Tax Compliance for Small Business Owners – Navigating Your Obligations

tax compliance for small business owners
March 14, 2024

Small business owners who are launching or growing their companies often find that tax planning and compliance can be more complicated than they appear on the surface. Enlisting the assistance of a small business accounting services or tax compliance services provider is a solid first start for new companies that are finding their balance. However, tax planning and compliance can be helpful during any stage of a business’s lifespan. 

Partnering with a professional to navigate the complicated venture ahead is the best strategy for a small business without a deep and experienced in-house accounting team. However, owners and managers can get a jump start on a smooth financial future by understanding tax planning and compliance fundamentals. 

What is Tax Compliance? 

Tax compliance and planning involve adhering to federal, state, and industry tax reporting and filing regulations. It also encompasses minimizing taxes in every legal way possible.  

Understanding Your Tax Obligations – Types of Taxes Small Businesses Need to Evaluate 

When it comes to the types of taxes that a small business will be responsible for, there are several possible scenarios that vary based on a business’s unique structure. 

Small Business Income Taxes 

Businesses and/or business owners (such as owners in partnerships), are required to file a federal tax return every year. However, the type of return – and what taxes are owed – will vary, depending on the legal structure of the company. 

  • Sole proprietorships, where a single owner owns the company, will typically need to file Form 1040 or 1040-SRs, in addition to other forms such as a Schedule C or industry-specific forms that align with their type of business. (For example, a Schedule F would be required for a farming business.) 
  • Individual partners in a partnership or shareholders in an S corporation will also need to file a Form 1040 or 1040-SR, as well as a Schedule E to start. 
  • C corporations and S corporations must file a Form 1120 or a Form 1120-S. The S corporation doesn’t pay federal taxes, like in a sole proprietorship, but instead, it passes that obligation on to its individual shareholders. 
  • LLCs have varying filing requirements, depending on how the limited liability company was established. LLCs can be set up as partnerships, corporations, or an entity “separate from its owner,” meaning that the LLC works like a sole proprietorship, where a single owner is taxed. 

How you structure your business will have a longstanding impact on what taxes you pay (and how you pay them). Additionally, a tax compliance services provider will be able to provide ample guidance on the best structure for your company now and in the years ahead as your business grows. 

Self-employment Tax and Employment Tax 

Certain types of businesses, such as sole proprietorships and individual partners within a more significant partnership, are also typically responsible for self-employment tax. This covers Medicare and Social Security contributions. 

Employment tax will come into play for any business that has employees, and this tax also includes Social Security and Medicare, for which the employer and the employee each pay a portion of the total cost.  

A business owner will also be responsible for other employment taxes, like the unemployment tax (under the Federal Unemployment Tax Act). This tax has a rate of 6% of the first $7,000 paid to each employee annually, which is entirely paid by the employer.  

Estimated Taxes 

Unlike individuals who file federal taxes once a year, most businesses will need to pay estimated taxes throughout the year.  

These estimated taxes are filed quarterly instead of annually, and failure to pay them can result in an underpayment penalty of at least 5% (with a cap of 25%) of the underpaid amount.  

This is where a tax planning and compliance expert can come in especially handy, as small businesses must pay and file tax documents four times throughout the year, as opposed to just once before the annual mid-April filing deadline.   

Excise Taxes 

Depending on the type of business, several companies (including Sole proprietors, partnerships, C corporations, and S corporations) may also be subject to excise taxes. 

Excise taxes are taxes on specified goods and services, such as fuel, air transportation, sport or fishing gear, alcohol and tobacco, and even more unusual items like indoor tanning beds. 

Excise taxes can be imposed by both the federal and state governments, and often, these tax rates vary depending on the state. The good news is that some types of excise taxes – particularly excise taxes on fuel – may be refundable, depending on the business and how the fuel was used. 

Sales Taxes 

Sales taxes are imposed in all U.S. states (except Alaska, Delaware, Montana, New Hampshire and Oregon) as well as in several counties and/or cities. (There is not a national or federal sales tax.) 

Depending on the state or region, a business may be required to collect sales taxes in everyday transactions and then pass them along to the relevant taxing authority if they sell specified services or goods. Like every aspect of small business taxes, the amount owed and how this tax is paid depends on multiple factors, including the business’ structure, industry, and region. 

Tax Compliance and Planning with the Experts at Waters Hardy  

 As we wrap up, remember that the above list is just a sample of the different types of taxes that may need to be accounted for. Other federal and state taxes may also apply from the get-go, such as property taxes, franchise taxes, and/or business license fees. 

The best way to understand your tax obligations and develop a comprehensive plan is to enlist a small business tax planning and compliance expert. 

At Waters Hardy, we can guide you through all aspects of tax planning for your business, from your initial launch to your company’s many evolutions as your business continues to grow. 

Reach out to us today to begin discussing your tax needs for your business.  With a resource like Waters Hardy behind the scenes, you can ensure every aspect of tax planning and compliance is secure and is in experienced hands. 

Contact us today! 

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