As an entrepreneur, the daily routine and tasks list can be hectic. There are many responsibilities that an entrepreneur needs to fulfill his business afloat. Some of them are internal matters to the company, like managing all functions on the macro level, making consistent sales, improving the product, providing excellent customer services, etc. Then, some responsibilities are imposed or required by the external department. These tasks involve taxation, rules, and regulations, statutory requirements, legislation implementations, etc. Similarly, such external matters are also crucial for the health of a business. Moreover, failure to comply can hit the company hard in the form of penalties, suspensions, or maybe closure of business too.
Mainly, taxes are a common regulatory requirement to be fulfilled. In many countries, where small businesses are exempted from tax, they need to submit their status every year to justify their tax exemption or simply file nil returns. Governments rely on tax amounts substantially, and for the same reason, stricter compliance is expected.
There are many taxes that governments or tax authorities impose or introduce on businesses, and each of the categories has its protocols to follow. And usually, it can be hectic for a company to manage and keep track of every move. This is the reason, a lot of business which cannot afford a comprehensive tax department, avail the services of third party tax consultants. These tax accountants or tax specialists compile the data, apply calculations, and file the tax returns on their behalf. However, it comes with a cost that can be justified with the time and effort saved by the business owner by delegating. On the other hand, it can be risky to entirely rely on an external party for such an important task. Therefore, it is recommended for a small business owner to at least understand the whole scenario of multiple tax categories like federal sales tax, income tax, etc., and processes, so that he can evaluate the progress and work of third party consultants.
So let’s explore some of the basic requirements and guide to follow for filing taxes for a small business.
- Essential Information of Your Business:
First and foremost, you need to gather all the relevant business information required to file tax returns for the IRS.
- Company Legal Name and Employer Identification Number (EIN):
Your company legal name and EIN would be required by the IRS. They will use this information to confirm and validate it with the vendors, employees, and customers.
- Business Locations:
You would be required to compile the list of all the states where your business is registered, doing sales, own property, running production facility, employs people and catering customers. It is necessary to look out for the rules as per the state as there are many differences in tax regulations among states across the U.S.
- Mode of Business Entity:
This means what kind of entity your business is registered as. Every mode of proprietorship has different requirements.
- Sole Proprietors are required to file their Profit or Loss from Business (Schedule C) with their Individual Income Tax Return (Form 1040) to conclude net profit or loss.
- Partnership or Limited Liability Companies require filing return of partnership income (Form 1065) to submit profit or loss to IRS. For alliance, partners’ share of income, credit, and deductions (Schedule K-1), which is a part of Form 1065, is also required to be filed for the partners or company members.
- If a business is registered as Corporation, then it is necessary to file U.S Corporation Income Tax Return (Form the 1120S). Whereas, the owners or shareholders of the company are required to file U.S Income Tax Return for an S Corporation (Form the 1120S) along with (Schedule K-1), which is a part of Form 1120S).
- Tax Responsibilities:
In addition to the classification of businesses as entity types, it is crucial to understand the required taxes a business needs to file the return for. We already have the income taxes as per the entity. Every business also needs to pay employment taxes for its employees in the form of Social Security, Medical Care, and Unemployment Taxes.
There are also some state taxes that a business is obliged to pay and, i.e., Sales Tax, Franchise Tax, Gross Receipts Tax, etc. And failure to comply with any category can result in hefty penalties.
- The Calculation, Deduction, and Final Amount:
For the calculation part, it is required to compile all the data regarding business earning activities like invoices generated, any sales or return, interest accumulated on savings accounts, or any other income in the form of investments, etc.
Then, for the deductions, a compilation of all everyday expenses related to business activity is required. All of the deductible business expenses will be later deducted from the taxable revenue to get the final amount of taxable income.
Finally, after adjusting last year’s credit (if any), apply the relevant tax percentages as per the requirements to calculate the final tax amount. It is also advised to keep all the records of the transaction included in the tax return for possible IRS inspection purposes.
As discussed already, timely submission of tax returns is essential; otherwise, it can result in penalization or suspension. However, it is recommended to schedule and plans tax-related activities in line with the official tax return submission dates as per your state and tax legislation. This will help to avoid any inconvenience and would help to focus on other business activities.