Small business taxes

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Page written by Ashlyn Brooks. Last reviewed on July 22, 2024. Next review due October 1, 2025.

Small business owners play a pivotal role in our economy, but they also face considerable hurdles. In addition to navigating small budgets, customer retention, and cash flow, taxes are another weight added to the mounting scale.

Let us take funding off your plate. At Swoop we understand the hurdles to obtaining cash flow for small businesses. Book a call with us today to find out how we can assist you in growing your business through our many funding options.

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What is considered a small business for tax purposes?

For tax purposes, the IRS generally defines a small business based on its number of employees, revenue, or type of ownership.

A small business can be a sole proprietorship, partnership, limited liability company (LLC), or corporation that meets specific size criteria. The exact definition can vary, but it often includes businesses with fewer than 500 employees and less than $7.5 million in average annual receipts.

How much does a small business have to make to be taxed?

According to the IRS, if you receive $400 or more in self-employment income, you must pay taxes. Like the rest of us, small businesses are subject to taxation if their net income surpasses certain thresholds.

For instance, sole proprietorships and single-member LLCs report their income on the owner’s personal tax return. Different thresholds may apply to other business structures and types of taxes.

What types of taxes do small businesses have to pay?

Small businesses must pay multiple taxes such as income tax, estimated tax payments, self-employment tax, employment tax, and potentially excise tax.

While this may seem like a huge lift, there are thresholds, limitations, and exceptions. Let’s look at each more in-depth.

Income tax

Federal income tax

Federal income tax is based on a business’s net income, which is calculated after accounting for all allowable deductions and credits. This tax is progressive, meaning the rate increases as the taxable income increases. Small businesses must accurately report their earnings and expenses to determine their federal income tax liability. Deductions can include operating expenses, cost of goods sold, and other business-related costs, while credits might cover specific activities like research and development.

State income tax

State income tax varies by state, with different rates and rules applicable depending on the location of the business. Some states have a flat tax rate, while others have progressive rates similar to federal income tax. Notably, a few states, such as Texas and Florida, do not impose state income tax on businesses at all. Businesses must be aware of their specific state tax regulations to ensure compliance and avoid penalties.

Estimated taxes

Quarterly payments

Businesses are required to make quarterly estimated tax payments if they expect to owe $1,000 or more in federal tax for the year. These payments cover income tax and self-employment tax. The due dates for these quarterly payments are typically April 15, June 15, September 15, and January 15 of the following year. Accurate record-keeping and forecasting are essential to determine the correct amount to pay each quarter, helping to avoid underpayment penalties.

Self-employment tax

Social security and medicare

Self-employed individuals must pay both the employer and employee portions of Social Security and Medicare taxes, which together total 15.3%. This includes 12.4% for Social Security and 2.9% for Medicare. Unlike traditional employees who split these taxes with their employer, freelancers and sole proprietors are responsible for the entire amount. To calculate this tax, self-employed individuals use Schedule SE when filing their federal tax return.

Employment taxes

Withholding tax

Withholding tax is the amount of federal and state income taxes that employers withhold from employee wages and remit to the government. This tax is calculated based on information provided by employees on Form W-4. Employers are responsible for withholding the correct amount from each paycheck and ensuring timely deposits to the IRS and state tax authorities.

FICA taxes

Federal Insurance Contributions Act (FICA) taxes are contributions made by both employers and employees to fund Social Security and Medicare programs. Employers are required to match the FICA taxes withheld from employees’ wages. The current FICA tax rate is 7.65% for each party, consisting of 6.2% for Social Security and 1.45% for Medicare.

Unemployment taxes

Unemployment taxes include federal (FUTA) and state (SUTA) unemployment taxes. These taxes fund unemployment compensation programs that provide temporary financial assistance to workers who lose their jobs. Employers are solely responsible for paying FUTA tax, while SUTA rates vary by state. Compliance with both federal and state unemployment tax requirements is essential for businesses to avoid penalties.

Excise tax

Industry-specific taxes

Excise taxes are levied on specific goods and services, such as fuel, tobacco, alcohol, and certain transportation services. These taxes are often included in the price of the product or service and are typically passed on to the consumer. Businesses in affected industries must collect and remit excise taxes to the government. Compliance with excise tax regulations requires understanding the specific tax rates and reporting requirements for the products or services they offer.

How to file business taxes

While a few more forms are involved, filing is generally the same as an individual tax return. Many tax software platforms can easily be adjusted to handle small business tax returns just as easily as your personal return. Here are the steps:

Step 1: Collect your records

Gather all financial records, including income statements, expense receipts, payroll records, and previous tax returns. Accurate records are a must for preparing your tax return and supporting any deductions.

Step 2: Find the right form

Depending on your small business structure (LLC, Sole proprietorships, S-Corp, etc.) you may need multiple forms such as:

Sole Proprietorship: Use Form 1040 with Schedule C.
Partnership: File Form 1065.
Corporation: Use Form 1120 for C corporations or Form 1120S for S corporations.
LLC: The form varies depending on how the LLC is taxed (sole proprietorship, partnership, or corporation).

Step 3: Fill out your form

Complete the selected tax form, reporting your income, deductions, credits, and tax liability. Many businesses use tax software or hire a tax professional to ensure accuracy.

Keep in mind, while you are still allowed to do this by hand, the process is tedious and snail mail is not advisable when it comes to something as important as your tax return.

Step 4: Pay attention to deadlines

Meet all federal, state, and local tax filing deadlines to avoid penalties and interest. Key federal deadlines include:

April 15: Annual tax return for sole proprietorships and single-member LLCs.
March 15: Annual tax return for partnerships and S corporations.
April 15: Annual tax return for C corporations.

What tax deductions and credits are available for small businesses?

Small businesses can reduce their taxable income through various deductions and credits, including:

Home office deduction is available for businesses operating from a home office.
Business expenses include rent, utilities, supplies, and equipment.
Vehicle expenses can be deducted based on mileage or actual vehicle expenses.
Health insurance premiums are deductible for self-employed individuals and small businesses providing employee health coverage.
Retirement plan contributions include those made to SEP IRAs, SIMPLE IRAs, or other retirement plans.
Tax credits available include the Small Business Health Care Tax Credit and the Work Opportunity Tax Credit.

How Swoop can help

At Swoop we may not be tax experts, but we are highly specialized in helping small business owners like you find funding options that work. Book a call with us or visit our website to learn more about grants, loans, and alternative financing to start or grow your small business.

Written by

Ashlyn Brooks

Ashlyn is a personal finance writer with experience in business and consumer taxes, retirement, and financial services to name a few. She has been published in USA Today, Kiplinger and Investopedia.

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