what happens if a business doesn't file taxes

What Happens if a Business Doesn’t File Taxes?

As a business owner, you probably know that you should file taxes on time. However, if you’ve fallen behind on taxes, you’re not alone. Over 33% of Americans procrastinate doing taxes until the last minute. Reasons for procrastinating taxes vary. Some find it too time-consuming and stressful, while others worry if they are filing correctly. 

No matter the reason, missing the tax filing deadline could be costly, especially for businesses. What happens if a business doesn’t file taxes by the due date? The Internal Revenue Service (IRS) can send you a bill for penalties and additional fees. However, we understand that tax filing requirements and rules change each year. It’s hard to keep up without your own accountant or business tax services

When you run a business, it’s easy to fall behind on your books and taxes. This guide will go over tax filing deadlines and what happens if your business doesn’t file taxes. We’ll also outline your options if you’re behind on your books, missed a filing deadline, or have tax payments.

Table of contents

Tax Filing Deadlines for 2023

Tax day is usually April 15th. However, since that falls on a Saturday this year, the date is April 18th. Even though April 18th is tax day, filing deadlines vary. 

The date you need to file depends on the following. 

  • Your business entity – How you file depends on if you’re a C corporation, S corporation, Partnership, or LLC. 
  • The state you operate – Check with your state’s revenue department for their filing requirements and deadlines.
  • Your tax status – Tax-exempt organizations and non-profits have different filing deadlines than for-profit businesses.
  • The type of return you’re filing – Different returns, including IRS Form 1120 for corporation income tax, have different deadlines.
  • Whether you’ve requested an extension – If you’ve requested an extension and it’s accepted, you have extra time to submit your taxes. However, you must pay what you owe by the deadline.
  • Owed taxes or refunds – If you owe taxes, the deadline to pay may be different than the deadline to file your return.
  • Location – If you’re outside the United States, there are different filing requirements and deadlines.

We recommend you double-check with the IRS and your state’s revenue department for any updates to the filing requirements and deadlines. A tax accountant can also advise you on deadlines and changes.

Here’s a list of common forms and tax filing requirements for businesses and their filing deadlines. For a complete list, we’ve updated our 2023 tax deadlines for businesses here.

Tax Filing Description Who Needs To File Filing Deadline
Estimated quarterly payments By paying estimated taxes, businesses avoid owing a large amount at the end of the tax year. Businesses that expect to owe more than $1,000 in taxes at the end of the tax year pay estimated quarterly payments. Q1: April 18, 2023

Q2: June 15, 2023

Q3: September 15, 2023

Q4: January 15, 2024

W-2 A W-2 details an employee’s wages for the year as well as taxes withheld from their earnings. Employers must provide W-2 forms to all employees who received wages, salaries, tips, or other compensation during the tax year.  January 31, 2023
W-9 Non-employees and contractors fill out W-9 forms to provide tax information.  Anyone who pays an independent contractor or non-employee must file a W-9 form. Not subject to IRS deadlines but non-employees should fill it out before beginning work
1099-NEC The 1099-NEC reports nonemployee compensation payments, such as payments to independent contractors.  Any business that pays an independent contractor or nonemployee more than $600 in a year must file a 1099-NEC form.  January 31, 2023

What Happens if a Business Doesn’t File Taxes?

All corporations must submit a corporate income tax return, even with no profits. LLCs who choose to be taxed as corporations are also responsible for filing a federal tax return. This must be done regardless of whether or not an LLC conducts any business activities during the year. 

If your business doesn’t file taxes, you’re subject to IRS penalties and additional fees. It’s best to deal with tax filing issues sooner rather than later. However, if you missed a deadline, it’s not the end of the world. Initially, the IRS sends a notice or letter to notify taxpayers when they’ve missed a deadline or payment. 

Everyone’s tax situation can vary. Businesses that don’t meet the tax filing due dates have several options. An experienced tax professional can assess yours and help you meet tax requirements. 

If you’ve had IRS notices that you haven’t responded to after several months, the IRS may take these steps. 

Penalties

Different penalties apply depending on your unique tax situation. Below are penalties you could face if you don’t accurately file your taxes on time or miss payments. 

  • Failure to File Penalty – if you don’t file your tax return by the due date
  • Failure to Pay Penalty – if you don’t pay the full amount of taxes you owe by the due date
  • Penalty for Underpayment of Estimated Taxes – if a business doesn’t pay enough estimated yearly taxes
  • Accuracy-Related Penalty – if the tax return is incorrect or you fail to report information correctly

In addition to penalties, the IRS charges interest on your unpaid taxes. This is in extreme cases. We’ll look at each penalty in detail, so you know how much it could affect you.

