Navigating the complexities of filing, deductions and tax credits to minimize liability is crucial for small businesses—but it’s also very difficult. Requirements vary by city, state and year, creating a web of financial legalese that can be challenging to understand.
Without dedicated tax support, small businesses risk late filings, IRS flags and unnecessarily high tax payments and compliance costs. To help provide clarity and support, we’ve compiled the most common small business tax questions our experts get from businesses like yours.
Tax Payments and Filing
How often do I need to pay my small business taxes?
The U.S. tax system operates on a pay-as-you-go basis. Unlike W2 employees, whose taxes are automatically deducted from their paychecks, businesses and independent contractors have to proactively estimate and pay city, state and federal taxes on a quarterly basis. The due dates for quarterly tax payment are:
- April 15 for taxes on Q1 income
- June 15 for taxes on Q2 income
- September 15 for taxes on Q3 income
- January 15 of the following year for taxes on Q4 income
Note: If a due date above falls on a Saturday, Sunday or legal holiday, the deadline extends to the following business day.
What are the key tax deadlines for small businesses?
Paying taxes is different from filing them. Filing means submitting a form, which small businesses typically do once a year, unless they follow a fiscal year, on the following dates:
- Sole proprietors: Form 1040 with Schedule C by April 15
- S-corps and C-corps: Form 1120 by April 15
- Partnerships and LLCs: Form 1065 by March 15
Learn more about filing deadlines and how to file with the IRS for a business tax extension if necessary.
For businesses with employees, federal payroll taxes are typically paid monthly or semi-weekly and are due by the 15th of the following month.
How do I calculate and pay estimated small business taxes?
To calculate your tax liability, first, have your business TIN or EIN handy. Then, it’s helpful to understand that your quarterly small business tax payments offset your tax bill when you file your annual return. This means that if you underestimate them, you’ll have to pay the difference when you file, on top of a possible penalty. If you overpay, you can get a refund or apply the overpayment to your next tax bill.
Use the guidelines below and find more detail on figuring and paying estimated taxes from the IRS.
Calculating what you owe:
Sole proprietorships, partnerships, S corporations and LLCs that do not elect to be taxed as a corporation are “pass-through” entities where the tax burden is “passed through” to the individuals involved. Thus, business owners pay the following on business earnings:
- Federal income tax (Find federal rates.)
- State income (Consult your state treasury for rates.)
- A 15.3% self-employment tax, which changes every year.
To calculate estimated taxes:
- Generally, use form 1040-ES to make these calculations.
- Add your 1099 income sources and apply relevant tax credits and deductions.
- Use the net amount to identify your federal and state tax rates and calculate taxes owed to each.
- Use that same net amount to calculate self-employment tax owed.
C corporations pay:
- A 21% federal corporate income tax
- State corporate income tax
- Personal income tax (both federal and state) on any salary you pay yourself
Making payments:
The IRS recommends using the Electronic Federal Tax Payment System (EFTPS). It requires enrollment, so do that well in advance of your next tax deadline. You can also pay in other ways, such as by credit card or check.
Other considerations:
Though small, private businesses rarely have to worry about dividend taxes, you may incur additional taxes based on business activity.
- If you have employees, you pay Federal Insurance Contributions Act (FICA) taxes (more on this below).
- If you paid unemployment, you owe Federal Unemployment (FUTA) taxes.
- If you sold business assets at profit, you owe capital gains taxes.
- If your business owns any buildings or land, you owe property taxes at local rates.
- If you sell or manufacture certain products, operate in specific industries or rely on special types of equipment, you may owe excise tax.
Deductions and Expenses
What are some common small business expense deductions?
