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 which tax forms you’ll 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 kind of income, deductions and tax credits you claim.
2. Gather your documents and 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, address, employer identification number (EIN), and, possibly, your Social Security number. The 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 with the IRS Instructions for Schedule C.
- Income: Gather information on the income you earned from selling your products or services, selling business assets, 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). A worksheet in Chapter 6 of IRS Publication 334 can help you calculate COGS for your business.
- Expenses: You can deduct the ordinary and necessary costs of running your business. Expenses vary from company to company.
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.
If you use small business accounting software, gathering the above information should be as simple as running a few reports. Otherwise, you may need to recreate your accounting records using receipts, bank and credit card statements and other documentation.
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 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 US.
- 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 employment 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. Ordinary and necessary expenses vary by business but might include:
- Advertising: Costs associated with marketing and advertising your business.
- Depreciation: Deduction for the 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 your business operations.
- 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.
7. 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. If March 15 falls on a Saturday, Sunday or legal holiday, you must file by the next day that isn’t a weekend or a holiday.
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. However, if April 15 falls on a Saturday, Sunday or legal holiday, the forms must be filed by 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, 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.
If your tax situation is relatively simple, you might feel comfortable handling filing on your own with the help of tax software.
However, doing business in multiple states, buying and selling business assets, carrying inventory and hiring employees can complicate tax filing.
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.
5 tips to make tax season easier
- 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 year-end.
- 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.
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