Note: This post has been updated for the 2020 tax season.
It’s that time of year again — tax season! Some small business owners may be relaxing after having filed their taxes early. Others may be scrambling to get started since Tax Day (April 15, 2020) is right around the corner. Paperwork needs to be organized and appointments need to be scheduled with accountants.
Remember the Tax Cuts and Jobs Act of 2017? It has been a few years since those tax laws went into effect. Some taxpayers may still feel the impact of the tax reform while filing their 2019 taxes. The good news, however, is that while there were a few changes made in the 2019 tax code, those were largely related to individual deductions, not businesses.
While I’m not an accountant, I’ve assisted thousands of startups in forming corporations or LLCs. I often witness the anxiety tax season brings small business owners who are hunting for receipts at the last minute or trying to remember if they mailed W-2 forms out to employees. Here are some of my tips for how business owners can best prep for tax season. The biggest pro tip of all? Consult with an accountant if you have pressing concerns on tax matters.
[Related: How Often Do I Need to File Taxes?]
Ask yourself which entity your small business incorporated as.
Huh? Why does this matter? Your business entity — whether you form a limited liability company (LLC), corporation, partnership, or sole proprietorship — affects everything about the way you pay taxes. A startup’s entity ultimately determines what kinds of taxes must be filed.
There are different ways to tax certain entity formations, like LLCs and S Corporations. An S Corporation and a sole proprietorship, for example, would not pay their business taxes in the exact same manner. An S Corp (like an LLC) is structured as a pass-through tax entity, meaning income flows through to the owner’s personal tax returns. Entrepreneurs that form an S Corp essentially tell the government they would like the business to be taxed as a partnership. This allows the S Corp to avoid double taxation of C Corps, where income is taxed once at the corporate level and then again when it’s distributed as income to shareholders.
With sole proprietorships, on the other hand, individuals and their businesses are one and the same for tax purposes. They do not have to worry about double taxation. Instead, sole proprietors need to pay their own income tax and self-employment tax, along with quarterly estimated taxes and an annual return.
Create a tax date deadline calendar.
What comes next? Create a calendar where upcoming tax dates are assembled on a month to month basis.
Aside from the major April 15th deadline for filing income tax returns, what else might be applicable to your startup? Take a look at some of these additional tax dates below.
- Quarterly estimated tax payments. According to the IRS, small businesses must make quarterly estimated tax payments if their business owes taxes of $1,000 or more. Quarterly estimated tax payments may be made using Form 1040-ES. These forms are due by their payment period deadline. As of 2020, the due dates are as follows:
- April 15 for the payment period of January 1 through March 31.
- June 15 for the payment period of April 1 through May 31.
- September 15 for the payment period of June 1 through August 31.
- January 15 of the following year for the payment period of September 1 through December 31.
- Sales tax. Typically, sales tax filing deadlines for online sellers are slated for January each year. It is advised that you check in with the state you do business in for dates and filing frequencies for monthly, quarterly, and annual sales tax. Some states even have different deadlines based on whether you file online or through the mail.
- 1099 and W-2 Forms. Do you employ employees or contractors at your startup? Your business needs to provide these respective workers with Form W-2 and Form 1099-MISC and submit copies to the IRS by January 31.
- S Corporation and partnership tax return. March 16, 2020 is the deadline for filing an S Corp tax return or partnership return. (Form 1120-S and Form 1065, respectively.)
Schedule an appointment with an accountant.
Some startups may decide to use accounting software to file their taxes. This is a perfectly fine approach to filing taxes if you understand exactly what you are doing. However, it may be wise to work with a professional if you are uncertain or have questions about the process.
If your small business has a trusted accountant, schedule an appointment to meet with them. Don’t have a tax professional? It’s not too late to find someone to help you out. Consider setting up an appointment with a small business preparation expert at H&R Block or Jackson Hewitt. You may also seek out recommendations through trusted friends, mentors, and family members and reach out accordingly.
Come physically and mentally prepared when working with a tax professional.
Certain documents and receipts are necessary to bring along when you meet with a tax professional. Not sure what you need to physically take with you? According to H&R Block’s Small Business Tax Prep Checklist, the necessary paperwork breaks down into three different categories.
- Income. This includes gross receipts from sales/services, sales records, returns and allowances, and business checking/savings account interest.
- Cost of goods sold. This may not be applicable to all businesses. If you find it is for yours, bring along information about your startup’s inventory, inventory purchases, and materials and supplies.
- Expenses. What did your startup spend money on over the year? Expenses may include, but are not limited to, advertising, phones (as they relate to business), computers and Internet, travel, business insurance, office supplies, and rent.
As far as mental preparation goes, jot down any pressing questions you may have for your accountant. Then, ask them while you’re working together on the returns. Some common questions pertain to the what constitutes as a small business tax deduction. You can take a look at 16 common small business tax deductions at Bench Accounting’s blog that are 100 percent tax deductible.
Bring along the questions you would like to have addressed and don’t leave without making sure you ask and understand them. Doing this will better prep you for both this year’s taxes and taxes you will file in 2021.
Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.
[Related: Does My Side Business Affect My Taxes?]