- Reasonably priced meals during which you discuss business (details below)
- Client gifts under $25 per gift per person, regardless of the type of product (Ignore items that cost $4 or less)
- Certain types of bank fees tied directly to commercial activity
- Rent payments toward office space (such as a coworking space) within small business taxation rules—excluding personal use
- A home office, to an extent (details below)
- Unreimbursed parking costs on-site with clients
- Certain tax payments
- The Qualified Business Income Deduction (QBI)
- Facility expenses for a private gym built at your business location that’s open to all employees
- Cost and upkeep of uniforms or special work clothes that are not suitable for everyday wear (e.g., clothes you provide employees that standardize your branding and appearance or are necessary for safety)
- Health care premiums in the form of either an adjustment to income if you’re self-employed or the small business health care tax credit if you have fewer than 25 employees
- Advertising, insurance, legal and professional fees, temporary contract labor and other items found on Schedule C
Not deductible for small businesses:
- Entertainment expenses
- Client gifts over $25 per person
- Gym and fitness memberships
- Medications (deductible on your personal Schedule A)
- Charitable contributions (deductible on your personal Schedule A)
- Dues to business, social, athletic, luncheon, sporting, airline and hotel clubs
- Personal, living, family and other expenses as outlined by the IRS
Learn more about small business expense deductions and see a complete list of business expense resources.
What are the rules for home office tax deductions for small businesses?
Whether your rent or own, you can usually deduct a portion of your home office space if the specific area is used exclusively and regularly for your trade or business AND is one of the following:
- Your principal place of business;
- A place where you meet or deal with patients, clients or customers in the normal course of your business; OR
- A separate, unattached structure you use in connection with your business.
Most self-employed freelancers and small businesses can take this deduction because they qualify for the first bullet above. As long as your space meets these conditions, it could be any structure, room or other separately identifiable space in your home, and it doesn’t need to be marked off by a permanent partition.
An easy example: You converted your “she shed” for regular and exclusive management of your business. A tougher example: claiming part of your dining room as a home office. It’s possible, but you must be able to prove that the part of your dining room used for work is never used for personal activities.
To calculate this home office deduction, you can use your actual expenses or a standard $5 per square foot amount up to $1,500.
See details on the business use of your home. Daycare providers should reference Publication 587.
Can I write off meals for anyone I take to dinner if we talk about business?
Yes, meals for business purposes are 50% deductible, but you have to discuss business, and they must be within reason—lavish meals perceived as entertainment can incur a flag.
If I do business while I’m out of town, is that a small business expense deduction? If so, how much can I write off?
You can deduct all travel-related expenses on a trip outside your tax home—that is, the entire city or area where your main place of work is—if the expenses are related to business. For example, if you are on a five-day trip, and you do business on just one day, you can write off one night of lodging off of the five. A best practice is to write the reason for the expense on each receipt, including names and topics discussed.
If you don’t like tracking receipts, use an IRS per diem rate for your destination city to calculate this expense.
Do I need to keep receipts if I pay for things with the business account?
Yes, for at least three years. In some cases, account statements will suffice. See a list of records the IRS recommends keeping for expenses. You also don’t need paper copies—you can scan and upload images to accounting software or your preferred method of digital storage (e.g., cloud software or an external hard drive).
For trips to conventions or conferences, keep related materials. The IRS may check the nature of the event to determine if it was relevant to your business.
Vehicle and Equipment Expenses
What are the rules for business vehicle and mileage deductions for small businesses?
You can deduct the entire cost of vehicle ownership and operation if you exclusively use it for business purposes. If you drive it for personal use too, you can only deduct the cost of business use. Small businesses can choose between:
- The standard mileage rate, which covers general costs per mile driven.
- The actual expense method, which accounts for maintenance, insurance and other specific costs.
Depreciation can also be factored in if applicable. If your vehicle breaks and is unfixable, you can dispose of it and take a loss equal to the amount of depreciation that has not been taken yet
Learn more about IRS mileage rate, tracking and uses.
I use a car for business, but the loan is in my personal name. Can I pay the loan from the business account?
The loan should be in the name that matches the payer account, so put the car loan under your business name. If you keep the loan under your own name, you could pay it from your personal account and deduct mileage and other auto expenses on your personal return for business use.
Leasing trucks, cars and materials specifically for jobs is tax deductible. Review our lease accounting (ASC 842) guide to learn more.
