TAS Tax Tip: Small business tax highlights
The form of business you operate determines what taxes you must pay and how you pay them. There are four general types of business taxes:
- Income
- Self-employment
- Employment
- Excise
Income Tax
All businesses must file annual income tax returns, except partnerships which file annual information returns. The form you use depends on your business structure; see Publication 583, Starting a Business and Keeping Records, to decide what forms you should file to report your business income. Publication 509, Tax Calendars, explains when to file returns and make tax payments.
Self-Employment Tax
Self-employment (SE) tax is a social security and Medicare tax primarily for individuals who work for themselves. It is like the social security and Medicare taxes withheld from most employees’ wages by their employers. Your SE tax payments contribute to your coverage under the social security system. This coverage provides you with retirement, disability, survivor, and hospital insurance (Medicare) benefits.
You must file Schedule SE, Self-Employment Tax, with your federal income tax return, Form 1040 or Form 1040-SR, and pay SE tax if either of the following applies:
- Your net self-employment income was $400 or more; or
- You had church employee income of $108.28 or more.
The instructions for Schedule SE are a good resource to understand who must pay SE Tax.
Self-employed individuals in Puerto Rico use Form 1040-PR to compute self-employment tax.
Note: Self-employed individuals generally must pay SE tax as well as income tax.
Employment Tax
When you have employees, you have certain employment taxes you must pay and forms you must file. Employment taxes include the following:
- Social security and Medicare taxes;
- Federal income tax withholding; and
- Federal unemployment (FUTA) tax.
You must also withhold Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year.
If you pay wages subject to federal income tax withholding or social security and Medicare taxes, you generally must file Form 941 quarterly; however, some employers use Form 944, Form 1040 (Schedule H), or Form 943 instead of Form 941. Generally you must use Form 940 to report your annual FUTA tax.
For additional information, refer to Employment Taxes for Small Businesses and Publication 15, (Circular E), Employer’s Tax Guide.
Excise Tax
You may be subject to Excise Tax if you do any of the following:
- Manufacture or sell certain products;
- Operate certain kinds of businesses;
- Use various kinds of equipment, facilities, or products; or
- Receive payment for certain services.
Excise taxes may be imposed on the manufacturer, retailer or consumer, depending on the specific tax.
These are the forms most commonly used to report excise taxes:
Form 720, Quarterly Federal Excise Tax Return, is used to report your liability by IRS Number. and pay the excise taxes listed on the form. If you report a liability on Part I or Part II, you may be eligible to use Schedule C to claim a credit.
Form 2290, Heavy Highway Vehicle Use Tax Return, is used to report federal excise tax on certain trucks, truck tractors, and buses used on public highways. This tax applies to vehicles having a taxable gross weight of 55,000 pounds or more.
Note: The weight declared for registering a vehicle in a state may affect the taxable gross weight used to calculate the tax.
Form 730, Monthly Tax Return for Wagers, is used by taxpayers in the business of accepting wagers, conducting a wagering pool or lottery, or required to be registered and received wagers for on behalf of another person but didn’t report that person’s name and address.
Form 11-C, Occupational Tax and Registration Return for Wagering, is used to register for certain wagering activity with the IRS and to pay the federal occupational tax on wagering.
Form 6627, Environmental Taxes, is used to report the environmental taxes on petroleum and imported petroleum products, and certain chemicals and imported chemical substances. Find the tax rates for 121 taxable substances here.
For additional information, see Publication 510, Excise Taxes.
Estimated Tax
Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. Estimated taxes are used to pay not only income tax, but other taxes such as self-employment tax.
Individuals, including sole proprietors, partners, and S corporation shareholders, generally must make estimated tax payments if they expect to owe at least $1,000 in tax after subtracting withholding and tax credits. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax.
Corporations generally must make estimated tax payments if they expect to owe at least $500 in taxes. Use Form 1120-W, Estimated Tax for Corporations, to figure your corporation’s estimated tax. You must deposit the payments using the Electronic Federal Tax Payment System. For additional information, refer to Publication 542, Corporations.
Note: S corporations must also make estimated tax payments for certain taxes, but instead use the instructions for Form 1120-S, U.S. Income Tax return for an S Corporation, to figure their estimated tax.
If you pay too little or pay late, you may have to pay an estimated tax penalty even if you are due a refund when you file your tax return. For more information, see Publication 505, Tax Withholding and Estimated Tax.
Payment Options
You generally must deposit certain excise taxes, corporate income tax, and S corporation taxes before you file your return. You must use an electronic funds transfer (EFT) to make all federal tax deposits (FTDs). Generally, an EFT is made using the Electronic Federal Tax Payment System (EFTPS). If you don’t want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or trusted third party to make EFT on your behalf.
For estimated tax purposes, the year is divided into four payment periods. It’s important to remember that the payment periods are not spread evenly throughout the year. In general, estimated payments are due on April 15, June 15, September 15, and January 15 of the following year. You can mail your estimated tax payments with Form 1040-ES, pay online, or pay by phone or from your mobile device using the IRS2Go app. Visit IRS.gov/payments to view all payment options.
Ten Federal Tax Tips to Help Small Business Owners
April shouldn’t be the only time you’re thinking about taxes. Keep these tax tips in mind throughout the year so you’re prepared to maximize your deductions and credits.
- Know your limitations and know when you need to ask a professional for help: There are many Online Learning and Educational Products available to help you learn about taxes. For example, the IRS Tax Calendar has important tax dates for businesses. However, if you choose to hire a professional, it is important to choose carefully because you are trusting them with your personal information and relying on them to have the knowledge to help you file an accurate tax return. You are responsible for all the information on your tax returns, no matter who prepares them. TAS Tax Tip: Choosing the right tax return preparer for you can help.
Note: ALL tax return preparers MUST sign their name and enter a preparer tax identification number on your tax return. For your protection, please check that they do this before submitting any documents.
- Keep adequate records: Accurate recordkeeping throughout the year will save you time and help ensure your tax return is correct. Set up a system for receipts. This can be a paper file, or you can use an app to scan and store them; just make sure you are saving them in some way.
- Separate your personal and business finances: Set up a separate bank account and credit card for your business and run only business expenses through those accounts. See Publication 583, Starting a Business and Keeping Records.
- Correctly classify your business: Some business structures enjoy more tax advantages than others. It’s important to choose the business structure that best suits your business. If you’re not sure which to choose, a tax attorney or certified public accountant can help.
- Manage payroll: You can take an online class to learn how to handle payroll. But if you don’t have the time, desire, or knowledge to manage payroll, hire someone to do it for you. To help make sure the company is reputable, see Outsourcing Payroll and Third Party Payers.
- Subscribe to e-News for Small Businesses: The IRS e-News for Small Businesses is a free electronic mail service that offers tax information for small business owners and self-employed individuals, including reminders, tips and special announcements.
- Research small business tax deductions: There is a long list of tax deductions for small business owners. See Publication 535, Business Expenses. A tax deduction is an item you can subtract from your gross income to lower the amount of taxes you owe.
- Self-employment tax deduction: You can deduct one-half (50 percent) of your SE tax as an adjustment to income on your federal income tax return. For tax years after 2017, you will also need to report the amount on Form 1040 Schedule 1, Part II.
- Make your tax payments timely: Anyone who files federal income tax returns and expects to owe more than $1,000 needs to pay estimated tax If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
- For faster processing, file your returns electronically: Electronic Filing Options for Business and Self-Employed Taxpayers.
TAS resources
IRS resources
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