Guide to Small Business Taxes in 2022
For small business owners, it’s always tax season. It’s a year-round job: on top of running a business, you’ll need to be making tax payments, keeping up with changes in tax laws, staying aware of due dates, and doing whatever you can to increase profits while limiting tax liability.
Filing Small Business Taxes in 2022
Even a small mistake on your taxes can lead to a time-consuming and expensive process of smoothing things over with the IRS. Read on to learn about the different ways you can get your taxes filed, the different taxes you’re on the hook for, and a few extra tips for filing your taxes in 2022.
Here are the different topics that we will be explaining in the Guide to Small Business Taxes for 2022:
Who files your business taxes?
The first thing to ask yourself when it comes to any tax question is who, exactly, is going to be filing your taxes?
There are a few strategies you can use when it comes to deciding who will be handling the paperwork. You could file on your own, of course. There are definite upsides to handling your small business taxes. Firstly, it’s the least expensive option upfront. Filers who handle their taxes pay no fees to a financial professional. It also means that you’re going to remain firmly in control.
However, there are concerns for small business owners when it comes to tax filing. For one, filing taxes for a small business isn’t like filing taxes when you’re 16 years old and only work a W-2 job over the summer. It’s complex: there are many different types of taxes to report, and the process can take days or weeks away from running your business’s operations.
There are also some major concerns for owners filing taxes. A small error on a single tax form can lead to overpayment, or, in the worst-case scenario, an IRS audit.
On the other hand, some businesses will either hire a tax professional or CPA (certified public accountant) on a full-time or tax season basis.
Having a full-time accountant on the payroll has obvious benefits. Taxes are completely off your plate and in the hands of a professional trained and certified in exactly what you need. Instead of taking days or weeks to complete your taxes, the staff accountant can handle all of it. Throughout the year, your hired accountant can handle all business paperwork in a fashion that makes tax preparation a simpler, quicker process. Instead of worrying that you’re making some sort of minute mistake that leads to an expensive audit, you know your taxes are in good hands.
However, while there’s an appeal to having a single person handling business income and business expenses throughout the year, hiring a full-time accountant is an expensive option. An accountant is an additional employee - and an expensive one. For some smaller companies, that resource allocation may simply be untenable.
Some companies will hire an accountant part-time. It’s an appealing middle option. Your company will be responsible for handling much of the paperwork and accounting throughout the year, but when it comes time to make tax payments or file a return, that responsibility passes to a financial professional.
No matter who you decide is the best option for filing your business taxes, it’s important to understand the different types of taxes you’ll owe.
How is your Business Structured?
Many factors determine the types of taxes you’ll pay and the rate at which you’ll pay them, including the size of your company and the state you operate in. In this section, we’ll explore the different types of businesses and the different types of taxes you’ll owe depending on the way your business is structured. The IRS keeps a helpful guide to the possible taxes you may owe depending on the business entity you’ve established.
Sole Proprietorship
A sole proprietorship is a company owned and operated by one single person. They feature high personal liability. Because the company is not incorporated, the business’s assets are the owner’s assets, and the business’s debts are the owner’s debts. These companies are nimble, under the control of a singular person, and simple to register and operate, but the risk to personal assets can be a major downside.
Partnership
A partnership is only slightly less simple than a sole proprietorship. In a partnership, the business is owned by more than one person, and the financial risks are shared by the partners. You can also alter the different levels of liability among partners.
C Corporations
Corporations are the strongest way to protect a company’s ownership. In creating a corporation, business owners trade assets (typically money or property) for stock in a company. For tax purposes, the corporation then operates as an entirely separate entity with its own income and losses. If a corporation files for bankruptcy or is sued, the assets of its owners are safe.
One possible downside to a corporate structure is what’s sometimes called “double taxation.” The company will pay taxes on its income. Shareholders receive dividends on any net income, and then those shareholders will pay income taxes.
S Corporations
S corporations are structured like a corporation with two key differences: first, there’s a 100-person limit to shareholders. Second, S corporations are taxed like sole proprietorships - taxes on the business’s net earnings are paid by its shareholders. This avoids the double taxation issue faced by C corporations.
Limited Liability Company (LLC)
An LLC is a business structure that is effectively the middle ground between a sole proprietorship and a corporation. In an LLC, owners can protect their personal assets from any business losses and also pay a lower tax rate. LLC ownership can be comprised of a variety of entities: individuals, corporations, or even other LLCs.
There are several benefits to structuring your company as an LLC: one major benefit is that there’s flexibility in how you’ll pay your business taxes. An LLC’s taxes can be “passed through” to its owners, and any income (or loss) can be paid as a personal tax. In other cases, LLCs can be taxed like corporations, as a separate entity from the owner. Precise laws and regulations (along with fees and other expenses) will vary by state.
Types of Small Business Taxes
Now that you know how your business’s structure affects its liability and tax status, you should understand which taxes your business will owe to the IRS.
Federal Income Tax
Much like individual taxpayers, the first tax to know is your federal income tax. Depending on how your business is structured, this tax rate can vary. If you’re set up as a corporation, it’s quite simple: you’ll pay at 21% of net earnings.
If you’re a sole proprietor or a member of an LLC structured so that business income passes through to owners, your tax rate will depend on individual income and filing status. For some business owners, business income might be their only income to report. For others, they may be married to a spouse with separate income, leading to a different tax bracket and a different tax rate for the company.
Payroll Taxes
Whether or not you’ve got employees, you’ll be paying payroll taxes. You’ll pay Social Security and Medicare taxes together, known as FICA Taxes (they were established in the Federal Insurance Contributions Act). In addition to FICA taxes, you’ll pay a small federal unemployment tax along with any possible state unemployment taxes.
