As a business owner, understanding your federal, state and local taxes is vital to your overall success. All businesses must pay business taxes, but the type of business entity you own determines which taxes you must pay and how you go about paying them.
Knowing how to file your taxes properly and on time allows you to spend minimal time working on IRS tax forms so you can focus on running your business. In this guide, we break down everything you need to know about business taxes, from your Employer Identification Number to common business tax forms.
What is an Employer Identification Number (EIN)?
An Employer Identification Number (EIN) is your business's federal tax ID number. Most businesses require an EIN to file business taxes, but not all. According to the IRS, you need to apply for an EIN if any of the following items apply to your business:
- You have employees.
- Your business is a corporation or partnership.
- You have a Keogh (tax-deferred pension) plan.
- You withhold taxes on income paid to a non-resident alien.
- You file Employment, Excise, or Alcohol, Tobacco and Firearms tax returns.
- You are involved with certain trusts, estates, real estate investments, non-profits, farmers' cooperatives or plan administrators.
If you do require an EIN, you can apply for one on the IRS's website.
Types of business taxes
The taxes you're required to pay depend largely on two elements: the type of business you own and the state you do business in. According to the IRS, these are the different business taxes you can anticipate:
All business entities -- aside from partnerships -- must file and pay taxes on received income during the year. Nearly all states impose a business or corporate income tax, but each state has its own tax laws. As you prepare your business taxes for the year, make sure you understand your required income tax at the state and local level.
Freelancers, solopreneurs, partners and S corporation shareholders are expected to make estimated tax payments if they anticipate owing $1,000 or more when they file their return. You pay estimated taxes quarterly; and determining just how much you must pay every quarter can be confusing for new business owners. It's important to get your estimation right as you can receive a penalty for missing or underpaying these taxes. Visit the IRS's guide on estimated taxes to determine if this tax applies to your business and to help calculate how much you owe.
The self-employment tax (SE tax) is a Social Security and Medicare tax that contributes to your coverage under the social security system. Social Security coverage provides you with retirement, disability, survivor and Medicare benefits.
If you have W-2 employees, you must file and pay certain federal taxes that include social security and Medicare taxes, federal income tax withholdings and federal unemployment tax. Furthermore, each state requires specific state employment taxes, such as unemployment insurance and workers' compensation insurance, so make sure you get all the information you need at your state's department of taxation.
These taxes are paid when purchases are made on certain goods, such as gasoline, and are often included in the price of the good. There are many different types of businesses that are required to pay excise taxes, but fuel is usually a major component. Excise taxes are collected mostly from sales of motor fuel, airline tickets, tobacco, alcohol and health-related goods and services. For a more complete list, visit the IRS's page on excise taxes.
Filing tax forms
With an understanding of which taxes your business may be required to pay, you can familiarize yourself with the right forms. While most tax preparation companies and software packages provide the correct forms for you, it's best to get acquainted with them so you can fill them out accurately and quickly when the time comes.
The IRS provides a thorough list of business tax forms and instructions, though if you're not sure you have everything you need, you should consult a Certified Public Accountant (CPA), professional tax preparer or tax accountant.
If you run a sole proprietorship or operate your business as a single-member limited liability company (LLC), you will likely need to fill out a Schedule C (Form 1040) to report your business's income and losses. In many cases, if you fill out a Schedule C form, you will also need to submit a Schedule SE (or self-employment tax) form. Schedule C is a simple business tax form at only two pages long. To complete this form, you simply list all the expenses you claim, then subtract your expenses from your earnings to find your net profit or loss. Finally, you transfer this number to your personal income tax form.
If your business is a corporation, or if you opt to treat your LLC as one, then you must prepare a separate corporate tax return on Form 1120 (or Form 1120S for S corps), which is the estimated tax form for corporations. Form 1120 is similar to Schedule C, as you calculate your business income the same way. However, this form is often more complicated because it requires more details than Schedule C, and you must file it separately from your personal income tax return.
Here is a list of the common tax forms your business may be required to file depending on the type of business you own:
Annual return of income (partnerships)
- 1040, U.S. Individual Income Tax Return
- Schedule C (Form 1040), Profit or Loss from Business
- Schedule C-EZ (Form 1040), Net Profit from Business
- Schedule E (Form 1040), Supplemental Income and Loss (partnerships)
- 1120, U.S. Corporation Income Tax Return (C corporations)
- 1120S (S corporations)
- 1120S Sch. K-1 (S corporations)
Social Security, Medicare taxes and income tax withholding
Federal unemployment (FUTA) tax
For a more complete list of tax forms, consult a business tax professional or visit the IRS's tax forms and instructions page.
Deadlines, extensions and past due
If you don't file your business taxes on time and become delinquent, you may face fines, penalties and back taxes, so it's important to know when they are due. Here are some of the most important business tax due dates for the 2019 calendar year:
- January 15, 2020. If you pay estimated tax payments for your business, January 15 is the deadline for your Q4 2019 estimated taxes.
- January 31, 2020. This is the deadline to send your W-2 Forms to your employees and file the appropriate documents to the IRS. This is also the deadline to send 1099 forms to all independent contractors who received payments in 2019.
- March 15, 2020. This is the tax return deadline for both S corps and partnerships. You can file for a six-month extension on either return, but your tax liability is still due on March 15th.
- April 1, 2020. This deadline is for filing 1099s electronically. If you don't file electronically, the deadline is February 29.
- April 15, 2020. This is the due date for corporate tax returns, using Form 1120. Additionally, this is the due date for individuals to file their 2019 income tax returns and pay any tax liability. You can request more time to file your taxes using Form 4868, but your liability is still due at this time.
- October 15, 2020. If you were granted an extension of time to file a corporate tax return or by filing Form 4868, October 15 is your new due date.
While preparing your business taxes can be overwhelming and time-consuming, investing the time to prepare, calculate and plan your taxes can help you make smart business decisions and avoid hefty penalties and fees. If you're not comfortable working on your business taxes alone, consult a CPA or other business tax professional.