Laying the foundation of a startup is difficult, and comes with unique challenges. Milestones like filing small business taxes for the first time can be a nightmare without the right tools. If you’re a founder new to small business taxes, you’ll find some of the answers to your burning questions here.
Which Tax Form Should I Use?
The type of tax form you fill out will depend on the number of employees you have under your care.
If you file citing sole proprietorship, you’ll be able to report your business’s entire income and expenses via Schedule C, which you’ll be able to attach to your personal income tax return. This is also the case if you’ve registered your business as an LLC and notarized yourself as the sole owner.
However, if you’ve registered your business as a corporation, you’ll be expected to fill out your corporate tax return via Form 1120.
To break for expectations down further, take a look at the listing below:
- Small businesses with a single proprietor or employee will file Schedule C as an addition to their personal tax return. When you do so, you should also prepare to fill out Schedule SE for self-employment taxes.
- Businesses that are registered as partnerships or multi-member LLCs are expected to file Form 1065, or a partnership return, in addition to Schedule K-1. Each partner affiliated with the business will be expected to file their own Schedule K-1.
- S corporations should use Form 1120-S
- Corporations otherwise unregistered are expected to use Form 1120
What Financial Information Should I Have?
You’ll need the following types of financial statements to accurately calculate and submit your yearly tax report:
- A Profit and Loss (Income) Statement
- A Balance Sheet
- Records of Deductions
- Records of Business Purchases
- Schedule C Guidelines and Tax Return
How Do I Calculate Cost of Goods Sold & When Is It Applicable?
You’ll vary the costs you need to calculate based on the operations of your business. You’ll only need to calculate the cost of goods sold, for example, if your business manufactures or sells a product. If you provide a service, you’ll be able to largely neglect this cost, though you’ll need to make sure that your accounting reflects expenses like hosting, customer success costs, and other elements of providing that service.
For those businesses needing to calculate the cost of goods sold (as this cost directly impacts net income), regularly assess the following variables:
- Initial Inventory Cost
- Additional Inventory Manufactured or Purchased
From these costs, you need to subtract the cost of your year-end inventory. Your result will accurately represent your business’s cost of goods sold. This calculation appears on all business tax reports, including Schedule C.
What Expenses Can I Deduct?
So long as your startup is legitimate, you can apply tax deductions to reduce the amount of taxes you’re expected to pay. These include:
- Accounting Expenses
- Advertising Expenses
- Software Expenses
- Vehicle Expenses
- Commissions and Fees
- Club and Organization Dues
- Employee Training Expenses
- Employee Benefits
- Employee Expenses (uniforms, tools, meals)
- Office Expenses
- Insurance Expenses
- Business Debt Interest
- Legal Fees
- Taxes (Other Than Income Taxes)
- Travel Expenses
When Are Taxes Due?
Small businesses are expected to pay their taxes four and a half months after the end of the applicable fiscal year. If you’ve registered your business as a corporation, then, and your fiscal year comes to an end on December 31st, you’ll be expected to make your estimated tax payments by April 15th.
Partnerships and S corporations – or businesses that register more than one person as their owner – will be expected to file their taxes by March 15th of the applicable year.
If you are the sole proprietor of a business, and you have made more than $400 in a fiscal year, you’re expected to file Schedule C alongside your personal tax returns by April 15th.
You can, however, file for an extension. You’ll still be expected to make your tax payments on time, but you will be able – upon approval – to submit your financial reports at a later date.
Do I File If I Don’t Owe Taxes?
Even if you do not owe taxes, you must prepare a small business tax return to accurately report your income and expenses to the United States Federal Government. If you file your income and expenses on Schedule C, take care to include those expenses when filing your personal taxes, as well. Owning and operating a startup or small business can earn you credits for your personal taxes.
What If I’m The Only Employee Working At My Startup?
If you are the only employee operating a startup, small business, or LLC, then you are required by law to pay self-employment taxes. These tax rates will vary by state, but they cover the Social Security and Medicare taxes you would otherwise pay while working for another employer.
Self-employment taxes, in a small-business environment, applies to:
- Sole business proprietors
- Sole business partners
Self-employment taxes does not substitute for your personal taxes. If you’re not certain whether or not you should fill out self-employment taxes, get in touch with your personal accountant to discuss the specificities of your situation.
Even with all of these answers at hand, It may be to your benefit to bring a financial advertiser in when filing your small business taxes for the first time. Not only will an expert bring a career’s worth of experience to your business, but you’ll be able to deduct the cost of their input from what you owe.
That said, small business taxes don’t have to be difficult. So long as you’ve kept an accurate record of your income through your first fiscal year in operation, the process will be as straightforward as taxes get.