Running a small business means managing more than customers, employees, and daily operations. Business owners also need to understand their tax obligations, keep accurate financial records, and plan ahead for tax payments.
Whether you operate a consulting business, professional practice, retail company, construction business, or another small business, understanding small business taxes can help you avoid surprises and make more informed financial decisions.
What Are Small Business Taxes?
Small business taxes can include several different types of federal, state, and local taxes, depending on how your business operates.
Your tax responsibilities may include:
- Federal income tax
- Self-employment tax
- Employment and payroll taxes
- State income or business taxes
- Sales and use taxes
- Estimated tax payments
The taxes that apply to your business depend on factors such as your business structure, employees, income, and location.
How Does Your Business Structure Affect Taxes?
Your business structure can affect how business income is reported and taxed.
Common structures include:
- Sole proprietorships
- Partnerships
- Limited liability companies (LLCs)
- S corporations
- C corporations
For example, income from a sole proprietorship is generally reported on the owner’s individual tax return, while corporations generally have different filing requirements.
Choosing or changing a business structure can have significant tax consequences. Business owners should consider discussing the decision with a CPA before making a change.
What Business Expenses Can Be Deducted?
One of the most important parts of small business taxation is understanding potentially deductible business expenses.
Depending on your circumstances, qualifying expenses may include:
- Office expenses
- Advertising and marketing
- Business insurance
- Professional and accounting fees
- Software and subscriptions
- Employee wages and benefits
- Business travel
- Qualifying vehicle expenses
- Equipment and supplies
- Certain home-office expenses
A business expense generally needs to meet applicable tax requirements to qualify. Keeping receipts, invoices and other supporting documentation is essential.
Don’t Forget About Estimated Taxes
Many small business owners do not have taxes withheld from their business income in the same way employees do from their paychecks.
Depending on your situation, you may need to make estimated tax payments during the year.
Estimated payments can help cover expected income and self-employment taxes. Waiting until the end of the year without planning for these payments can create a significant tax bill or potential underpayment penalties.
Regular tax planning can help you estimate your liability and prepare for upcoming payments.
Small Business Tax Filing: What Records Do You Need?
Good records make small business tax filing easier and can help support deductions.
Business owners should maintain organized records of:
- Business income
- Bank and credit card transactions
- Receipts and invoices
- Payroll records
- Contractor payments
- Mileage and vehicle expenses
- Equipment purchases
- Business travel
- Tax payments
Keeping business and personal finances separate can also make bookkeeping and tax preparation much more straightforward.
Common Small Business Tax Mistakes
Some common problems can make tax filing more difficult or increase the risk of errors.
These may include:
Mixing business and personal expenses: Separate accounts and clear records can make it easier to identify legitimate business expenses.
Waiting until tax season: Leaving bookkeeping and tax planning until the last minute can make it harder to identify issues or plan for tax payments.
Forgetting estimated taxes: Business owners should determine whether estimated payments are required based on their individual circumstances.
Poor documentation: A deduction without adequate supporting records can create problems during tax preparation.
Ignoring changes in the business: Hiring employees, changing business structures or significantly increasing revenue can affect tax responsibilities.
Why Tax Planning Matters for Small Businesses
Tax planning is more than preparing a return after the year ends. Reviewing income, expenses and expected tax liability throughout the year can help business owners prepare for upcoming obligations.
A CPA can review your financial situation, identify potential tax-planning opportunities and help you understand how business decisions may affect your taxes.
For Chicago business owners, working with a local CPA can also provide guidance based on the business’s location and applicable state and local requirements.
When Should a Small Business Contact a CPA?
You do not need to wait until tax season to speak with a tax professional.
Consider working with a CPA when you:
- Start a new business
- Hire employees
- Begin receiving significant 1099 income
- Expect a major increase in revenue
- Purchase business equipment
- Consider changing your business structure
- Need help with estimated taxes
- Want assistance with bookkeeping and tax planning
Professional guidance can help you stay organized and make tax decisions based on your specific circumstances.
Frequently Asked Questions
1. What taxes does a small business have to pay?
The taxes that apply depend on the business structure, income, employees, location, and activities. They may include income, self-employment, payroll, sales, and other applicable taxes.
2. What expenses can a small business deduct?
Potentially deductible expenses may include advertising, professional fees, insurance, office expenses, software, employee costs, travel and other qualifying business expenses.
3. Do small businesses have to pay taxes quarterly?
Some business owners are required to make estimated tax payments during the year. The requirement and amount depend on the individual’s or business’s tax situation.
4. How can I make small business tax filing easier?
Keep accurate records throughout the year, separate business and personal expenses, track income and expenses consistently, and work with a qualified tax professional when needed.
5. Should I hire a CPA for my small business taxes?
A CPA can help with tax preparation, bookkeeping, estimated taxes and year-round tax planning. Professional guidance can be especially useful as a business grows or its financial situation becomes more complex.
Get Help With Small Business Taxes in Chicago
Small business taxation can become complicated as your company grows. Chicagoland CPAs can help Chicago business owners with tax preparation, tax planning, bookkeeping, and other accounting needs.
If you need help understanding small business taxes, preparing your tax return, or planning for future tax obligations, contact the Chicagoland CPAs team to discuss your business and tax needs.