Failure to File Penalty

The IRS calculates the Failure to File penalty as a percentage of taxes that you owe each month the return is past due. The fee starts accruing on the due date and continues until you file the return or reach the maximum penalty limit.

This penalty is usually 5% of the taxes you owe for each month or partial month that you miss. The percentage increases each month until it reaches the maximum cap of 25%. If you’re more than 60 days late on submitting your return, you’ll pay either $435 or 100% of the unpaid tax balance—whichever is lower.

Don’t forget that you can request an extension if you can’t meet the tax filing deadline. The extension will give you an extra six months to file your return, but it won’t change the due date for the taxes you owe. The deadline to file for an extension is the same as the return’s original due date. 

Here’s how the Failure to File penalty works:

Months Late Penalty Amount
1 5%
2 10%
3 15%
4 20%
5+ 25%

Failure to Pay Penalty

Taxpayers who have filed taxes but didn’t pay them on time face a Failure to Pay Penalty. The IRS calculates this penalty as a percentage of the amount you owe. The penalty increases gradually each month you haven’t paid. Even if you file your taxes on time, you need to have the money to pay what you owe.

For each month you haven’t paid, the IRS assesses a penalty of 0.5% of the amount you owe. It starts accruing from the due date and continues until you pay it or it caps at 25%.

Remember, the IRS may waive penalties and interest for taxpayers who can show reasonable cause for failure to pay on time. You can request an installment agreement if you cannot pay your taxes by the deadline. With this, you make monthly payments to cover what you owe. However, there’s a fee for setting this up, and interest still accrues on anything you don’t pay.

Here’s a chart to help you visualize how the Failure to Pay penalty works:

Months Late Penalty Amount
1 0.5% of the unpaid taxes
2 1% of the unpaid taxes
3 1.5% of the unpaid taxes
4 2% of the unpaid taxes
5 2.5% of the unpaid taxes

Unpaid Taxes and Penalty Interest

The IRS may also tack on interest for any unpaid taxes or fees. Interest accumulates daily and the IRS sets it by the federal short-term rate. The IRS calculates interest from when payment was due until you pay the amount you owe. 

As of 2022, the interest rate for underpayment of taxes is 6% per year. This compounds daily, meaning it adds daily to the total amount you owe. The rate for overpayment of taxes is 5% per year. If you pay more than what you owe, you will get a lower rate of interest.

Corporations should be aware of corporate interest rates, which are higher than individual rates. 

Here’s how interest works on unpaid taxes.

Number of Years Accrued Interest
1 6%
2 12%
3 18%
4 24%
5 30%

Filing and paying your taxes within the deadlines can help you avoid costly penalties from the IRS. If you have fallen behind on filing or paying your taxes, consult with a tax professional. 

Xendoo’s tax accountants will help you file the right paperwork to prevent additional charges. We’ve seen all kinds of tax situations from missed deadlines to late taxes, so no judgment here. 

How Long Can You Go Without Filing Business Taxes?

It’s always best to file and pay your taxes as soon as possible. If this isn’t possible, a tax accountant will help you minimize your liability.

A tax professional familiar with complex tax laws and regulations can help you:

  • Apply for an extension to get a few more months of breathing room. 
  • Lower your tax bill by leveraging deductions, credits, and other strategies to reduce liability.
  • Navigate your filing obligations and comply with all applicable laws and regulations.
  • Avoid errors and omissions that could trigger an audit or penalties.

Even though you must file and pay taxes, there are ways to lower your tax bill legally. 

Tax Evasion vs. Tax Avoidance

Tax evasion is illegal and involves deliberately falsifying or concealing income, inflating deductions, or failing to file taxes. On the other hand, tax avoidance is a legitimate way of reducing your tax bill by using legal methods such as deductions and credits. 

What Happens if a Business Doesn’t File Taxes for Three Years?

If you don’t file your taxes for three consecutive years, the IRS may consider it willful neglect and impose harsher penalties.

These penalties can include levies on your wages or bank account. You may also be subject to a federal tax lien that limits your access to loans or credit. In extreme cases of intentional tax evasion, the IRS may impose fines of up to $250,000 and possible jail time.

Tax Liens

The government can take action against those who fail to pay their taxes through a tax lien. It takes assets or property the taxpayer owns and gives the government legal interest in those assets. If you continue to owe taxes, the agency might begin proceedings to seize your assets. 

