Keep These Tips in Mind When Filing Small Business Taxes for the First Time in the U.S.

For many new business owners, tax time can be a rude awakening. After all, it’s tough to say goodbye to a big refund of all of the tax your employer withheld from your paycheck. Not to mention filing a return is much more complicated when you’re self-employed.

Want to get up to speed as quickly as possible? This guide will help you understand how business taxes work, so you can file your first business tax return with confidence.

Who Has to File Business Taxes?

If you own a business you’ll need to file a tax return, even if that business isn’t profitable. But not every business files the same tax return. The type of return you file depends on your business structure.

For example, a business structured as a partnership will need to file Form 1065, an informational return, as well as Schedule K-1, which details each partner’s share of income. Each partner will then need to include the information from Schedule K-1 on their individual income tax return.

How Are Small Businesses Taxed?

Before we jump into the details of how to file your small business taxes, it’s a good idea to understand just how small businesses are taxed. We’ll cover pass-through entities, which include sole proprietors, partnerships, limited liability companies (LLCs), and S corporations. These types of businesses are called pass-through entities because the profits pass through to their business owners. The businesses themselves aren’t taxed—the owners are taxed on their profits.

For example, if your business makes $120,000 in revenue and has $20,000 in expenses, your profit will be $100,000. You’ll pay state and federal income taxes on that profit.

But those aren’t the only taxes you’ll have to pay. You’ll also be required to pay self-employment taxes.

What Is Self-Employment Tax?

If you’ve ever worked for a company as an employee, you may have noticed that you had money taken out of your paycheck for Social Security and Medicare taxes. As an employee, you pay half of the Social Security and Medicare taxes due, and your employer pays the other half.

Now that you’re self-employed, you’ll be on the hook for the entire tax. This tax is called self-employment tax and for some business owners, it can feel especially painful. That’s because this tax is 15.3% of your taxable self-employment income. That combined with income taxes can make it feel like you’re paying a lot in taxes as a small business owner.

What Type of Tax Returns Do I Need to File?

When it comes to tax returns, there are different forms for different business structures. For example:

• Sole proprietors and members of single-member LLCs report business income and expenses on a Schedule C attached to their individual return, Form 1040.
• Partnerships, multi-member LLCs, and S corporations file their own returns on Form 1120S or Form 1065, and income and deductions are passed-through to the owners on a Schedule K-1. Business income reported on the K-1 is then used to complete the owner’s individual tax return and appears on Page 2 of Schedule E.

All of this sounds very complex, but your tax software or accountant will ask questions and walk you through exactly which forms need to be completed.

One thing to keep in mind if your business needs to file a separate return is due dates. If you are in a partnership or multi-member LLC and need to file Form 1065, or if you set up your business as an S corporation and need to file Form 1120S, the due date of your business return will be March 15.

Note that this is not the same as the typical due date for individual tax returns. Make sure your return is filed—or request an extension before March 15—or you’ll face penalties.

Tips for Filing Small Business Taxes for the First Time

When it comes to filing small business taxes for the first time, there are some things you’ll want to be aware of before you jump in.

1. Find Your Form and the Due Date

As previously mentioned, depending on your business structure, you’ll file different forms on different due dates. Here’s a breakdown:

*These are the due dates for the calendar year entity (when the last day in your business year is December 31).

If any of the above dates fall on a weekend or legal holiday, the deadline shifts to the next business day.

2. Choose Your Accounting Method: Cash vs. Accrual

The IRS wants to know what accounting method you use to keep your books and records in order. The simplest option—and what most business owners choose—is the cash method. That means money gets recorded as you receive and pay it. For example, under the cash method, you’ll record income from an invoice when it gets paid.

But under the accrual method, you’d record that same invoice once the work has been completed, even if you haven’t been paid yet. You can read more about the cash versus accrual method in this article.

