How Do Businesses File Taxes

I’m often asked by small businesses owner, how do I file taxes? Simple, with your individual tax return. As a LLC or a Sole-proprietor you have to understand that you are responsible for the taxes as an individual. Therefore, during the tax season, you do not file a separate business tax return. Your business income and expense is reported on your individual tax return (1040) which is why you are taxed on your total income. If you worked for someone, they would give you a W2 at the beginning for the year that shows the tax they paid on your behalf throughout the year. However, because now you’re the employer, you’re responsible for paying the taxes quarterly.

What are Quarterly Taxes

When you hear people talk about “Quarterly Taxes” they are talking about Income and Self-Employment Tax. You know, the tax people only think about once a year; well that’s the same. Whether you operate as LLC or Sole-proprietor you should be estimating your quarterly tax. See article: How to Estimate Quarterly Taxes.

What is Business Income

Your business income is your net taxable income. This is your income minus any eligible write offs. You have to know which of your expenses is an eligible write off before you can estimate taxes. I recommend setting up the Chart of Accounts in your accounting software based on the eligible tax categories. To know which expenses you’re eligible to write off, use the Tax Index to easily put them into the tax categories.

What is Income Tax

Income Tax is the tax you pay on all income you earned in the tax year. So if you have an employer, receive retirement income, or have unemployment income to name a few; all that income is added up with your business income to determine your tax rate.

What is Self-Employment Tax

Self-Employment Tax is the tax you rarely hear people bring up, however, this is the one that causes the most shock when small business owners file their tax return. It’s like the awkward black sheep of the family no one likes to talk about. However, we should be talking about it more because it’s 15.3% of you’re business’s net taxable income. Self-Employment Tax is your contribution to Social Security and Medicare.

When do Businesses File?

Filing business taxes and paying business taxes is two different thing. If you operate as an LLC or Sole-Proprietor, you pay estimated tax quarterly. If you do not pay the tax each quarter, you will pay it when you file your tax return. When you file a tax return during the tax season, you are verifying if you paid enough taxes each quarter. However, if you pay when you file interest and fees may be added.

How do I pay Estimate Tax

Estimated taxes is paid from your account on the IRS website.

Note: Your account will be set up under you individual name, not your business.