Everything you need to know about small business tax payments


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As a small business owner, you may assume the IRS has bigger fish to fry than your small business operations. However, recent reports have cited that the IRS has increasingly targeted small businesses for tax audits.

The National Taxpayer Advocate estimates small businesses spend approximately 2.5 billion hours each year preparing tax returns or responding to IRS inquiries about their returns. This is the equivalent of 1.25 million full-time jobs. The study also cited that 70% of small businesses employ tax professionals for tax preparation and to represent their interests before the IRS.

To avoid wasting time, money, and resources, pay attention to your potential tax burden when forming your business. The formation stage is vital to maximizing deductions and minimizing your tax liabilities for the future.

With the Tax Cuts and Jobs Act in full effect, many small business owners are unsure how the new tax law will impact their tax bill. Many business owners don’t even know corporate income tax rates, business tax deductions, or what tax cuts they’re eligible for.

Every small business owner should understand these five important things that can affect the business’s income taxes and overall tax situation. 1. Choose your legal structure wisely

When forming your business, it’s important to be aware of the different legal structures that exist, since each structure has different tax implications. Sole proprietorships, S corporations, C corporations, and limited liability companies (LLCs) are all different legal structures with different tax requirements.

  • Here are the differences between each.

Sole Proprietorships

If you’re operating an unincorporated business and are the only owner, then you’re automatically a sole proprietor. This is the most common business entity with over 23 million sole proprietorships in the United States. It’s the easiest to set up and manage, but also one of the riskiest since you personally assume all financial and legal obligations.

Sole proprietorship taxes are straightforward since you can report business income and losses on your personal tax return (Form 1040), using Schedule C. Your company profits are added to other income (interest, dividends, etc.) on your personal tax return.

With the new tax law, sole proprietors are able to take advantage of the 20% tax deduction, which allows them to deduct 20% of the business’s net income from their taxable income, which reduces their tax liability.

S Corporations

S corporations may pass income directly to shareholders to avoid double taxation. Double taxation means that a firm’s profit is taxed on a business tax return, and any after-tax profits distributed to owners is taxed again as personal income. But this won’t happen if your company is set up as an S corporation.

S corporations must have no more than 100 shareholders, all shareholders must be U.S. residents, and each member is only allowed to own one class of stock. Shareholders report business income, expenses, losses, and deductions on their personal tax returns. S corps are also eligible for the 20% tax deduction, but shareholders pay taxes on business profits at their personal income tax rate. It’s one of the most common types of legal structures for small business owners because they have the same advantages as traditional corporations but with more tax flexibilities.

C Corporations

Traditional corporations are C corporations (C corps). The organizational structure of a C corp consists of shareholders, a board of governors, officers, directors, and employees. Although Fortune 500 firms are the most well-known C corps, it’s still a viable option to structure your small business this way. It provides legitimacy to investors and clients, allowing you to raise funds faster and land larger contracts. If you anticipate quickly transitioning from a startup to a more established company, then the C corporation structure may be right for you.

C corps are the only type of business discussed here that must pay taxes on the company level. The current corporate income tax rate for C corps is a flat 21%. Additionally, in contrast to S corps that lets shareholders report profit and losses on their personal tax returns, shareholders receive dividends (i.e. a share of company profits). Shareholders must pay personal taxes on those dividends.

The taxation structure on both the company and shareholder levels is referred to as double taxation. This turns off many small business owners. When starting out, LLCs tend to be a more popular option than C corps for various reasons.

Limited Liability Companies (LLCs)

Many small businesses tend to form as an LLC. LLC members have two important tax advantages: no double taxation and deductible business losses.

Unlike C corporations, where business income is taxed twice — at the corporate level and at the individual level — LLCs are only taxed once at the individual level. This means that members pay taxes on business income on their personal tax returns in the same way a sole-proprietorship or an S corp does. This treatment is referred to as a “pass-through” tax treatment.

Another advantage of owning an LLC is that you can have an unlimited number of members (i.e. potential shareholders) in your LLC, which makes it easier to raise capital and expand your business. If you have multiple members in your LLC, you have to determine the ownership percentages for each member.

With multiple-member LLCs, you can choose to be taxed as a partnership or as a C corporation. If you choose to be taxed as a partnership, then you’ll report your share of the business income on your personal income tax returns. If you choose to be taxed as a C corporation, you will be subject to double taxation.

Single-member LLCs, on the other hand, are automatically taxed as a sole-proprietorship.

You may pay upfront costs to set up and maintain your LLC with your state. To operate an LLC in California, for instance, small business owners pay $800 in state taxes annually — regardless of how much money the LLC is making or losing.

If you’re in a state where you have to pay annual taxes to operate an LLC, then your job is to grow the business enough to offset that cost. Every state has different annual taxes to operate an LLC and some may not have any annual state taxes, so it’s important to check before you establish your business.