Again, this is in rare cases, and usually when the IRS suspects tax evasion. 

A tax lien can make it difficult for taxpayers to sell or refinance their property. You must pay off the lien before any transactions occur. In more extreme cases, the government might foreclose on the property.

It’s important to note the difference between a tax lien and a levy. A levy is a legal process by which the government takes possession of assets or property to settle a debt. A lien serves as a legal claim on those same assets or property to secure payment of taxes. There are also different types of tax liens. 

Notice of Federal Tax Lien

The IRS uses a Notice of Federal Tax Lien (NFTL) as its initial step when taxpayers have not paid their tax debt. This document serves as public notification that the government holds a legal claim over the taxpayer’s property or assets. If you pay off the taxes or reach an installment agreement, the IRS can lift the NFTL.

Notice of State Tax Lien (NSTL)

A Notice of State Tax Lien (NSTL) is similar to an NFTL but the appropriate state agency files it instead of the IRS. The same rules apply with an NFTL—if you pay the taxes, the IRS can release the lien.

If you receive an NTFL or an NSTL, it is crucial to take action. Tax liens can devastate your financial and credit health, so you should address the issue head-on. 

What to Do if You Owe Back Taxes or Miss Filing Deadlines

Back taxes can be expensive and stressful. But, there are measures to help businesses pay off their debt. 

If you’re behind on filing or paying taxes, you have options. Here are some steps to help you avoid or lower expensive tax penalties, interest, and other fees.  

File a Tax Extension

If you need more time to collect all the documents and submit your business tax returns, you can file an extension. However, filing a tax extension doesn’t give you more time to pay the taxes that you owe. To prevent extra costs due to interest and penalties, make sure to pay by the initial due date. 

C corporations, S corporations, and partnerships must fill out Form 7004 to ask for a tax filing extension. Single-member LLCs, sole proprietorships, and trusts submit Form 4868 to request a filing extension. If the IRS approves your extension, you’ll have an additional six months to submit your tax return. 

Companies that face unexpected issues may be eligible for a hardship extension. For a hardship extension, you must submit a written request that explains why you need more time and includes the date you’ll submit the return.

Dispute a Penalty

If you believe there has been an error, you can dispute a penalty. Generally, businesses must provide evidence to support their argument and show why the IRS should remove or reduce the penalty.

For instance, if you receive a penalty for failure to file or underreporting income, you might have a reasonable cause for the oversight. Reasonable circumstances could include a fire or natural disaster or incorrect advice from a certified public accountant (CPA).

Waive a Penalty

You can also use first-time penalty abatement (FTA) to request a penalty waiver. To qualify for FTA, your business must have filed all returns and paid all taxes due within the past three years. 

An administrative waiver is another way businesses can request relief from penalty charges. 

Businesses can request an administrative waiver if they are facing financial hardship or if there’s a reasonable cause for the error.

The IRS also has a Voluntary Disclosure Program (VDP) for business taxpayers who fail to report or underreport their taxes. Businesses can come forward voluntarily and resolve their tax issues. As a result, they limit their exposure to interest and/or penalties by working with the IRS.

Reduce Payment

You can also request an Offer in Compromise (OIC), a settlement agreement between a taxpayer (you) and the government. In it, the two parties agree on a reduced tax payment. You would only be responsible for paying the new amount. However, this option should only be used as a last resort. Taxpayers must provide significant financial information to qualify.

Businesses may also consider filing for bankruptcy protection. This will stop any IRS or state tax agency collection activities while the business reorganizes its financial obligations. It may forgive taxes entirely depending on the type of bankruptcy. However, filing for bankruptcy is a complex process and has many financial consequences, so treat it as a last resort.

Setup a Payment Plan

If you can’t pay in full, you can try setting up a payment plan. To do this, file Form 9465 with the IRS by the deadline. With a payment plan, you make monthly payments toward the taxes you owe. While this won’t reduce your tax liability, it will break up the total into manageable payments.

Businesses can also apply for Currently Not Collectible (CNC) status if they cannot pay their taxes due to financial hardship. When a taxpayer has CNC status, the IRS will temporarily postpone collection actions. It will not pursue collection until the taxpayer’s financial situation improves.

Hire a Business Tax Professional

Skilled tax accountants provide expert advice on how to lower your tax bill and get more money back. They should know all the business tax deductions and credits to save you money.

