What do tax obligations look like for small business owners in 2021?
2020 was a difficult year for small businesses and entrepreneurs struggling to stay afloat during the Covid-19 pandemic. Many entrepreneurs found relief through financial resources introduced in the Coronavirus Aid, Relief and Economic Security (CARES) Act. The U.S. Small Business Administration launched the Paycheck Protection Program (PPP) where qualifying businesses could receive emergency loan assistance. The Economic Injury Disaster Loan (EIDL), a program expanded by the SBA, offered financial support to businesses that struggled during state shutdowns in 2020. In between, entrepreneurs received additional financial relief through Covid-conscious grants created by corporations like Facebook and GoFundMe.
In 2021, what can small business owners expect when filing their taxes? As a brief disclaimer, I am not a tax professional. I have, however, assisted thousands of startups in forming corporations and LLCs, so I understand that tax season is often stressful for small businesses. Here’s what to expect — and where you may need to further consult an accountant for filing assistance.
[Related: How Often Do I Need to File Taxes?]
Your Calendar for Tax Date Deadlines
When can taxpayers start filing their taxes? The IRS will begin accepting and processing 2020 tax year returns on Feb. 12.
Small businesses have additional tax dates that may also be applicable to the businesses. These include, but are not limited to, the following deadlines.
1. Quarterly estimated tax payments
These are tax payments made by small businesses, like sole proprietorships and self-employed individuals, that owe $1,000 or more in taxes. Additionally, small businesses incorporated as S Corporations and C Corporations will need to file quarterly estimated taxes if they own more than $500 in taxes for the quarter they are filing in. As per the name, estimated tax payments are made within four payment periods.
- January 1 – March 31 with a due date of April 15.
- April 1 – May 31 with a due date of June 15.
- June 1 – August 31 with a due date of September 15.
- September 1 – December 31 with a due date of January 15 in the following year (January 2022).
Quarterly estimated tax payments may be filed using Form 1040-ES.
2. Form W-2 and Form 1099-MISC
If you employ employees and independent contractors at your business, you must make sure worker receives their respective tax filing form in the mail. Employees will need Form W-2 while independent contractors need Form 1099-MISC.
What are the deadlines to file each form? Both Form W-2 and Form 1099-MISC must have been submitted to the IRS and employee by Feb. 1.
3. S Corporation tax return
Businesses that have incorporated as an S Corporation must file their annual tax return by a specific deadline. This is March 15.
In order to file tax returns as an S Corp, entrepreneurs must complete Form 1120S U.S. Income Tax Return for an S Corporation. This outlines the S Corp’s financial activity throughout the last calendar year. Additionally, those that incorporated as an S Corp will need to file Schedule K-1. This is also referred to as Form 1065 and shares the income, deductions, and credits of each partner in the S Corporation.
4. April 15: Tax Day
The deadline for income taxes for most taxpayers is April 15. This is also true of businesses that have incorporated as a sole proprietorship or LLC. Income tax is also due on April 15 for C Corporations. C Corps will need to file Form 1120.
In 2021, April 15 is also the last day to request a six-month tax extension for C Corporations filing income tax returns. (Please note the extension deadline for S Corps and partnerships is March 15.) Request the extension as soon as you are able, depending on your business and its tax circumstances. Then, remember to file taxes according to the six-month extension.
[Related: 5 Reasons Why You Should File for a Tax Extension]
Meet with a tax professional
In 2018, the Tax Cuts and Jobs Act (passed in December 2017) had a significant impact on the existing tax code. Some of these changes included new rules for pass-through entities, like LLCs, and lower corporate tax rates. Many small business owners sought advice from accountants, CPAs, and tax professionals that could assist them with questions relating to tax reform. Even if they felt confident doing their taxes on their own, there were still plenty of questions to ask to ensure taxes were filed properly.
The good news is that there has not been a major tax legislation change for a few years. However, Covid-19 has changed the way we work and it’s incumbent to meet with an accountant, CPA, or tax professional to ask any questions you may have before filing taxes.
Some of these questions may include covering the following topics:
- What qualifies as a tax deduction? Traditionally, small businesses have been able to write off business expenses that include everything from home office space to employee salaries. However, some of these business expenses have shifted due to the Covid-19 environment. Business travel, for instance, may have less opportunities for write-offs since many entrepreneurs have been working from home. Explore what may and may not qualify for a deduction in 2020 with your tax professional.
- What if I moved out of state in 2020? If you moved in 2020 to work from a different state due to Covid-19, what does that look like for your taxes? What if you embraced a digital nomad lifestyle and worked across the country while traveling in a camper? Will you need to file taxes for multiple states?
- I received aid through the CARES Act. How will this change filing my taxes? Make sure to bring along documentation to your CPA and request filing assistance if you are unsure of what to do next.
- How do I file for a tax extension? Earlier, I mentioned the deadline dates for tax extension filing. If you have never filed for a tax extension and know that your business needs it, you may consult a tax professional about getting started.
- Will any of the tax payment deadlines be extended? It is possible that this could happen. In 2020, the April 15 tax deadline was delayed to July 15 due to Covid-19. Ask your tax professional if any of the tax deadlines you have for your business may be subject to change.
[Related: Does My Side Business Affect My Taxes?]
Keep thinking about taxes year-round
In terms of what to expect when it comes to business taxes, I would recommend coming prepared.
Doing a bit of prep work in advance can make all the difference in ensuring tax season is bearable as a business owner. Organize your paperwork, keep your receipts handy, and file documents ahead of their deadlines. Focus on what is expected of your business each quarter and file accordingly.
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.