File your business taxes with confidence

Small Business Tax Preparation: Tips & Best Practices

Gerri Detweiler

While it’s easy to think of business tax preparation as just another tedious task to tick off your to-do list, it has a hidden benefit. 

Tax-related tasks, like bookkeeping, require you to keep your business financial information up to date. That data can then provide you with valuable insights about your business financial health. It can even help your business qualify for some of the most favorable small business loans. 

It’s also important to mention the downside of not keeping up on your taxes. Falling behind on business taxes can result in expensive penalties, hurt your business credit, and can even force you to shut down your business. 

Fortunately there are numerous resources, such as bookkeeping software and tax preparation services, that can make small business taxes easier. 

When it comes to best practices, always use a business bank account for business income and expenses. Mingling personal and business transactions in the same account will cause headaches at tax time. 

Similarly, using a small business credit card will make it easier to identify business expenses and possible tax deductions. 

Small Business Tax Preparation Checklist

Small business tax preparation involves three main steps:

1. Recording and documenting income and expenses (bookkeeping)
2. Filing local, state and/or federal tax returns
3. Paying taxes due, including payroll taxes as well as business taxes.

We can break these down even further by looking at these tasks in more detail. 

Bookkeeping

As a business owner, you’ll need to track the income and expenses your business receives and pays. This is true even if you are a sole proprietor or independent contractor who reports business income with your personal tax returns.

You have two choices here: do it yourself, or hire a bookkeeper. DIYers will typically use bookkeeping software, which can help streamline this process and even automate certain tasks. In addition, bookkeeping software may include invoicing or other services that feed into bookkeeping. 

If you don’t use bookkeeping software, when tax season comes you’ll likely face additional steps to enter this information into tax preparation software. If you hire a CPA or tax professional to prepare your tax return, they may charge for bookkeeping services on top of tax preparation. 

If you hire a bookkeeper, they will also use accounting software to enter your information. Most bookkeepers are familiar with the most popular accounting software programs. 

Filing Tax Returns and Paying Taxes Due

There are several tax returns your business may need to file, and taxes that must be paid. Some must be paid throughout the year, so you want to be sure you note these dates on your calendar or work with an accounting professional who will help you stay on track. 

Income Taxes

Your business will likely need to file an income tax return with the Internal Revenue Service (IRS). This is referred to as federal income tax. Your business structure (sole proprietorship, LLC, partnership, S corporation or C Corporation) and how you elect to be taxed will determine which tax form you need to file. 

Your business may also need to file local and/or state tax returns as well. 

If the business is not withholding income taxes, or if the amount withheld will not cover the taxes you’ll owe, you will likely need to pay quarterly estimated taxes.

Payroll Taxes

If you pay employees in your business (including yourself, if you are on the business payroll), you need to withhold and pay federal income taxes for the employee, the employer’s share of Medicare and Social Security, and federal unemployment taxes. 

If you are self-employed and do not pay yourself formal payroll with tax withholding, you assume the full responsibility for Medicare and Social Security taxes, often referred to as “self-employment taxes.” 

Payroll solutions can simplify the task of paying employees and contractors, and managing payroll tax payments.

Sales and Use Taxes 

Sales taxes refer to taxes the business must collect and pay when they sell certain types of goods or services, while use taxes refer to taxes that must be paid on certain purchases when sales taxes aren’t collected. For example, if you buy certain items from out-of-state sellers and you don’t pay sales taxes on those purchases, your state may require you to pay a use tax. 

Sales tax rates vary by state and even by county. They have become much more complicated in recent years due to online sales. If your business sells goods or services in another state, it may be required to collect and pay sales tax even if the purchase is made in a state where the business doesn’t have a physical presence. 

Many merchant services providers offer services that track purchases and charge the customer sales tax as appropriate. 

Excise Taxes

Businesses in certain industries (like energy or sports betting) may also have to pay excise taxes. At the federal level, a quarterly excise tax return must be filed for businesses subject to this tax. 

Property Taxes

If your business owns real estate or equipment (including computer equipment or business vehicles), it may have to pay property taxes, depending on state and local tax laws. 

Cost of Tax Preparation for Small Business

The two most basic and universal components of tax service for small business are:

• Bookkeeping
• Completing and filing tax returns

In addition, a business may pay for tax help for payroll taxes (including federal unemployment taxes), sales and use tax, or other types of tax returns that must be filed. 

Costs vary widely, but most online tax preparation services are transparent about their pricing. A very small business may pay $500— $1000 annually (or less) for basic bookkeeping and tax preparation software. Costs will be higher for businesses with more complex needs. 

Tax Preparation Tools for Small Business Owners

Here are the tools you’ll want to successfully manage your business taxes:

1. Accounting software (also known as bookkeeping software). This will allow you ( or the professional you hire), to track income and expenses. You may also outsource this task completely to a bookkeeping service or accounting professional. 
2. Tax preparation software. If you want to handle your own business income tax return, you can use software to walk you through that process. This type of software is also very helpful to independent contractors or sole proprietors who pay business taxes with their individual tax returns. Alternatively you can hire a tax pro such as a CPA, enrolled agent, or accountant, to do this for you. 
3. Payroll service or payroll software. If your business pays employees and/or independent contractors, a payroll solution will make it easy for your business to manage these payments, and to manage payroll taxes. 
4. Sales tax software. If you sell products or services subject to sales tax you’ll likely want to invest in this type of software. Your merchant account provider may offer this as part of your merchant account, or as an add on. 

Tax Services for Businesses

Tax services can be as simple as bookkeeping and preparing tax returns for small business owners. Tax experts can also help you start a new business by providing insights into the best business structure for tax purposes. 

Business owners can benefit from a variety of tax deductions, and a tax professional can help you identify strategies to earn the maximum refund. 

As your business grows, it may need more extensive services such as:

• Tax planning
• Tax compliance
• Tax negotiation and settlements
• Tax credits and incentives, including ERC Credits
• Audited financial statements for financing or to sell a business

Start by creating and maintaining a solid bookkeeping system and staying up to date with tax filing requirements. Those steps will benefit your business all year long, not just when you need to pay taxes.