When choosing a business tax professional, look for experience in business tax preparation and resolution. Xendoo’s team of CPAs, bookkeepers, and tax specialists can help you with:

  • Tax filing and preparation
  • Delinquent returns
  • Negotiating payment plans or settlements
  • Preparing documents for tax audits
  • Catch up bookkeeping when you’re behind months or years

If you’re concerned about filing taxes for your business on time, hire a tax professional. In addition to hiring a tax consultant, it’s a good idea to invest in a year-round bookkeeping service.

Like taxes, updating your books each month is important but it’s easy to fall behind. If you are behind on your taxes, chances are that you are behind on your books too. With the right help, you can get your books in order and prepare for the next tax filing season.

Xendoo has all the finance expertise a business needs in one place. You can choose from business tax services, bookkeeping, accounting, and CFO services. To learn how Xendoo can help with your particular tax situation or business finances, schedule a time to talk to an expert

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

small business tax rates

Business Tax Rates: How Much Do Small Businesses Pay in Taxes?

Filing taxes as a small business owner can be complex, with numerous factors to consider. From tax law revisions to the overwhelming number of forms, understanding your small business tax rate and how to file can be difficult.

Your business entity type and preferred filing status will also affect your tax rate. For example, LLCs that opt for the IRS to tax them as corporations are subject to corporate tax rates. Other businesses like sole proprietorships and limited partnerships may be subject to self-employment taxes. Understanding your entity type and requirements is the first step toward filing your taxes accurately and efficiently.

Tax laws are constantly changing, and it can be challenging to keep up with the latest revisions. A professional tax advisor or CPA can accurately file your business taxes on time. Our experienced tax specialists also know all the deductions and credits that can lower your tax bill.

We’ll cover small business tax rates, filing requirements, and various strategies that can help to reduce your taxes.

Table of contents 

How Are Small Businesses Taxed?

Depending on your business structure and income, you may be subject to one or more types of taxes.

  • Corporate tax
  • Self-employment tax
  • Sales tax
  • Payroll tax

We’ll cover everything you need to know about tax rates for the most popular business entity types—corporations, partnerships, sole proprietorships, and LLCs.

Pass-Through Entities

The IRS considers most U.S. businesses (around 95%) pass-through entities, also known as flow-through entities. Pass-through entities include:

  • Sole proprietorships – Businesses with a single owner 
  • Partnerships – Businesses with two or more owners
  • Limited liability companies (LLCs) – LLC owners can protect their personal assets from their business, but get the tax benefits of a pass-through entity. LLCs can also request the IRS tax them as corporations.
  • S corporations (S corps) – Corporations that have a special tax designation, so the IRS taxes them as pass-through entities.

The biggest advantage of pass-through entities is that they avoid double taxation. The term refers to when the IRS taxes the same income twice—once at the corporation level and again on an individual shareholder’s personal income tax. 

Corporations

A corporation (C corporation) stands alone from its shareholders. The IRS taxes corporations as separate legal entities, which opens them up to double taxation. C corporations must report profits and earnings to the IRS. The IRS then taxes them at the corporate income tax rate. Shareholders still must file their personal income tax returns and report the corporate dividends and capital gains they get as part of their taxable income. 

Let’s say a corporation earns $1,000,000 in profit and then passes on $200,000 in dividends to its shareholders. The business would have to pay corporate income taxes on the full amount of $1,000,000. Individual shareholders would also be subject to taxation on their share of the $200,000 dividend earnings.

The federal corporate income tax rate currently sits at 21%. A corporation with $100,000 in taxable income would owe $21,000 in taxes. With that said, that’s not necessarily the amount you need to pay. You can apply various small business tax deductions and credits to help reduce your tax liability.

While corporations have advantages, double taxation can be a major drawback. Most small businesses operate as pass-through entities instead.

Small Business Tax Rates

Unlike C corporations, the IRS taxes income for pass-through entities at the individual level. Owners file and pay taxes on all income—including business earnings—on their personal income tax returns. However, there are specific forms you need to include depending on your business structure. For example, partnerships will file Form 1065. S corporations will file Form 1120-S

If you operate a pass-through entity, your small business tax rate will depend on your income tax bracket. The higher your taxable income, the higher your tax rate. Federal income tax rates range from 10% to as high as 37%. 

It is important to note that pass-through entities may be subject to other taxes, outside of income. For example, you may need to pay self-employment tax. 

