As a business owner, your attention and focus should be on building your company. But, it’s also essential to stay on top of your taxes and make sure you’re filing and paying them correctly. Building a business is difficult enough, and filing and paying your taxes is a confusing process. Whether you’re a new business owner or have been operating for years, there’s always something to learn when it comes to taxes. In this article, we’ll outline the process for filing and paying your taxes, so you can feel confident and prepared when Tax day rolls around.
Before we dive into how to pay your taxes, it’s best first to understand how the US tax system fundamentally operates. So let’s get started!
Taxes for businesses
You can create an LLC or corporation for your business.
The confusing part is that an LLC can be treated in 4 different ways under the Tax Code. Suppose your business is treated as a C-corporation for tax purposes. In that case, your C-corporation will pay a 21% federal income tax (plus state income tax) on its taxable income (effectively net profit). If any of that profit is distributed to you as a shareholder, you’ll pay an additional 15% qualified dividend tax (plus state income tax.)
S-corporations and partnerships
If your business is treated as an S-corporation or partnership for tax purposes, then your business will not pay any federal income tax. The business passes through the income to the ultimate shareholder or member, and you pay the tax at your tax rate. You will not pay additional taxes when profits are drawn from the business unless you don’t have enough basis in your ownership.
IMPORTANT: One major misconception many of our clients have when first starting out is how pass-through income taxes work. Pass-through income means that the business itself doesn’t pay taxes – you do. Even if you leave every dollar of profit in the business, someone still has to foot the tax bill. Don’t expect to leave profit in the business to never pay a dollar of income tax.
Payroll tax filings
If you are active in an S-corp or C-corp, you are required to pay yourself reasonable compensation in the form of W-2 wages. This means you and your business must pay payroll taxes – 7.65% up to the first $147,700 in 2022 and 1.45% for every dollar of salary after that. Your business could also be responsible for making unemployment contributions, paying workers compensation insurance, etc. These taxes are all deductible on your business return. You should run payroll and submit taxes through a payroll platform like Gusto.
Gusto will help you file and pay taxes for the following forms with the IRS and state tax authorities:
- Form 941 (quarterly employer returns) + state equivalents – due 15 days after every quarter
- Form 940 (annual unemployment tax returns) + state equivalents – due 15 days after year end
- Form W-2 and W-3 (reporting employee wages and salaries) – due January 31 after year end
Business income tax filings
Importantly, you will need to file federal and state income tax returns for your S-corporation, partnership, or C-corporation. State tax returns should be filed wherever your business has a physical presence (including employees) and economic nexus.
Filing S-corp and partnership tax returns
S-corporations (Form 1120S) and partnership returns (Form 1065) are due March 15 of the following year for calendar year filers. You can extend the due date to file your returns by another 6 months or September 15. You must file a Schedule K-1 for each member or shareholder that owns a portion of the business. This schedule shows the taxable income from the company allocated to each shareholder or member. If you file late, the penalty for late filing is $200 per month per shareholder. We can try and get this waived, but it is not pretty.
Filing C-corporation tax returns
C-corporation returns (Form 1120) and tax payments are due April 15 of the following year for calendar year filers. You can extend the due date to file your C-corporation returns by another 6 months or October 15. If you file late, you will immediately incur a 5% penalty on any outstanding tax plus interest over time.
IMPORTANT: Extending your filing date does NOT change the due date to pay your taxes. You MUST pay those by the original due date. Federal taxes can be paid using the EFTPS platform here. You will need to apply for a PIN which could take 7-10 business days to process.
The primary prerequisite to completing your business taxes is to ensure your business’ accounting records are prepared and reconciled for the entire calendar year. This can be prepared by a bookkeeper or outsourced CFO. If this is something you need help with, our Profit Accelerator program is designed to get you up and running, complemented by business strategy.
Should I prepare my own business tax returns?
We do NOT recommend preparing a business tax return on your own unless you have the necessary technical experience to do so. There are many different inputs and questions on the forms that should be accurately prepared by a CPA or EA. Fortunately, CleverProfits provides an integrated service to our CFO clients where we handle all of your books and taxes required to prepare your business return.
With your accounting records in hand, your CPA or EA can prepare your business tax return reporting all of your business income, deductions, and adjustments. You might owe a small amount of franchise taxes for any state returns you need to file with your filings.
Taxes for individuals
Individuals pay income taxes on everything dollar of income they earn from all sources:
- salaries and wages
- contractor (1099) income
- pass-through income
- rental real estate income
- interest and dividends
- capital gains on stocks, crypto, etc.
- miscellaneous income from whatever source derived
Anything that increases your “ascension to wealth” is basically considered taxable income and should be included in your tax return when it is received or recognized. For S-corp owners, pass-through income is recognized on whatever your business makes when it makes it, not when you distribute it. For the crypto traders out there, that means any time you sell or exchange one cryptocurrency for another, you are creating a taxable event.