But the tax advantages, pass-through profits, and management flexibilities still make LLCs a popular option. Your tax situation depends on doing your research to determine which legal entity best suits your needs.

2. Use tax deductions to lower your tax bill

New small business owners have to stretch their financial resources.

Small businesses have business expenses that include vehicle expenses, wages, business travel, contract labor (i.e. hiring freelancers and independent contractors), supplies, equipment, depreciation of assets, rent on business property, utilities, insurance (i.e. property, business, health insurance, etc.), and repairs.

Fortunately, as a small business owner, you are able to minimize your business taxes by writing off a lot of those operational expenses come tax season.

3. Write off your startup costs

Many brand-new startups make the mistake of thinking initial business expenses aren’t deductible until their businesses are fully operational. However, the IRS allows small business owners to deduct a wide array of startup expenses before beginning business operations.

The IRS allows you to deduct up to $5,000 in business startup costs and up to $5,000 in organizational costs, but only if your total startup costs are $50,000 or less. With the help of your tax software or a tax expert, you can write off typical costs associated with setting up a business during tax filing.

Typical costs to set up a business include business insurance, office space, real estate, office supplies, business cards, business assets, professional fees (i.e. hiring accountants), and small business loan fees. If you’re operating your business from a home office, you can qualify for a home office deduction.

Additional costs can also include employee training, locating suppliers, and advertising to potential clients. While companies cannot deduct licensing and incorporation fees as startup expenses, these costs may be deductible as organizational expenses.

It’s important to remember that startup founders can only deduct those expenses leading to the creation of a viable business entity. If you decide against forming your business, the above costs will be labeled as personal expenses, and you may not be able to deduct any of your costs.

4. Pay quarterly taxes

According to the IRS, individuals, including sole proprietors, partners, and S corporation shareholders, have to make quarterly estimated tax payments if they expect to owe taxes of $1,000 or more when their federal returns or state tax returns are filed.

You can figure out your estimated tax payments as a business owner using Form 1040-ES. It may be helpful to use last year’s income, deductions, and tax credits as a starting point. You can also use your previous year’s federal tax return as a guide.

Once you’ve figured out the number and e-file, you can pay the IRS in a number of ways. These include IRS Direct Pay, which takes money owed out of your checking or savings account, and IRS Pay By Card, which allows you to pay with a credit or debit card online. Another option is paying by phone.

Quarterly estimated tax payments for each respective quarter are due every April 15, June 15, September 15, and January 15 (of the following tax year).

The self-employed and sole-proprietor business owners almost always have to pay estimated quarterly taxes unless their business loses money. Unlike a salaried employee — where their employer withholds a certain amount with each paycheck — sole proprietors, freelancers, and business owners assume the full tax burden.

Additionally, people who are partners in a business, a corporation, or an S Corporation often pay quarterly taxes if they expect to owe at least $500 in taxes.

Business owners who fail to submit at least 90% of the taxes they owe are subjected to severe penalties, so working with a tax professional can be very helpful to double check if the amount owed is correct.

5. Some business taxes you might need to pay

Keeping track of the amount of taxes you’re responsible for can come as a great surprise when you own your business. Here are the most common types of taxes to account for as a business owner.

Self-Employment Tax

If you’ve never owned a business before, then you are likely unaccustomed to paying self-employment taxes. Businesses pay a 15.3% FICA tax, which is used to fund Social Security and Medicare. Employees pay 7.65%, and employers pay the other 7.65%.

As a self-employed individual, you’re responsible for the full 15.3%, which is sometimes called “self-employment tax.” However, you can deduct half of the self-employment tax on your personal tax return (Form 1040). Additionally, it’s important to take advantage of all possible startup and operating business expenses to maximize tax deductions.

Payroll Tax

If you have employees, you’ll be responsible for paying payroll taxes on their wages. Payroll taxes include federal income tax withholding, Social Security and Medicare taxes, and federal and state unemployment taxes. Many businesses hire a payroll service to file their tax forms and manage their payroll tax liabilities on their behalf.

Excise Tax

Depending on the nature of your business and industry, you might be responsible for paying excise taxes. Excise taxes are indirect taxes, that are not paid directly by the consumer of a product.

Often the tax is included within the price of the product itself, such as with cigarettes, gasoline, and liquor. Businesses that sell products subject to excise taxes are responsible for collecting the taxes and sending them directly to the IRS.

Sales Tax

Although a federal sales tax doesn’t exist in the United States, the majority of states levy sales taxes. Customers pay a sales tax on goods and services at the point of purchase. Business owners are responsible for collecting and reporting sales taxes to local and state governments. As a small business owner, it’s also important to understand state and local tax rules with respect to sales taxes.

Property Tax

If you own commercial property, you’ll have to pay property taxes to the city or county where your business is located.