Tax rate Single individual income Married (filing jointly) income
10% $10,275 or less $20,550 or less
22% $41,775 $83,550 
24% $89,075 $178,150
32% $170,050 $340,100
35% $215,950 $431,900

Updates to Small Business Tax Rates

The IRS updates small business tax rates yearly to account for inflation or other economic changes. Therefore, you should look out for the latest rules and regulations or consult a tax professional. Legislation also impacts your tax bill. 

Tax Cuts and Jobs Act (TCJA)

For example, the Tax Cuts and Jobs Act (TCJA) made major changes to the U.S. tax code, deductions, credits, and business tax rates. One of the biggest changes is that it lowered the corporate income tax rate from 35% to 21%. It also introduced a 20% deduction for qualified business income (QBI) from pass-through entities. However, some of those changes will phase out in the next few years. 

A total of 23 individual and business tax TCJA provisions are set to expire on December 31, 2025. A tax professional can help you understand these changes and their impact on your business.

Inflation Reduction Act (IRA)

The Inflation Reduction Act (IRA) also influences how much you could pay in taxes. For one, it increased incentives for electric vehicles and other energy-efficient upgrades. 

It also proposed a minimum tax rate of 15% for corporations that have made over $1 billion over three taxable years. This change has little to no impact on small business taxes. Unless you are a large, publicly traded corporation—think Walmart, Amazon, and Apple—it won’t have an impact on your business taxes. 

What Taxes Do Businesses Pay?

Other than income tax, your small business may be subject to payroll taxes, self-employment taxes, and more. In addition to federal taxes, you may also have state and local taxes. Here is an overview of the taxes that businesses must be aware of:

Payroll or Employment Taxes

If your business has employees, then you’ll need to consider payroll tax. Payroll taxes are the taxes employers pay on employee salaries and wages. They include federal, state, and local taxes and Federal Insurance Contributions Act (FICA) taxes. You’ve likely seen FICA taxes appear as Social Security and Medicare on a paycheck. 

The current FICA tax rate is 7.65% for the employer and 7.65% for the employee, or 15.3% total. As the employer, you’re responsible for withholding the appropriate payroll taxes from your employee’s salary and paying them to the IRS.

You’ll also withhold income tax from employees’ wages. To know how much tax to withhold, you’ll need to collect a W-4 Form from employees before they start work. This IRS form has details like an employee’s address, social security number, and tax filing status. 

In addition to withholding and FICA taxes, there are other types of payroll taxes, including FUTA and SUTA. For example, Federal Unemployment Tax Act (FUTA) is an employer-paid tax that funds state unemployment benefits. Likewise, employers pay State Unemployment Tax Act (SUTA) taxes to fund state unemployment benefits.

Quarterly Taxes (Estimated Taxes)

Most sole proprietorships, partnerships, and S corps owners pay estimated taxes to the government on a quarterly basis. Instead of paying taxes all at once, it’s broken into four payments. You must pay estimated taxes if the amount you expect to owe is greater than $1,000.

Quarterly taxes usually fall into two categories—self-employment taxes (Social Security and Medicare) and income taxes. Even though you pay quarterly taxes, you’ll still need to file an annual tax return. 

There are a few ways that you can calculate your estimated taxes. First, you’ll need to estimate your gross income and how much of that is taxable. Then, factor in possible tax savings from deductions and credits. You can also estimate your yearly taxable income and look at the tax rate for your income bracket.

Another method you can use is to look at your tax return for the past year. You can use last year’s figures to estimate your tax liability for this year. However, this method only works if you don’t expect your income to change much year over year.

The due dates are usually April 15, June 15, September 15, and January 15 of each year. However, some of the dates change if they fall on a weekend or holiday. 

Here are the due dates for 2022 and 2023.

2022 tax year 2023 tax year
April 18, 2022 April 18, 2023
June 15, 2022 June 15, 2023
September 15, 2022 September 15, 2023
January 17, 2023 January 16, 2024

If you underpay your estimated taxes or don’t pay them by the due dates, you may be subject to penalties.

Xendoo’s business tax services will help you figure out what you owe if you’re unsure of how to calculate your estimated taxes. 

Self-Employment Taxes

You’ll factor self-employment taxes into your quarterly or estimated tax payments. As the name suggests, self-employment taxes are taxes that self-employed individuals must pay. This includes those who own an unincorporated business or another type of pass-through entity.

Self-employment taxes consist of two separate parts: Social Security and Medicare. Currently, the combined tax rate is 15.3%. This situation differs from employers who only have to pay half of their employees’ Social Security and Medicare taxes. You won’t be subject to these payroll taxes if you don’t have any employees.

