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How To Calculate Payroll Taxes For Your Small Business

By on March 11, 2020

how to calculate small business taxes

The extension is for six months for non-corporate tax returns, so the due date for the return is October 15 . Once you began earning money as a small business owner, you should have started paying quarterly estimated taxes if you expected to owe the IRS $1,000 or more ($500 for corporations). The CARES Act created the Paycheck Protection Program , which authorized small businesses loans to cover employee salaries and certain other expenses. Assuming certain conditions are met, businesses can apply to have those loans forgiven.

If you operate a business making little or no profit, you’ll probably want to skip the first-year deduction and spread it out over more profitable years instead. Alternately, you could use the simplified method to calculate this deduction, and you’d be able to deduct $5 per square foot for business use of your home, up to $1,500. Should the IRS send you a notice that you’re going to be audited, you can easily back up the figures reported on your tax return with complete and well-organized accounting records. Small businesses may get a tax credit to help defray the cost of starting certain retirement plans. In December of 2017, Congress passed the Tax Cuts and Jobs Act , which went into effect in 2018.


Property taxes are levied on the property’s assessed value, not on the purchase price or fair market value. As discussed above, all C-corporations pay a flat 21% tax rate on net business income. If your business is in a certain type of industry or sells certain types of products or services, you might be responsible for excise taxes on these transactions and activities.

S corporations must have no more than 100 shareholders, all shareholders must be U.S. residents, and each member is only allowed cash basis to own one class of stock. Shareholders report business income, expenses, losses, and deductions on their personal tax returns.

how to calculate small business taxes

We get it — tax season is the time of the year that can strike fear in the hearts of even the most prepared and organized small business owner. This is especially true when you’re a new business owner and you only have experience filing your taxes as an employee of a business.

Additionally, if you have a business location in a city that has enacted the business tax, then you are required to pay the city business tax as well. Click here for a comprehensive list of cities that have enacted business tax.

Online Learning and Educational Products – Links to IRS virtual small business tax workshop, tax calendar for small business, SBA small business training, and more. Tax law changes constantly, making it difficult for a small business owner to keep up. With more than 15 years of small business ownership including owning a State Farm agency in Southern California, Kimberlee understands the needs of business owners first hand. When not writing, Kimberlee enjoys chasing waterfalls with her son in Hawaii. The company pays anywhere from 0.15 to 4 percent in taxes based on industry. That means the business pays anywhere from $450 to $12,000 in taxes while breaking even. Enabling tax and accounting professionals and businesses of all sizes drive productivity, navigate change, and deliver better outcomes.

If your product costs more money to make than you charge for it, you will lose money regardless of how many units you sell. Small business owners often forget to take into account the difference between their net and gross income, Bhansali says.

How To Calculate Small Business Taxes

More forms, new deductions, different business taxes you’ve never even heard of before — it can all seem completely overwhelming. You need to file your taxes with the federal government on or before the dates listed above. If your business has a full- or part-time accountant, they can file business taxes for you. If you don’t have an accountant, you can file with tax software or with the help of a seasonal tax professional.

how to calculate small business taxes

To avoid wasting time, money, and resources, pay attention to your potential tax burden when forming your business. The formation stage is vital to maximizing deductions and minimizing your tax liabilities for the future. As a small business owner, you may assume the IRS has bigger fish to fry than your small business operations. However,recent reportshave cited that the IRS has increasingly targeted small businesses for tax audits. TurboTax works with programs like QuickBooks and Quicken, so you can import information directly into your tax return. But you may be able to deduct expenses related to the donation, like travel or materials.

Types Of Small Business Taxes

In destination-based states, like Florida and New York, sales tax rates are based on the customer’s location. Within states, rates might also differ based on which locality you’re in and what types of products you’re selling.

Do sole proprietors pay federal tax?

Sole proprietors are responsible for paying: Federal income tax. State income tax, if this applies in your home state.

Because of governmental reactions to COVID-19, there’s expected to be a lot of changes to small-business taxation. Additionally, bookkeeping the IRS is expected to announce a new deadline for 2019 tax filing in addition to penalty-free tax deferment.

Making financial decisions without consulting an accountant or financial adviser can put you at risk and cost you more money in the long run, says John Blake, CPA, in Hamilton, N.J. Beyond tax deductions, minimize your income tax bill by claiming tax credits—they are generally preferable because they’re subtracted directly from your tax bill. Deductions, in contrast, are subtracted from the income on which your tax bill is based. As great as tax credits can be, they are only available for certain situations or industries (e.g., research and development, home-buying, car buying, or alternative energy production). And credits come with a set of very complicated rules, which you or your tax pro must follow in order to claim. This process evaluates options to determine when, whether, and how to conduct business and personal transactions for minimal taxes. As an individual taxpayer, and as a business owner, you generally can complete a taxable transaction by multiple methods, choosing whichever results in the lowest legal tax liability.

