Small Business Tax Preparation Checklist
To file taxes for your small business, you’ll want to gather all your forms and documents, update and issue any employee forms, calculate your taxes and deductions and file before the deadline. Having the correct forms and understanding your responsibilities and deductions can save you money and prevent legal trouble down the line.
Using a tax preparation checklist is a good way to ensure you aren’t missing any crucial steps and can make handling your federal and state filings a little less taxing.
1. Decide how to file
There are multiple ways to prepare and file your business taxes.
Tax software
If your taxes are relatively simple, tax preparation software is often one of the cheapest and easiest ways to file. The best business tax software will depend on your budget, business type and how complicated your taxes are.
Tax professionals
In some cases, it might be best to hire a tax professional to prepare your tax returns. For example, doing business in multiple states, buying and selling business assets and hiring employees can all complicate tax filing. If your tax situation has changed or you’ve never filed before, it could be helpful to have a professional by your side throughout the process.
While hiring a tax professional costs money, it’s often worth the added expense. The right tax advisor does more than just input your numbers into software — they can provide tax planning services and help you identify all the write-offs and tax credits you qualify for.
Filing manually
If your tax situation is simple, you can also file your taxes with pen and paper and mail them in for free — though it’s typically more complicated than using software or hiring a professional, and the savings may not be worth the cost of your time. The specific forms you’ll need depend on your business type and your specific tax situation.
- 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 also need to attach additional forms and schedules to your return, depending on the kind of income, deductions and tax credits you claim.
2. Gather your documents and information
Start your small business tax prep by collecting any information you have on your business income and expenses. If you use accounting software, this should be as simple as running a few reports. Otherwise, you may need to gather receipts, statements and other documentation.
Tax forms also ask for your principal business activity code, a six-digit code that helps the IRS classify your business activities. The code that best applies to your business can be found in the chart included at the bottom of the IRS Instructions for Schedule C.
If you have business locations, sales 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 file a state income tax return.
Before starting your tax return, gather your:
- Business name
- Business address
- Federal tax ID number
- Social Security number
- Principal business activity code
- Business bank statements
- Credit card statements
- Profit & loss statements
- Balance sheets and income statements
- Federal tax ID number
- Gross receipts from sales or services
- Receipts for business expenses
- Asset invoices and purchase orders
- Mileage logs for business vehicles
- Repair and maintenance records
- Social Security number
- Copies of employee W-2 and 1099 forms
- Payroll reports
- Previous year’s tax return
3. Issue any necessary 1099s
If your business paid any freelancers or independent contractors $600 or more during the tax year, you must issue them a 1099-NEC. Form 1099-NEC 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-NEC 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 third-party network.
While the IRS provides a PDF version of Form 1099-NEC on its website, you can’t simply print this form and fill it out by hand. Copy A of Form 1099-NEC must be printed using special scannable red ink. Most small business accounting software allows you to file 1099 forms electronically. If yours doesn’t, or you don’t use accounting software, you can buy blank 1099 forms from most office supply stores.
4. Check for outdated employee documents
Record keeping and documentation are crucial for managing a small business with employees. Failure to comply with employment laws can expose your business to legal risks and government penalties.
- I-9 forms: I-9 forms are used to verify that new employees are legally eligible to work in the U.S.
- W-4 forms: Employees fill out W-4 forms to provide information about how much state and federal taxes should be withheld from their paychecks. Employees fill out a new W-4 form whenever they want to alter their withholding.
5. Determine which taxes you’re responsible for
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 payroll taxes, check out IRS Publication 15.
- Unemployment taxes: Employers must also 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. You can find more information on unemployment tax compliance in IRS Publication 15.
- Self-employment taxes: Self-employment tax covers Social Security and Medicare taxes for self-employed individuals. Generally, you must estimate and pay your self-employment taxes quarterly, along with your estimated income taxes.
- Excise taxes: Some businesses must 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. Check with your state’s tax agency for more information.
6. Determine which deductions you’re eligible for
Tax deductions can help you save big at tax time by reducing your taxable income. Deductions vary by business, but can include business costs and ordinary and necessary expenses, like:
- COGS: If your business involves selling products, you can deduct the cost of purchasing or creating those products as a cost of goods sold (COGS). A worksheet in Chapter 6 of IRS Publication 334 can help you calculate COGS for your business.
- Advertising: Costs associated with marketing and advertising your business.
- Depreciation: Cost of tangible assets over their useful life, reflecting wear and tear.
- Employee benefits: Costs of benefits provided to employees, such as health insurance and education assistance.
- Insurance: Premiums for business insurance and workers’ compensation.
- Legal and professional fees: Fees for legal, accounting and other professional services directly related to running your business.
- Rent: Expenses for leasing office space, equipment or vehicles used for business purposes.
- Salaries and wages: Payments to employees.
- Office supplies: Costs for items necessary for your business operations, such as printer ink or postage.
- Taxes and licenses: State and local taxes, licenses, and regulatory fees related to your business.
Working with a professional, like a CPA or tax preparer, can help you maximize your deductions without accidentally taking deductions you aren’t qualified for or applying deductions more than once. For example, if you’re a manufacturer, you can deduct labor used to make a direct product as part of your COGs. But you can’t deduct something as both a cost of goods sold and a business expense.
7. File on time
The deadline for filing your federal income tax return depends on the form you file.
Partnerships, multi-member LLCs and S corporations typically need to file their taxes by March 15. If March 15 falls on a Saturday, Sunday or legal holiday, this deadline is pushed to the next business day.
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. If this date falls on a weekend or holiday, the forms must be filed on the next business day.
Request an extension
You can request an automatic six-month extension if you need more time to file your return. Sole proprietors and single-member LLCs can request an extension using Form 4868, while other business entities should use Form 7004.
Keep in mind that an extension gives you more time to file your return, but the deadline to pay what you owe doesn’t change. You’ll need to estimate what you owe and pay it by the original deadline to avoid interest and penalties.
5 tips to make tax season easier
- Correctly classify your business. Structuring your business as an LLC, S corporation or C corporation can provide different tax benefits. Discuss the decision with your attorney or accountant to select the right structure for your circumstances.
- Separate your business and personal finances. Use separate business bank accounts and credit cards to simplify accounting and tax preparation.
- Track your receipts. Receipt management software may be a worthwhile investment if you regularly make tax-deductible purchases for your business.
- Use accounting software. Reliable small business accounting software can automate bookkeeping and easily generate financial statements and other helpful reports.
- Make estimated tax payments. Pay estimated taxes quarterly to avoid a large tax bill and potential penalties at the end of the year.
Compare business loan offers
Read more
Best Small Business Tax Software Updated October 18, 2024 Preparing your business taxes doesn’t have to cost thousands of dollars. Small business tax software…Read more
Can a Small Business Get a Tax Refund? Updated February 8, 2019 Refunds for businesses aren’t as common as refunds for individuals because a business might not…Read more