When filing your taxes, you can deduct your self-employment tax payments as an adjustment to income on your tax return. This deduction ensures that you aren’t double-taxed on the same money. Other tax credits may be available to small business owners to offset some or all of the cost of paying self-employment taxes.

To avoid paying self-employment taxes, consult a tax professional to discuss incorporating your business. You can take advantage of certain IRS regulations for corporations that may reduce your overall self-employment liability.

Sales Tax

While sales tax laws differ by state, retailers generally collect sales tax when they sell tangible goods to customers within their state. 

The location of the sale, not the business location, will determine how much you pay in sales tax. For example, if your business is in one state but sells to someone in another state, you’ll pay the respective state’s sales tax. Certain states have reciprocal agreements that allow businesses to only collect sales tax from customers within their own state. It’s best to check with an accountant or tax professional to comply with the applicable laws.

In most cases, you’ll need to register with the applicable state government before collecting and remitting its sales tax. This process usually requires you to list the items you plan to sell and provide account information. You must also keep accurate records of all transactions made within the state. Failure to comply with the applicable laws could result in penalties, interest payments, and other fees.

Xendoo’s bookkeepers and CPAs are familiar with tracking and remitting sales tax for all types of businesses, including ecommerce. If you’re interested in sales tax services, we can do a consultation for your business.

Capital Gains Tax

The IRS collects capital gains taxes on the profits you earn from selling an asset such as stocks, real estate, or other investments. 

Capital gains fall into two categories—short-term and long-term. Short-term gains are from assets that you’ve owned for less than one year before selling. Long-term gains are from assets that you’ve owned for more than one year.

Your capital gains tax rate depends on which category it falls under. The IRS taxes short-term capital gains as income. Tax rates for long-term capital gains are different and usually lower than income tax rates. 

Here are 2022 long-term capital gains tax rates. 

Tax filing status 0% rate 15% rate 20% rate
Single Under $41,675 taxable income  $41,675 – $459,750 Over $459,750
Married, filing separately Under $41,675  $41,675 – $258,600 Over $258,600
Head of Household Under $55,800 $55,800 – $488,500 Over $488,500
Married, filing jointly Under $83,350 $83,350 to $517,200 Over $517,200

Keep in mind that capital gains tax rates can vary from this for particular types like collectibles. The time that you own a capital gain can also impact how much you owe in taxes. 

How Much Do Small Businesses Pay in Taxes by State?

In addition to federal income taxes, you’ll likely have state and local taxes. The federal corporate income tax rate is currently 21%, but most states have individual tax rates and rules. 

Currently, 44 states and Washington D.C. impose taxes on corporate income. Top rates range from 2.5% in North Carolina to 11.5% in New Jersey. 

There are also states that don’t have personal income taxes. If you are in one of the below states, you don’t have to file and pay state income taxes on earnings.

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Tennessee (on wages)
  • Texas
  • Washington (state)
  • Wyoming

Even though some states don’t have an income tax, they may have other taxes. For example, some states have a gross receipts tax that taxes sales instead of profits. Companies must pay taxes on their total amount of sales, even if they don’t make any profit. Look up your state’s requirements or verify with a tax accountant to comply with the applicable laws.

Small Business Tax Professionals

As a small business owner, filing taxes can be confusing. It can be difficult to understand that tax code and all its complexities. But, with an experienced tax specialist, you shouldn’t have to. 

Xendoo is an all-in-one service. We have expert bookkeepers, accountants (CPAs), and tax specialists in-house. Our experts work together on your accounts and know all the tax code changes to file your tax returns accurately. They can also choose the best tax deductions and credits that will save you and your business money. 

Our bookkeeping plans come with flat monthly fees, so you know exactly what you’re paying each month. If you want to get personalized advice from our tax CPAs, you can add on tax services for as little as $100 per month. We’ll file your taxes too. Schedule a free consultation to see how we can help your business.

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

tax form 1120

Tax Form 1120 Guide: Everything Businesses Need to Know

Tax season can be difficult for business owners, and it’s tough when you don’t know what tax forms to fill out or how. If you have a domestic corporation, then you’ll need to use the IRS Tax Form 1120. Corporations and LLCs that are taxed as corporations must use this form to report their income, tax deductions, and credits.

You can use this guide to better understand the purpose of Form 1120 and what information you’ll need to fill it out correctly.

What is Form 1120?