Other Small Business Taxes

While tax avoidance is expected, tax evasion—reducing tax through deceit or concealment—is not. In origin-based states, like Texas and Pennsylvania, sales tax rates are based on where the seller or business operates.

For example, an accountant could help fine-tune your cash flow analysis. The average business owner often overlooks this part of the calculation, Weil argues.

There are specific requirements a taxpayer must meet in order to claim this deduction. An accountant or tax professional can help you determine if you qualify. You can also check out the IRS’ many resources surrounding the qualified how to calculate small business taxes business income tax deduction. One of the biggest reasons taxes are so difficult for small business owners is because there isn’t a single “small business tax”—meaning there isn’t a single small business tax rate either.

How can a small business avoid paying taxes?

If you need ways to reduce your taxable income this year, consider some of the following methods below. 1. Employ a Family Member.
2. Start a Retirement Plan.
3. Save Money for Healthcare Needs.
4. Change Your Business Structure.
5. Deduct Travel Expenses.
6. The Bottom Line.

The end of the tax year is the cut-off point for many tax-saving strategies. Like sales taxes, property taxes vary greatly based on city and county. When you purchase property, the property will be registered with the local tax authority. This agency will send you information about property tax rates and deadlines.

Kylie spent two of the last four years writing for and with small-business owners—from dentists in Australia to plumbers in the Midwest. She spent the other two writing in depth about internet and security. She’s passionate about reading, hiking, and dedicating every spare second to writing for fun (at lunch, between meetings, on the train, before breakfast . . . ). Her content helps small-business owners tackle the logistics of running a business so they can focus more on their passions too. The IRS only recently extended this year’s tax-filing deadline for individuals to May 17. If you want extra guidance on when your taxes are due, we recommend consulting with an accountant. In general, you can deduct 100% of the premiums on your small-business insurance coverage.

For the 2020 tax year, the mileage reimbursement rate is 57.5 cents a mile. If you didn’t track the exact number of miles you traveled for work this year, you’ll need to calculate actual car expenses instead. Where the IRS is concerned, you can’t just estimate how many miles you traveled for work—you need a firm, accurate number backed up with itemized receipts. IRS Publication 463 explains more about how to calculate and claim car expenses on your taxes. Again, if you use small-business accounting software, these documents will be super easy to generate. Alternatively, you can sign up for free accounting software to get all your accounts in order before filing taxes. We recently updated this page to reflect 2021’s tax season deadlines for the 2020 fiscal year.

  • Let’s break down your tax obligations, and walk through the tax deductions and credits that can help you save money for your business.
  • However, half of the deferred funds will have to be paid by December 31, 2021, and the other half of the deferred funds by December 31, 2022.
  • Corporations pay a flat rate of 21%, while pass-through entities have tax rates between 10% and 37%.
  • This is not something that the business owner pays out of pocket.
  • Some states, like Nevada and Texas, don’t have a state income tax, but they do assess a gross receipts tax on businesses.
  • Accounting method changes not specified as an automatic method change by Rev. Proc.

This way, you won’t accidentally spend money that was earmarked for the IRS. You can even set up automatic transfers from your business bank account into a separate account, so that you know you’re always putting away money to cover your tax bill.

It’s important that small businesses consult with an attorney and accountant to determine how their businesses should be classified. The IRS gets a copy of the 1099-MISC forms you receive so they can match the income you’ve reported against what they know you’ve received. Make sure the income you report to the IRS matches the amount of income reported in the 1099s you received, Blake says. Even if a client doesn’t send out a 1099, you still need to report that income. is an independent, advertising-supported publisher and comparison service.

The form of business you operate determines what taxes you must pay and how you pay them. To calculate estimated tax payments, use the process described above. If you don’t pay enough through withholding and timely estimated tax payments, you may be charged a penalty. You may also be charged a penalty if your estimated tax payments are late, even if you got a refund.

The internet has made it easier than ever to e-file your taxes, access tax forms and resources, and even connect how to calculate small business taxes with tax professionals. Now, let’s take a look at the steps required for filing your small business taxes.


You can set up a formal payroll to pay yourself a salary, and your payroll provider takes the estimated taxes out of your paycheck. With the other business structures, income passes directly to you before it’s taxed.

Your accountant can tell you if buying a small space for your store or business – rather than renting – could save you money. Whether you’re a corporation or an LLC, you must comply with a variety of state requirements. Find out what types of corporate records and inspection measures are needed in order to meet compliance. Heather is founder of Satterley Training & Consulting, assets = liabilities + equity LLC, a firm dedicated to helping accounting professionals learn and implement QuickBooks and related applications. She works with sole practitioners and teams to streamline internal processes as well as consulting on a variety of client engagements. Section 179 deductionlets businesses deduct the total cost of an asset, like a vehicle or machinery, in the year of purchase.

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