Your Small Business Tax Preparation Checklist
For small business owners, there’s good and bad news: there weren’t any major changes to the small business tax code for 2019, but many are still adjusting to the changes brought on by the Tax Cuts and Jobs Act of 2017. To help you get a jump on tax season and make filing your small business taxes as painless as possible, we’ve put together this straightforward tax preparation checklist.
- Which tax forms do you need?
- Gather necessary information
- Issue any necessary 1099s
- Understand your other tax responsibilities as a small business owner
- File on time
Which tax forms do you need?
The type of tax form you’ll use to file your small business tax returns depends on how you’ve structured your business.
- Corporations use Form 1120.
- S Corporations use Form 1120-S.
- Partnerships and LLCs with more than one member use Form 1065.
- Sole proprietorships and LLCs with only one member use Schedule C attached to the owner’s Form 1040.
You may need to attach additional forms and schedules to your return, depending on the kinds of income, deductions and tax credits you claim.
Gather necessary information
No matter which form you use, you should begin your small business tax prep by collecting basic information about your business. Having this information readily available helps make the filing process much easier. Here’s an overview of the information you need to gather:
- General information. You’ll need your company’s legal name and employer identification number (EIN), and knowledge of your business’ classification. You may also need to provide your Social Security number. The forms ask for a business address and your principal business activity code. These six-digit codes help the IRS classify your business activities, whether you run a small hotel or offer landscaping services. You can find the code that best applies to your business in the chart included with the IRS Instructions for Schedule C.
- Income. Gather information on the income you earned from selling your products or services, selling business property, rents, interest and dividends, canceled debt and other income. You should also include any returns or allowances.
- Cost of goods sold. If your business involves selling products, you can deduct the cost of purchasing or creating those products as a cost of goods sold (COGS). To determine COGS, you need to know your beginning and ending inventory. A worksheet in Chapter 6 of IRS Publication 334 can help you calculate COGS for your business.
- Expenses. You can deduct all ordinary and necessary costs of running your business. Expenses vary depending on the type of business you run, but they might include advertising costs, car and truck expenses, commissions and fees, contract labor, depreciation, employee benefits, insurance, interest, legal and professional fees, office expenses, salaries and wages paid to employees, taxes and licenses and other items.
If you have business locations or employees in several states, you may need to break down the income, property owned and wages paid in each state. This information helps allocate your taxable income to each state in which you need to file a state income tax return.
For business owners that use small business accounting software, gathering the above information should be as simple as running a few reports. But if you haven’t been tracking your business income, COGS and expenses, you may need to recreate your accounting records for the year using receipts, bank statements, credit card statements and other documentation.
Issue any necessary 1099s
If your business paid any freelancers or independent contractors $600 or more during the tax year, you need to issue a 1099-MISC. Form 1099-MISC is an informational return used to report payments for services performed by independent contractors and other non-employees who work in your business.
You don’t need to issue a 1099-MISC if you paid via credit card or another third-party payment network, such as PayPal, as those payments will be included on a 1099-K issued by the credit card company or network.
While the IRS provides a PDF version of Form 1099-MISC on its website, you can’t simply print this form and fill it out by hand. Copy A of Form 1099-MISC must be printed using a special scannable red ink. Most small business accounting software includes the ability to electronically file 1099 forms. If yours doesn’t, or you don’t use accounting software, you can buy blank 1099-MISC forms from most office supply stores.
Unfortunately, the deadline for sending Form 1099-MISC to payees has already passed — you’re required to issue payee copies by Jan. 31 and send copies to the IRS by Feb. 28 (March 31 if filed electronically). If you’ve missed the deadline, just issue your 1099s as soon as possible.
Note, however, that the IRS may assess a penalty for sending in your 1099-MISC forms late. The penalty will vary depending on how late you file: for 1099s due in 2020, businesses with gross receipts under $5 million pay anywhere from $50 to $550 per late 1099. You can find a full breakdown of penalties here.
Understand your other tax responsibilities as a small business owner
Federal income taxes aren’t a small business owner’s only tax responsibility. Depending on how your business operates, you may be responsible for other types of taxes and tax returns, such as:
- Employment taxes. If you have employees, you must withhold federal (and sometimes state) income taxes, Social Security and Medicare taxes from the employee’s wages, regularly deposit those withholdings with the IRS and file quarterly payroll tax reports. For more information on employment taxes, check out IRS Publication 15.
- Unemployment taxes. Employers are also required to pay federal (and sometimes state) unemployment taxes. These taxes aren’t withheld from the employee’s pay — the employer pays them from their own funds. Information on unemployment tax compliance can also be found in IRS Publication 15.
- Self-employment taxes. Self-employment tax covers Social Security and Medicare taxes for self-employed individuals. You’re required to estimate and pay your self-employment taxes quarterly, along with your estimated income taxes.
- Excise taxes. Some businesses are also required to pay excise taxes on certain goods or activities. Examples include gasoline, sports wagering, indoor tanning, alcohol and tobacco. Check out the IRS Instructions for Form 720 for more information on federal excise taxes.
- Sales taxes. The federal government doesn’t collect sales tax, but most states and many localities do. You’ll need to register with your state’s taxing agency before collecting sales tax. Each state sets its own rules for how much to collect and when sales tax returns are due, so you should check with your state’s tax agency for more information.
- Property taxes. If your business owns property, you will likely have to pay property taxes to your state and local government. Property tax rates and rules vary depending on your location, so, again, check your with your state’s tax agency for more information.
File on time
The deadline for filing your federal income tax return depends on the form you file. Form 1065 and Form 1120-S are typically due on March 15. Since March 15 falls on a Sunday in 2020, the deadline for filing 2019 partnership and S corporation tax returns has been shifted one day to Monday, March 16 but was extended to July 15 due to the coronavirus pandemic.
Sole proprietors and C corporations get an additional month to file their returns, as Form 1040 and Form 1120-S are typically due on April 15. The deadline was changed to July 15 due to the coronavirus pandemic.
Request an extension
If you need more time to file your return, you can request an automatic six-month extension. Sole proprietors and single-member LLCs can request an extension using Form 4868, while other types of business entities should use Form 7004.
Keep in mind, an extension gives you more time to file your return, but the deadline to pay what you owe is still July 15. You’ll need to estimate what you owe and pay it by the original deadline to avoid interest and penalties.
Ask for help
Following this 2019 tax preparation checklist will help you get organized and ready for tax season. While dealing with your small business taxes might seem overwhelming, using reputable accounting software can help. If you need more information or help filing your LLC tax checklist, seek out the advice of a CPA or other tax professional.