Form 1120, also known as the U.S. Corporation Income Tax Return, is an IRS form that certain businesses use to file taxes. It helps businesses report their yearly profits and losses to determine their tax liability. Businesses can also use Form 1120 to report the gains or losses from the sale of assets and any taxes due from foreign income.

In addition to Form 1120, the IRS requires businesses to make quarterly estimated tax payments if they expect to owe more than $500 on their tax returns. To remain tax compliant, companies must understand the filing requirements and deadlines. 

Who Files Form 1120?

C corporations (C corps) or limited liability companies (LLCs) that choose to be taxed as a corporation file Form 1120. Other businesses, such as sole proprietorships and partnerships, do not file Form 1120. S Corporations must file the IRS’ Form 1120-S instead of the standard 1120.

LLCs have a bit more flexibility regarding taxes. They have three tax options—corporation, partnership, or disregarded entity. By default, the IRS taxes LLCs as a partnership when there are two or more owners (multi-member LLC). 

If there is only one owner (single-member LLC), then for tax purposes, the IRS doesn’t separate the business from the owner. The owner of the single-member LLC files Form 1040. They must attach Schedule C (Form 1040) to report business Profit and Loss, along with any other required Schedules or forms.

However, a company can choose to be taxed as a corporation instead. If this is the case for your business, then you’ll need to file Form 8832, Entity Classification Election, first. Then, you can use Form 1120.

What You Need to File Form 1120

Now that you understand who must file Form 1120, let’s review what paperwork and records you’ll need for filing. Here is a brief list of what you will need to know:

  • Business name and Employer Identification Number (EIN) 
  • Date you incorporated your business
  • Gross receipts or sales
  • Cost of Goods Sold (COGS)
  • Gross profit
  • Dividends earned
  • Interest earned
  • Royalties earned
  • Net capital gain income
  • Tax deductions (These vary by company. View our list of tax deductions for businesses.)
  • Business tax credits you plan to apply for
  • You should also attach any other required forms or schedules to the form, such as Schedule K-1 for shareholders or Schedule M-1 for reconciling net income with financial statements

You can find most of the information on your financial statements, such as your balance sheet, income statement, and other related documents.

To complete Form 1120 accurately, you can hire a bookkeeper to record your income, expenses, and other financial records for the tax year. They’ll track your receipts, invoices, bank statements, and other business transactions. Once you file taxes, you’ll have all the information you need on hand to fill out the relevant forms.

How to File Form 1120

There are two ways to file Form 1120: online or by mail. Online or e-filing is the fastest and most accurate way to submit your tax return. You’ll need a copy of Form 1120 that you completed and any required attachments like Schedules and forms. Alternatively, you can mail a copy of Form 1120 with any required payment and attachments to the IRS.

Filing corporate taxes may be confusing, especially for larger businesses that need to consider depreciation, business expenses, and tax credits. Business tax services with CPAs can file all the tax forms for you, on-time and error-free.  

Form 1120 Page 1

Page 1 of Form 1120 reports your income, gains, losses, deductions, and credits to the Internal Revenue Service (IRS). Information on this page includes:

  • Business name, contact information, and address – You will need to provide the full name and address of the corporation, as well as the name and title of an officer or responsible party.
  • Employer Identification Number (EIN) – This is a unique nine-digit number assigned by the IRS to identify your business for tax purposes.
  • (Line 11) Total gross income for the tax year – This includes income from sales, services, investments, and other sources.
  • (Line 27) Total deductions – Any expenses your business can deduct from its total gross income on Form 1120.
  • (Line 30) Total taxable income – You can calculate this by subtracting your deductions from your total gross income.
  • Tax payments made during the tax year – This includes any estimated taxes paid, any balances due from prior years, and other special payments.

Schedule C

Schedule C of Form 1120 reports any dividends or special deductions the corporation has taken.

On Schedule C, you will need to report dividends the corporation paid to shareholders during the tax year. Dividends are distributions of the corporation’s profits to its shareholders. They may be taxable or tax-exempt, depending on the type of dividend and the shareholder’s tax situation.

You will also need to report any special deductions the corporation claims, such as charitable contributions or domestic production activities. Special deductions are expenses specific to a particular business activity or industry that may not be permissible for other businesses. To ensure that you claim these deductions correctly, consult a tax professional or the IRS for detailed instructions.

