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Updated: April 1st, 2020
Many small business owners approach tax season with resignation and trepidation. To stay in business however, tax filing is an unavoidable activity. If the process is still something of a mystery to you, here’s a quick guide to the basics of small business taxes.
The IRS has different tax filing rules for different kinds of businesses. The forms you have to file and the kind of taxes you pay, ultimately depends on how your business is structured.
Sole proprietorship – Under the federal tax code, there is no separation between individual and business income, when you operate as a sole proprietor. When you file your individual 1040 tax return, you’ll have to include your business income and expenses on Schedule C.
Partnership – Partnerships are similar to sole proprietorships for tax purposes. Each owner pays both income tax and self-employment tax on his or her individual share of the profits. For the actual tax filing, the partnership must complete Form 1065. This is an annual income and loss report for the business. When you file this, it creates a Form K-1 that you file with your individual 1040 return, in lieu of a Schedule C.
Corporation – Corporations have the most complicated tax filing, because they’re considered a separate entity from the business owner. The corporation itself must file Form 1120 and pay taxes on profits according to the corporate tax table. If you draw a salary or receive dividends from the business, you’ll have to report this on Form 1040. If your business is set up as an S Corp, you’ll have to file Form 1120S to report corporate income.
Limited liability company – Limited liability companies offer some flexibility as to how the business is taxed. You can elect to designate the LLC as a sole proprietorship, partnership or corporation. The tax filing rules you’ll follow will be determined by your designation. It can only be changed once every five years.
As a general rule you have to file taxes for your business once it accrues $400 in net earnings for the year. If your business is in start-up phase and has yet to make any money, you still need to file to claim deductions for your expenses. If you have employees, you must file a return to cover payroll taxes, regardless of whether the business has any profits to report.
Small business owners are required to make estimated tax payments once their expected tax liability for the year exceeds a certain amount. For corporations, the threshold is $500; it goes up to $1,000 for all other business types. Estimated payments count towards your income and self-employment taxes for the year. If you don’t pay enough, you could be hit with a penalty.
There are several due dates small business owners need to be aware of throughout the year. Check out the table below for the most important dates to remember:
|Sole Proprietorships and Partnerships||Corporations|
|Estimated Tax Payments||January 15th, April 15th, June 15th and September 15th||April 15th, June 15th, September 15th and December 15th|
|Annual Tax Filing Deadline (Personal Returns)||April 15th (Partnerships must also file Schedule K by this date)||April 15th|
|Annual Tax Filing Deadline (Business Returns)||April 15th (Business income is reported on your personal return)||March 15th (For Form 1120 or Form 1120S)|
|Tax Extension Deadline||October 15th||September 15th|
You could face a tax penalty for missing any of the cutoff dates. Note however, that if April 15th falls on a Saturday or Sunday, the deadline for personal and corporate income taxes is extended to the next business day.
The key to getting your small business taxes filed without any major snags is a solid record-keeping system. The most important things to document are your business’s income and expenses. Examples of the kinds of paperwork you’ll want to file away include:
Federal taxes are likely to take the largest bite out of your bottom line, but the picture isn’t complete without state taxes. Each state is responsible for determining how businesses are taxed and when taxes must be filed. Making sure you understand your state’s rules can help you dodge a potentially costly tax penalty.
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Samantha Novick is a senior editor at Funding Circle, specializing in small business financing. She has a bachelor's degree from the Gallatin School of Individualized Study at New York University. Prior to Funding Circle, Samantha was a community manager at Marcus by Goldman Sachs. Her work has been featured in a number of top small business resource sites and publications.