Employee and Payroll Taxes
How do I handle payroll taxes for small businesses?
In addition to filing and reporting, you need to calculate how much to deduct from each employee paycheck and pay that to the proper authority by the deadline. Payroll taxes typically include:
- Federal, state and local income tax based on the cities where you and your employee are located
- FICA taxes, which include Social Security and Medicare tax
- Federal or state unemployment tax
- Additional Medicare and other obligations based on locality, such as disability or paid family and medical leave
You will need to collect W-4s,1-9s and direct deposit authorizations from each employee in addition to monitoring and adjusting withholdings based on life events such as marriage or childbirth.
What are the tax implications of hiring independent contractors vs. employees?
It’s imperative to classify workers correctly to avoid fees and legal action. Once you’ve classified employees correctly, here’s what to expect:
For independent contractors:
- You must attest to the degree of control and independence the workers have
- You must report nonemployee compensation by sending copies of each 1099-NEC to the IRS and the contractor
- You don’t have to withhold or pay payroll taxes
For employees:
- You pay 50% of FICA and typically a portion of health care costs if you provide the option
- You must report payroll taxes to the IRS and the state
Business Structure and Income Reporting
What are the tax implications of business structures?
Tax implications for a small business depend on its structure:
- Sole proprietorships report income on personal tax returns and pay self-employment tax, and you are personally liable to business risk.
- Partnerships pass income through to partners, who report income and self-employment taxes on their personal returns.
- S-corporations allow for shareholder salaries, with business income and employment taxes managed separately.
- LLCs are flexible and can be taxed as sole proprietorships, partnerships or corporations, depending on the owner’s election. Most LLCs are treated as pass-through entities, with income reported on the owner’s personal tax return.
- C-corporations are standalone legal entities that are taxed separately from owners at corporate tax rates.
Learn more about LLC filing and tax implications for the different business structures, as well as what to consider before changing your structure.
How do I report small business income on my personal tax return?
Sole proprietorships, S corporations and entities with pass-through taxation report small business income using Form 1040 Schedule C.
Sales Tax and Record Keeping
Do I need to collect and pay sales tax?
Your “sales tax nexus” is the state(s) in which you’re required to collect, pay and file sales tax. Whether you’re selling a physical, technological or knowledge service, you probably have to collect sales tax. Use tax, excise tax, transaction privilege tax and many others fall under the umbrella of sales taxes.
Each state’s department of revenue provides its own compliance guidance.
How long do I need to keep tax records?
For sales tax, gather copies of all sales tax returns filed in each state throughout the year and hold them for at least three years. Review our sales tax nexus guidance if you operate in multiple states.
Tax Credits and Professional Help: Unlocking Savings
Are there any tax credits for small businesses?
Here’s a complete list of tax credits, but the following are most common for small businesses and startups:
- The Small Business Health Care Tax Credit (for businesses with fewer than 25 employees)
- The Work Opportunity Tax Credit, for businesses hiring employees from certain groups
- The Disabled Access Credit, which covers costs of making your business accessible
- The Research and Development (R&D) Tax Credit for expenses related to innovation and development
These credits reduce your total tax bill, not just taxable income.
When should I consider hiring a small business tax professional?
If you’re not entirely confident about everything you’ve read thus far, you could benefit from professional tax help. Working with a tax specialist can save a significant amount of cost and risk to ensure you maintain tax compliance for your small business. At the very least, it’s worth gathering your own list of questions to ask a tax professional.
Here’s a helpful tax preparation checklist to get together before meeting with a professional.
Answer Your Small Business Tax Questions with Expert Help
Delegating tax tasks is a key step for small business owners aiming to focus on growth and reduce stress. A qualified tax professional can often handle your small business tax filing more efficiently, accurately and cost-effectively than attempting it on your own.
To get personalized answers to your small business tax questions, you’ll want to speak to a professional who specializes in your industry and local tax regulations. Schedule a consultation with Paro today and experience the benefits of tailored tax support for your business.