3. Review Which Expenses You Can ‘Write-off’

As a savvy business owner, you know that you can reduce your taxable income by taking allowable deductions for some of your business expenses. Before you do your bookkeeping or taxes, it’s a good idea to review the business expenses that qualify. These are some of the most common allowable expenses you’ll see:

• Training costs: If you require additional training and education to support your business, those direct costs can be deducted from your taxable income.
• Travel expenses: Need to travel for business reasons? Your travel costs can be deducted from your taxable income.
• Meal expenses: These expenses are a little trickier. Meals that are related to your business and have a valid business purpose are deductible expenses. But most of these meals are only 50% deductible, meaning you can only take a deduction for 50% of the total cost.
• Vehicle expenses: There are 2 ways to claim vehicle expenses. The first is by taking the miles that you drove for your business and multiplying it by a standard mileage rate set by the IRS. The second is by keeping track of actual vehicle expenses paid. Need help keeping track of your trips? You can now track your mileage, categorize business trips, and view your tax deduction using FreshBooks’ new Mileage Tracker.
• Home office expenses: There are also two ways to claim home office expenses. The simplified method allows you to take a standard deduction of $5 per square foot for up to 300 square feet. The more complex method requires you to keep track of actual expenses and allocate them based on what percentage of your home your office occupies. For example, if your office is 10% the size of your home, you’d deduct 10% of the actual costs of maintaining your home.

Keeping track of expenses can be tricky. Luckily, cloud accounting tools can help make organizing your expenses (and properly recording them) a breeze.

4. Keep Track of Estimated Quarterly Taxes

When you work for someone else, federal and state income taxes, and FICA (Social Security and Medicare) taxes are withheld on your behalf by your employer each quarter. When you freelance, it’s up to you to estimate and pay taxes quarterly. If you wait until the end of the year (and hope for the best), you could end up owing a bunch of money, plus interest and penalties.

When you make estimated quarterly tax payments throughout the year, you aren’t stuck paying a hefty tax bill all at once when you file your taxes. But you’ll need to keep track of how much you paid in estimated taxes throughout the year and be sure to include the amount of taxes already paid on your tax return.

5. Send 1099-NECs to Any Non-Employees You Paid

Did you outsource the design of your website, hire a virtual assistant, or pay anyone $600 or more for services in the past year? If so, you may need to issue a 1099-NEC (formerly this was reported on the 1099-MISC).

The deadline to file Form 1099-NEC is January 31. Whatever you do, don’t ignore this filing obligation or you could be facing penalties of $250 per return. Since the penalties apply to both the copy filed with the IRS and the copy filed with the payee, you could end up paying $500 for every 1099 you fail to issue.

Getting the Help You Need

Unless you have a good understanding of tax law and how a business tax return should look, it’s always wise to hire a professional who specializes in preparing taxes for freelancers. Hiring a professional does cost money, but it’s often worth it. They can help you maximize deductions and recommend other tax-saving strategies. Here’s a list of a few of the professionals you want on your team.

Financial Advisor

Freelancers face different financial planning considerations than people with full-time, permanent employment with an employer. Retirement saving, insurance (health, disability, and life), budgeting, and saving are vastly different for self-employed people than they are for people who receive benefits through their employer.

A financial advisor with experience working with freelancers can help you understand your options, think through big decisions, and make sure you are on track to meet your goals.

Tax Preparer

Many freelancers don’t consult with a tax preparer until several years into starting their business. However, the tax elections you make in your first year of business can impact your business’s tax filings in future years, so it pays to start things on the right foot rather than try to fix them later on.

If terms like depreciation, capitalization, and accrual sound like a foreign language, you might want to consider hiring a professional to handle tax preparation.

A good certified public accountant (CPA) or enrolled agent (EA) can help guide you through the tax preparation and strategy process. If you need the support of a CPA, consider working with Taxfyle, a service that connects you with licensed CPAs and helps you file your business taxes.

Bookkeeper

Bookkeeping is not just about entering invoices and paying bills. It might include processing payroll, reporting sales tax, reconciling bank statements, monitoring cash balances, tracking inventory, accounts receivable, and accounts payable.

New freelancers often save money by handling bookkeeping on their own. That’s usually fine when you are starting out. But if you are already working long hours on your business, you may want to focus your efforts on scaling instead of spending hours on tedious bookkeeping tasks. Instead, consider outsourcing as much or as little as you want to a bookkeeping service like Bench.

File Your Taxes With Confidence the First Time Round

When you’re a first-time small business owner, there’s a lot to know and understand, especially when it comes to filing your taxes for the first time. But knowledge is power, and with these tips in your back pocket from the beginning, you can save yourself headaches (and money) down the road.

This post was updated in December 2022.