All of this is reported on Form 1040, which is an annual form filed for both you and your spouse.
Income tax brackets
Many of our clients and/or their spouses also work full-time jobs. We get a lot of complaints around tax time that their tax bill is too high. They ask why their solopreneur friends are paying significantly less tax than they are.
To answer that question, we must first understand that tax rates go up the more taxable income you have. This is done using income tax brackets. As you make more money, you progress through the tax brackets. However, taxes aren’t all done at one flat rate; taxes are graduated, and your pools of income are taxed starting at the lowest rates up to your highest marginal rate.
All that means is you are fairly taxed whether you make $10,000 or $100,000 or $1,000,000. There is no incentive for you to try and make less money just to stay in a lower tax bracket. The only incentive is to claim more deductions to lower your tax liability.
Tax brackets and marriage
Tax brackets also fluctuate when you file as married when filing jointly with your spouse. A single filer reporting only $150,000 of taxable income from their business will have a marginal tax rate of 32%. A married filing jointly filer reporting only $150,000 of taxable income from their business will have a marginal tax rate of 24%. Getting married can be an advantage when your household has a single source of income and a disadvantage when your home has dual incomes.
Tax brackets and two incomes
If you have income from a day job and your business, then here’s one way to think about your tax brackets. All of your income from your business is gravy on top and taxed starting at the marginal bracket from your day job. To further clarify, if you are making $150,000 from your day job as a single filer, your business income will be taxed at a minimum of 32%, all the way up to 37%. That’s a big difference in tax from a solopreneur who only makes money from their business!
Suppose you’re a sole proprietor or a general member in a partnership. In that case, you also have to pay additional taxes on self-employment income. Self-employment taxes is a nice slap in the face after already paying all of your income taxes. They represent your contributions to social security and Medicare programs in the US. In theory, paying into social security means you’ll get a payout in the future when you retire. Most of our clients are not banking on social security being available for them as a retirement strategy.
You must pay up to 15.3% on the first $147,700 of self-employment earnings and 2.9% after that. This is how S-corps shine: by sheltering you from self-employment taxes. It may not help as much if you have a day job because your day job income is already subject to payroll taxes which eats into the $147,700 floor. Fortunately, you do not have to file a separate tax return for this because the IRS has made it super convenient to file and pay this with your Form 1040 personal income tax return on Schedule SE.
Personal tax filings
You will need to file federal and state income tax returns for you and your spouse every single year. Your Form 1040 and final tax payments are due April 15 of the following year. For example, your 2021 tax return is due April 15, 2022. You can extend the due date to file your personal taxes by another 6 months or October 15. You will immediately incur a 5% penalty on any outstanding tax PLUS interest over time if you file late.
IMPORTANT: Extending your filing date does NOT change the due date to pay your taxes. You MUST pay those by the original due date. Personal federal taxes can be paid using IRS Direct Pay. You will need to verify your identity using details from your prior year tax return(s) before making a payment towards your account.
Form 1040 (and state equivalent) shows all your income sources, and the calculations used to arrive at your total taxable income and tax liability. This will include Form W-2 income from your business or day job, Schedule K-1 income from your S-corporation or partnership, and dividend income from your C-corporation.
How to calculate your personal tax returns
To accurately prepare your personal tax returns, your CPA or EA will need quite a bit of information from you. CleverProfits uses a detailed tax organizer that asks important questions about you and your business. Aim to provide all of your tax documents because they typically need to be reported with your return to the IRS. If you miss a tax document, the IRS could issue an automated notice for an amount due plus penalties and interest. This creates a lot of headaches for you, and you will need to pay your CPA a lot of fees to correct it.
Estimated taxes and tax refunds
If you’ve made estimated tax payments or had withholding on your paychecks, these credits are applied against your tax liability. You could get a tax refund if you’ve paid more than your liability. For most business owners, it’s the other way around, and they pay their remaining tax bill at tax time. If you haven’t paid a dime in estimates or withholding, you could be in for a world of hurt because you will have to pay all of your taxes with the return submission. That is why proper tax planning is crucial, so you have enough saved up to pay your tax bill by April 15.
If you don’t have enough cash to pay your tax bill by the original due date, you can apply for an installment plan through the IRS portal. Note that you will continue to accrue significant penalties and interest when paying on installment.
Online account with the IRS
If you ever want to check on the status of your tax returns, verify your wage and income, you can set up an account with the IRS for free. All it will take is to verify your identity on their platform. This is also where you can try applying for an installment plan.
I’m not going to remember all of this…
If all of this seems too confusing, fear not. Finally, you can get all your taxes and filing done in the comfort of your own home. We’ll take care of everything from start to finish so that you don’t have to worry about anything other than getting ready for tax season. CleverProfits provides an integrated CFO service where we handle your books and taxes so that you don’t have to. Schedule a consultation with an advisor today to learn more about how we can help you!