pay taxes on earnings. Federal income tax for C companies is 21% of their net taxable income.
- A sole Proprietorship: A sole proprietorship is a default legal entity for small firms operated by individuals or couples. A sole proprietor has to declare their company revenue and deductions on their personal income tax return since the business and the owner are treated as one.
- S-Corporations: Although similar to C-corporations, these do not bear a federal income tax burden.
Smart Tax Planning for Small Businesses
Tax season can feel overwhelming for small business owners, especially with the uncertainty of how much will be owed. Effective tax planning not only helps reduce the financial burden but also ensures businesses remain compliant with legal requirements. If you’re in Pennsylvania, companies like Tax Preparation Philadelphia can support your planning, but it’s also wise to understand the strategies available.
Simple approaches, such as investing in essential business equipment or considering qualified small business stock, can lead to significant tax advantages. Having a skilled accountant who stays updated on tax laws is essential. It is also important to be aware of relief options in cases such as natural disasters. Ultimately, tax planning isn’t about evasion. It’s about taking a proactive, strategic approach to maximise your income and support long-term growth.
Types of Taxes You Need to File
Various kinds of taxes might be relevant to your company:
- Income tax: For income tax, you have to submit and pay tax returns based on your company’s net income.
- Self-employment tax: Per the Federal Insurance Contribution Act (FICA), self-employed people must pay self-employment taxes, including Social Security and Medicare.
- Taxes on payroll: In addition to W-2 forms, you must withhold and pay federal income tax, Social Security, and Medicare for your employees.
- Sales tax: If you sell taxable goods and services, you might need to collect and report sales taxes to our state or local government
To avoid fines and penalties, file these taxes and make the essential payments on time.
Organise Financial Records
Keeping your bank accounts, income statements, and spending organised can help you prepare your taxes more quickly and identify any errors before you file. Here’s how you do it:
- Bank statements: To help calculate your company’s annual income, compile all the documentation that shows your earnings, such as investment records and sales receipts.
- Expense receipts: To file tax deductions, you should have receipts for operations and business-related expenditures, such as travel, office supplies, utilities, etc.
- Income statements: Gather all paperwork that determines your company’s revenue, such as investment records and sales receipts, to help you choose your company’s yearly income.
- Payroll records: If you are an employer, keep detailed records of the wages, taxes withheld, and benefits provided to your staff. This will also come in handy in the long run.
Manage Employee W-2 Forms
For tax preparation, W-2 forms are required if your company hires employees. The W-2 Form lists each employee’s pay and any taxes withheld(federal, state, Social Security, and Medicare). Ensuring that all information on W-2 forms is correct helps avoid any problems. Then, according to the IRS, you give this form to each employee before January 31. If you file on paper, you must send the documents to the IRS by the end of February. If you complete your W-2 online, you should send it by March 31.
Minimise Your Taxes With Deductions and Credits
By reducing the amount you owe, business tax credits and deductions can help you pay less in taxes.
- Business tax deduction: As a business owner, you might want to deduct some expenses from your gross income, such as rent, staff salary, and office supplies. By identifying the costs related to operating a business, tax deductions help you reduce your tax burden.
- Business tax credits: decrease the amount of tax that you owe. Credits reduce your overall tax liability. They are typically granted for specific actions, such as investing in energy-efficient machinery or recruiting personnel from particular groups, such as veterans who have worked for the military or been unemployed for a specific time (Work Opportunity Tax Credit).
Endnote
It is much easier to complete the tax filing procedure if you are aware of your business structure. Also, if you keep accurate records and handle W-2 forms correctly, knowledge may help you file taxes confidently, whether you work with a professional or do them yourself.
