Business taxes are some of the most important bills a small business owner must pay. If you're dreading tax accounting, don't worry—every online seller is. This year, ensure that you cover all your bases by reading this helpful blog post.
We'll discuss staying on top of your small online business taxes and some helpful tips to make the process easier. So don't stress out, and read on to get started!
5 Tips to Keep Your Taxes Under Control
Spring is a busy time for small business owners. Not only are you dealing with the day-to-day operations of your business, but you're also preparing your taxes. By following these tips, you can manage your business's finances throughout the year and minimize your tax liability come April.
1. Pay Estimated Quarterly Taxes
Do you owe the IRS more than $1,000? If so, you're required to pay estimated taxes every three months. Otherwise, the IRS will charge you additional fees for not paying these quarterly taxes.
The word "estimated" makes calculating this tax quite daunting, but there are two approaches you can do.
- If you have an even income for the whole year, you can total your entire year's net income and taxes. Then, you can divide what you owe into four payments.
- If it's not even, then you’ll need to compute your taxes every quarter.
You must keep track of your income and expenses throughout the year and then make estimated tax payments quarterly. However, keep in mind you also need to pay your annual income taxes on top of your quarterly tax payments. This is where you'll calculate your annual tax liability and compare it to the estimates you paid in your quarterly tax payments.
2. Save Up for Payroll Taxes
You're not only an owner of a small online business but also an employer to your staff and responsible for keeping your business up and running. Thus, you are obligated to compute and pay their respective taxes too. So how much do you need to pay for your employee's taxes?
- Social Security (6.2%)
- Medicare taxes (2.9%)
- State and local income tax (employers-only in most states)
If you only have a few people working for you, computing payroll taxes is easy. Otherwise, it can be time-consuming. Fortunately, online businesses can connect Shopify to QuickBooks Online, or other payroll automated software, for easier computation.
Once you have set up payroll software for small businesses in the US, you will not need to worry about calculating and paying payroll taxes for your employees each payday. Instead, the payroll service will withhold the appropriate amount of taxes from each employee's paycheck and remit the funds to the IRS on the business's behalf.
3. Know Your Sales Tax Nexus
Does your small business have the following requisites for nexus in a state?
- A place to do your business, like an office or a warehouse
- People who work for your business
- A location for storing your goods
- Short-term activities such as trade fairs
- Third-party partners
Each state has different thresholds for what triggers a "sales tax nexus." A business has a sales tax nexus in a state when it meets certain requirements, like having employees or property there or passing a certain dollar amount of sales to or from customers in the state.
The good news is, if you have a business with sales tax nexus in multiple states, you can often get by just paying taxes to one state. This is because many states have reciprocal agreements, allowing businesses to file just one tax return covering all the states they do business in. Nevertheless, it is important to choose one state and study its requirements for sales tax nexus.
4. Take Advantage of Tax Deductibles
Do you need to compute taxes on all of your expenses? Not necessarily. The IRS provides a number of tax breaks for businesses, including the ability to write off business expenses and equipment.
You must ensure that the expenses meet the IRS criteria. Expenses must be ordinary, meaning other businesses commonly use them in the same industry. They must also be necessary, meaning they are helpful or assist in business growth. Thus, evaluate every expense carefully so you can compute taxes accurately and keep more of your income.
Here are some expenses you can deduct:
- Organizational and startup costs
- Work vehicles
- Depreciation on equipment and machinery
- Office supplies
- Office furniture
- Software subscriptions
- Advertising and marketing materials
- Business entertainment expenses with clients or partners
- Travel expenses
- Bad debt
- Employee salaries
- Employee benefits
- Employee gifts
- Contracted labor
- Professional and legal fees
- Contributions to charity
5. Prepare in Advance
Taxes are a necessary evil for business owners. No one likes to pay them, but at the end of the day, it must be done. Unfortunately, business taxes can also be a big pain to deal with if you're not prepared.
Everyone knows the deadline is April 15 for submitting personal taxes. But for businesses, here are important tax dates to remember:
- Quarterly tax dates (the 15th of January, April, June, and September)
- March 15 for corporations and partnerships
- April 18 for sole proprietorships
- Quarterly employment taxes (the 30th of April, and the 31st of July, October, and January)
Do you have trouble juggling your business operations and tax returns? The IRS allows business owners to file for an extension if they are short on time to file on the regular due date.
This can be for either personal or business taxes, but note that you will not automatically get an extension for both—you need to request separately. A tax extension gives you an extra half a month to file your taxes. If you think your business might need more time to file, it's better to request an extension sooner rather than later by filing Form 7004 with the IRS.
Failure to file for an extension, thus missing your filing date, will incur you a 5 to 25% late filing penalty fee for each month. On top of this, if you fail to pay your outstanding taxes, you'll also pay a late payment fee and additional interest, which compounds each month you don't pay your taxes.
Can't Handle Taxes? Get All The Help You Need from Experts
Tax compliance can be difficult for one person to handle, which is why many small businesses find the best tax preparer to outsource tax-related activities.
A good tax professional can remind you of important dates and file your returns on your behalf—no extensions necessary. Plus, they can offer advice on how to lessen your tax payments and maximize your tax deductions. As a result, you can be tax compliant and profitable at the same time.
You don't have to be a tax expert to do your taxes. As long as you take the time to gather all of your information and double-check your work, you should be able to file your small business taxes without any trouble. Don't forget errors and omissions insurance for tax preparers because you will need it in the case of errors when preparing taxes.
Have you filed your small business taxes yet? What challenges did you face? Check out our other financial tips for ecommerce sales tax and more.
Mike Pignatelli, CPA, is the CEO of Unloop Accounting, an agency built to meet the accounting needs of modern ecommerce businesses. As an experienced financial controller, Mike has worked with various seven-figure inventory businesses. Mike and his team are your go-to accountants if you need reliable data to make sound financial decisions.