Payroll Tax Deferral Updates and Implications for Business Owners
Business owners—did you know that deferred payroll taxes may ultimately fall on you for repayment? Ensure you're up-to-date here.
Each year, roughly 400,000 new business owners hang out their shingles to fulfill unmet needs they recognize in the market, become their own boss, or build an empire. Are you one of them?
If so, congratulations! Launching your own business is exciting, but it also comes with some serious responsibilities – one of those being filing a tax return. Fortunately, you don’t have to become a tax law expert or live in fear of IRS auditors knocking at your door. We’ve prepared the following guide to small business taxes for dummies (and savvy business owners who want to take advantage of tax-saving strategies).
All small businesses are not created equal. In fact, there’s not even a standard tax form for all small business owners. The form you use depends on how your business is structured.
Here’s a quick rundown of the tax forms required for different types of businesses.
The default structure for a solopreneur is a sole proprietorship. In most cases, a solo business owner doesn’t even have to file paperwork with their state to start a sole proprietorship – it’s the default structure for an unincorporated business with only one owner.
Technically, a sole proprietorship is not a separate legal entity from the business owner, and the way the business files and pays taxes reflects this. As a sole proprietor, you’ll report your business income and expenses on Schedule C, Profit or Loss From Business, which gets filed along with your Form 1040. Your business’s net income is taxed at the same rate as your other ordinary income. Tax rates for individuals range from 10% to 37%, depending on your total taxable income.
The default structure for a business owned by two or more people sharing profits and losses is a partnership.
Partnerships must file their own tax return, Form 1065, U.S. Return of Partnership Income, to report business income and expenses. Each partner then receives a Schedule K reporting their share of business profits or losses, which they use to complete their individual tax return and pay tax on their share of profits.
A corporation is a legal entity that is separate from the company’s owners. For tax purposes, there are two different kinds of corporations:
C Corporations file Form 1120, U.S. Corporation Income Tax Return, and pay tax on any business profits. If the company’s shareholders receive dividends, those are taxed again at the shareholder level. This means corporate profits are double-taxed, first at the business level and then again on each owner’s personal income tax return. The corporate tax rate is a flat 21%.
S Corporations file Form 1120-S, U.S. Income Tax Return for an S Corporation. Rather than paying tax at the corporate level, S Corporation shareholders receive Schedule K-1 reporting their share of business profits and losses. They use this form to complete their individual tax return and pay tax on their share of profits.
Businesses structured as LLCs have several options for how they’re taxed. The IRS may treat an LLC as a sole proprietorship if there is only one owner or as a partnership if two or more people own the LLC. An LLC may also elect to be taxed as an S Corporation or as a C Corporation.
When you’re getting your business started, keep track of all of your income and expenses from day one. It’s easy to put bookkeeping on the back burner when you’re focused on the dozens of other things you need to do to launch your business and turn a profit but staying on top of your accounting and saving receipts ensures you can take advantage of all available deductions at tax time.
So how do you know what’s deductible? The IRS considers a business expense to be deductible if it is “ordinary and necessary.” An ordinary expense is common and accepted in your business. A necessary expense is one that is helpful and appropriate for your business.
While what’s ordinary and necessary depends on your industry and your unique business needs, some common deductible business expenses include:
Advertising and marketing
Business meals (limited to 50%)
Business use of your car
Dues and subscriptions
Home office expenses
Legal and professional fees
Repairs and maintenance
Salaries and wages
Taxes and licenses
Telephone and internet expenses
Even if you’re not sure whether an expense is deductible or not, it’s a good idea to save the receipt. Your professional tax preparer can help you figure out what you can and can’t deduct.
When you work for someone else, your employer withholds Social Security and Medicare taxes (also known as FICA tax) from your paycheck. When you’re self-employed, you have to pay these taxes on your own. That’s where self-employment tax comes in.
Self-employment tax covers Social Security and Medicare taxes for self-employed people, including freelancers, independent contractors, and small business owners. You’re required to pay self-employment taxes if you have self-employment earnings of $400 or more.
The self-employment tax rate is 15.3%, of which 12.4% applies to Social Security, and 2.9% applies to Medicare. However, the Social Security portion has an upper limit, based on the Social Security wage base.
The Social Security wage base is $142,800 in 2021, meaning the 12.4% Social Security portion of self-employment tax applies only to the first $142,800 of your income (including self-employment earnings and wages if you have a full- or part-time job).
So, let’s say you have a net self-employment income of $100,000 in 2021. Since your income isn’t over the Social Security wage base, we don’t need to worry about capping the calculation. To estimate your self-employment tax:
Figure your net earnings subject to self-employment tax. Multiply $100,000 by 92.35%. Reducing your earnings by 7.65% takes into account the employer-half of your FICA taxes, which the business would deduct if you were paid as an employee. $100,000 x 92.35% is $92,350.
Calculate your self-employment taxes. Multiply your self-employment taxable income by 15.3%. $92,350 x 15.3% is $14,130. That’s your estimated self-employment tax liability.
You’ll include this calculation on Schedule SE, which gets filed with your Form 1040.
If you expect to owe $1,000 or more in combined income and self-employment taxes, the IRS requires you to make estimated quarterly payments.
These payments are due April 15, June 15, September 15, and January 15 of the following year. If any of those dates fall on a weekend or holiday, the deadline shifts to the next business day.
You can estimate the amount you need to pay using the worksheet on page 8 of Form 1040-ES or get help calculating your estimated payments from a Taxfyle tax pro.
Once you know the amount you need to pay, you have a few options for making your payments:
Pay via check. Form 1040-ES includes vouchers to include with a check or money order if you prefer to send your payment via snail mail. The form also includes the address to mail your payment. Make your check payable to U.S. Treasury, and you might consider sending it Certified Return Receipt, so you have proof you sent your payment on time. The IRS recommends including the following information on your check to ensure your payment gets applied to the right account:
Your Social Security number or employer identification number (EIN)
The tax year to apply the payment to
The tax form number, such as Form 1040-ES for an estimated tax payment
Pay online via electronic funds transfer. The IRS allows taxpayers to make payments directly from a checking or savings account using its free Direct Pay service.
Pay via credit or debit card. The IRS doesn’t accept credit cards or debit cards directly, but they do work with third-party payment processors who accept most credit cards and debit cards. Keep in mind, these payment processors charge a fee, which varies depending on the service provider and your payment method.
Pay with cash. You should never mail cash to the IRS, but you can still pay your taxes with cash if that’s your preferred payment method. Certain retailers are allowed to accept cash payments of up to $1,000 on behalf of the U.S. Treasury. However, the IRS recommends making your payment at one of their retail partners at least seven days before the due date, so this isn’t a good option for last-minute payments.
Dealing with taxes is complicated enough when you work for someone else, but it gets a lot more complex as a small business owner. But you don’t have to handle it all on your own.
Taxfyle can connect you with a licensed CPA who understands small business taxes and can help you make sense of the rules and take advantage of valuable deductions that can maximize your tax refund.
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