Maximize your flexibility as a small business owner

Setting up and operating a small business can come with significant initial costs.

Whether you’re flying solo or working with partners, the tax system is set up to help offset those potentially high costs for self-employed professionals at tax season. Maximizing tax deductions by writing off startup and operating costs can limit your tax liability in relation to your business income.

Having quality small business tax software can guide you. As a new business owner, it also helps to work with a tax professional to avoid common pitfalls like underreporting your business expenses or ignoring an important tax form that can save you money.


This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org.

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5 tips for organic business growth

5 tips for organic business growth

It’s no secret that startups have a prodigious failure rate. In fact, according to a recent Entrepreneur.com study, the four-year survival rate for a startup is just 49%.

With demoralizing stats like this in mind, entrepreneurs may be tempted to grow their profits through any means necessary, including inorganic strategies like acquisitions or mergers. However, the truth is that business owners can achieve impressive growth through organic strategies as well, allowing them to retain control of the companies they built from the ground up.


Also known as “true growth,” organic growth refers to the process of growing a business by reducing costs and increasing sales, either by finding more customers or enhancing output to current clients. On the other hand, inorganic growth occurs when a company merges with or is acquired by a second business. Entrepreneurs should take the time to familiarize themselves with the advantages of organic and inorganic growth, as well as some of the top strategies for execution, so they can decide which is the best choice for their business.

As a new business owner, you’ll likely want to increase profits as quickly as possible. By employing inorganic strategies like mergers and acquisitions, startups can grow their businesses more quickly while taking advantage of resources such as stronger credit lines and expanded market resources. Additionally, joining with another company lets you take advantage of its expertise and experience in the industry to develop your own brand.


By merging with another business, you agree to hand over some of your control and equity to another company. Not only can your initial vision become diluted, but you may also be forced to take on new business and managerial challenges before you’re truly ready. In some cases, you may have to rush to grow your staff and production capabilities to keep up with demand.

On the other hand, organic growth techniques allow you to grow your business on your own timeline. Because you aren’t sharing control with another company, you can hire employees and expand sales at your own pace. Additionally, entrepreneurs who maintain their autonomy now can sell for a larger profit later when the company is fully developed.

While retaining control of your company offers many advantages over the long haul, it can make business growth challenging in the short term. Some entrepreneurs struggle to grow beyond their current marketplace, while others find themselves cut down by the competition. Additionally, new businesses must often fight to make ends meet from month to month. Fortunately, strategies exist to help startups grow their profits without handing over control to partners or investors.

Here are just a few of those strategies to help you grow your business organically:


Want to grow a business that will feed your family and employees for years to come? The first step on the road to entrepreneurial success is starting the right kind of company.

With home-based and e-commerce businesses, you can avoid expenses like rent and commuting during the early, lean years of your company. As an added bonus, working out of the home lets you write off parts of your mortgage and electric bill. You can then invest these savings back into the business to help you grow in the long term.


A common conundrum for new business owners is whether to take your full cut of the profits or invest the money back into your company. While you may be tempted to keep some of those hard-earned dollars for yourself, you should aim to reinvest gross profits whenever possible to help your business grow. Investing your own money shows prospective clients and lenders that you are confident in your company’s long-term potential.

Not sure where to put profits? When in doubt, invest in marketing, SEO and other tactics likely to generate more business for your startup. If your income permits it, you may also want to invest in employee training and technological improvements, as these can yield large profits down the line for your company.


No matter how happy your current clients are with your offerings, you will have trouble growing your business organically if you don’t put effort into finding new sales channels. If you don’t currently sell your goods online, you should definitely consider starting a website to expand your reach to other regions. Additionally, you can introduce new products, cross-market services to your existing clients and expand to different markets. For example, a company that specializes in SEO may want to expand its services to include social media and search engine marketing.

Finally, business owners should employ market segmentation to customize their strategies according to the specific channels they are leveraging and the specific markets they are trying to reach. This way, you can create unique campaigns based on customer location and demographics and watch your sales rates skyrocket.


As a new business owner, you may feel the urge to micromanage everything that happens at your company. However, the truth is that macro-management is a far more effective way of enabling organic growth for your startup.

To keep your company moving forward, you should train top employees to take over some of your daily responsibilities. While you may be tempted to keep costs down by hiring employees who will work for less, in the long run these staff members could end up costing you more if their efforts aren’t up to par. Find people you can trust to get the job done—even when you’re not around—so you can focus on growing and developing your business in the years to come.


From minimizing spending, to reinvesting profits back into the business, organic growth strategies help ensure that you will retain control of the company you worked so hard to build. Do your research, and consider all the growth strategies available in order to give your business the best shot at success.

Do you know how sales taxes are impacting your bottom line? Check out our sales tax calculator.

This article originally appeared in the QuickBooks Resource Center and was syndicated by MediaFeed.org.


Featured Image Credit: franckreporter.