Even if you operate a pass-through company with no employees, you’ll need to pay a self-employment tax of a little over 15%, which functions as your individual FICA tax.
Excise Taxes
Excise taxes are a tax paid on particular goods or services. There are a fair few goods and services that qualify. If your company operates in certain aviation or trucking operations, sports gambling, indoor tanning, and many more industries, you may owe excise tax.
State/Local
Much like federal income taxes, many states and localities will also require payment and those business tax payments will depend on your business’s income and structure. Rates vary from the paltry 2.5% levied by North Carolina all the way up to New Jersey’s 11.5%. Some states opt for gross receipts taxes in lieu of corporate income taxes. In these states, like Ohio and Washington, taxes are paid on earnings without regard to business expenses or the cost of goods sold. South Dakota and Wyoming don’t take a corporate income tax at all.
Of course, owners of pass-through companies will pay state taxes on their income. Rates will vary by state, filing status, and tax bracket.
The Necessary Forms to File Taxes
The exact forms you’ll need to fill out for the IRS will depend on the structure of your company. You’ll need to gather all of your financial statements in order to ensure accuracy and refer to the IRS or a tax professional to ensure that you’re filing all the correct paperwork. But in general, you’ll need the following:
Sole Proprietor
You’ll need to fill out Form 1040, which is the standard individual income tax return. There are several schedules within this form depending on your individual circumstances. You’ll need to fill out Schedule SE, for example, to pay your self-employment tax.
Partnership
On top of a tax return for individual income, you’ll need to file Form 1065, which is the U.S. Return of Partnership Income. This form will show how much money your company made and how much of that income is passed to each partner for taxation.
LLC
Because LLCs can be taxed in different ways, the most important form to remember for them is Form 8832, the Entity Classification Election. This form tells the government how you’re classifying your company for federal tax purposes. Once this form is approved, you’ll file your taxes with one of the forms found here.
Corporation
Corporations will file income taxes using Form 1120, The U.S. Corporation Income Tax Return. S corporations will use a slightly different form, Form 1120S. In order for a corporation to become an S corporation, they’ll also need to file Form 2553.
When Do You Need to File Taxes?
There are two key deadlines to know for taxes. For most people and pass-through companies, tax returns and tax payments are due on April 18th, just as they are for individual taxpayers. In addition, if you expect your company to owe more than $1,000 in taxes, you’ll need to make estimated tax payments quarterly. Those payments will be due April 18th, June 15, September 15, and January 15, 2023.
Tips for Filing Your Small Business Taxes
In addition to knowing what type of business you have, who’s filing your taxes, and when they’re due, there are a few key tips to keep in mind in order to have your taxes simple, quick, and advantageous for your company’s health.
If you Receive a Tax Refund, Use it Wisely
It’s much less common for a business entity to get a tax refund than it is for an individual. That’s because most businesses (95% of them, according to the Brookings Institute), are pass-through entities. So, any tax refund for your business will end up in your personal bank account after your personal taxes.
If you do get a refund, consider how it might help your business. That money can be spent to upgrade equipment, pay off a company credit card, or be a bonus for employees. Using that refund to lower a debt could be a way of building business credit, which can make future financing less expensive.
Never Guess or Estimate Your Tax Payments
Guessing on anything when it comes to your taxes is a fantastic way to ensure that you’re overpaying, under-deducting, or otherwise completing your taxes in such a way that raises the IRS’s eyebrows.
There are numerous tax credits and tax deductions out there for businesses and business owners. Are you positive that a certain expense can be deducted? Don’t guess. Use all available resources - irs.gov, a tax professional, previous years’ taxes, whatever it may be - to ensure that you’re filing with the precision your business deserves.
Pay Attention to Changes in the Tax Code
Particularly if you’re taking your taxes into your own hands instead of handing them off to a professional, you need to stay abreast of any changes to the tax code, for better or worse. There are even a few changes for 2022, which we’ll discuss next.
Changes for Business Taxes in 2022
Many of the changes in business taxes for 2022 come from relief efforts due to the coronavirus pandemic. The pandemic was painful for many small businesses, some of which are only now reopening after COVID.
The government did pass some legislation to ease some of that burden. For example, the Coronavirus Aid, Relief, and Economic Security (CARES) Act created a few tax credits for small businesses aimed at retaining employees. The Employee Retention Credit was a credit against some employment taxes. Very pertinent for 2021 taxes, though, is the fact that the CARES act allowed businesses to defer a portion of their Social Security taxes during the worst of the pandemic. Those deferred payments have come due, and the IRS can penalize companies that didn’t repay them in time.
Even outside of COVID-era measures, there are several additional changes for small business owners. Consult the IRS to see which changes apply to you and your company.
Reduce your Taxes with Deductions and Credits
Finally, it’s always an important step to try and reduce your taxable income by taking advantage of tax breaks. Tax breaks exist for companies to be able to keep that saved money working for these companies, and you should always try and take advantage.
There is any number of expenses you can write off as a small business owner. You can write off real estate costs if you’re renting, money spent on advertising, and money spent on employees, including salaries, healthcare premiums, and money contributed to their retirement plans.
As for tax credits, there is the Employee Retention Credit, which is meant to help with retaining employees during the pandemic. There’s also the Paid Leave Credit, which allows small businesses to offer paid leave to employees due to sickness, caregiving for a family member, and more. Businesses can claim up to $5,000 as a credit. The IRS offers a ton of additional credits depending on your company’s industry - you can check out that list here.
Paying Taxes as a Small Business Owner
Paying your taxes in full and on time is an integral part of being a responsible small business owner. We hope that this guide provided in-depth insight into the different considerations you need to be aware of when paying your taxes. For other in-depth guides around the different aspects of being a small business owner, check out these small business guides from Biz2Credit.