Schedule J

Schedule J (Form 1120) calculates the corporation’s tax liability and any taxes paid during the year. This form requires reporting on the following items:

  • The total income and adjustments reported on Form 1120
  • Alternative minimum tax calculation and payment, if applicable
  • Total current-year tax after credits and adjustments
  • The total amount of taxes paid for the tax year
  • Any unpaid balance due or refund due to the corporation

Form 1120 Deadline

You must file Form 1120 and pay any taxes due by the deadline. All corporations have a filing deadline of April 18, 2023, if they are a calendar year business. If your business uses a fiscal year, you need to file your tax return by the 15th day of the third month following the tax year. If you do not pay your taxes by these deadlines, you’ll be subject to penalties and interest charges.

Business Taxes for Corporations and LLCs

Filing Form 1120 is a complex process that requires careful planning and attention to detail. As your business grows, it can get more and more complicated. With Xendoo, you get an experienced team of tax professionals, bookkeepers, and certified accountants to support you. 

Xendoo provides business tax preparation and filing, so you’ll never miss a tax deadline. We’ll file all the tax forms for you, with guaranteed accuracy. Get started with Xendoo today and leave the tax filing to the experts.

 

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How to Deduct Business Travel Expenses (Even Some Vacation)

For the most part, business travel expenses are tax deductible, meaning that you could lower the amount of taxes you need to pay. 

When it comes to tax-write offs for travel, the IRS provides specific guidelines around what you can claim. Mainly, your trip needs to be primarily for business purposes. However, there is some wiggle room to get a little vacation time in during a business trip that qualifies as a travel expense.  

As a hard-working business owner, it’s good to carve out some time for meaningful rest and relaxation. We can almost guarantee that your business will be all the better for it. 

Obviously, we’re not advocating for exploiting the tax code. As long as a trip is primarily for business, you could claim it as a business travel expense (within reason) and save some money on taxes. Here’s how to follow the rules while saving a bundle on your tax return.

What is considered a business trip?

We’ve already covered that the trip needs to be for your business, but what does that mean exactly? For a business trip to qualify for a tax deduction, it needs to meet these criteria. You must: 

1. Travel away from home

The trip must be somewhere other than your “tax home.” In other words, you must leave the location where your business is based for longer than a normal workday. Specifically, you will be staying overnight somewhere else.

2. Spend the majority of the time on business

The IRS looks at what you do for each day of your trip. To qualify as business-related, you need to spend more days doing work-related activities, such as meeting with customers. 

The days you spend traveling to and from the destination count as business days, so meeting this requirement is easier than it seems. For example, you could fly to Honolulu on Monday, attend a conference Tuesday through Thursday, hit the beach on Friday and Saturday, and fly home Sunday. That would be considered five workdays and two vacation days. 

3. Plan in advance

Write out a detailed itinerary and what you’ll be doing each day. Get it time-stamped well in advance of your departure. For example, you could email it to a colleague.

4. Ordinary and necessary

The IRS states that business travel must be for “ordinary and necessary” activities. Ordinary means the expenses are usual for businesses in your industry. Necessary means you can’t run your business without the expense. Your expenses must meet both of these requirements to be deductible.

For example, it may be necessary to rent a car during your stay, but it’s not necessary to rent a luxury class one. 

There’s a lot of room for interpretation here. But, carefully review the requirements, especially since the IRS penalties can be substantial.

5. Conventions

The cost of travel and attendance at conferences is considered tax-deductible as long as the event is related to your business. This includes training and meetings meant to improve skills related to your business. For example, if you own a design agency, a web design conference is tax deductible. 

Expenses related to trade shows follow the same rules as other conventions.

Different Rules for International Trips

You may have even more opportunities for vacation deductions if you’re traveling internationally. 

As before, your trip needs to be primarily for business purposes. This may limit you in terms of destination, but it also might give you a chance to see a part of the world you might not see otherwise. 

The rules for these types of deductions are also a bit less stringent than the regulations for other trips.

International trips must meet the following criteria to qualify as a business travel expense. 

  • Spend 25% of your days doing business
  • If you spend less than 25% of your time working, you can still take deductions, but only as a percentage of the total cost. For example, if you spend 1 day out of a 5-day trip to Italy on business, that’s 20% of your time away and you can deduct 20% of your airfare.

What is considered a business travel expense?

When you’re traveling, there is a long list of expenses that are deductible that you would not be able to write off when working from home. This list may include:

  • Transportation
  • Baggage fees
  • Lodging
  • Meals
  • Laundry

These are common expenses that you can write off. Keep in mind that some of them can be written off in their entirety, while others can only be written off partially.

In all cases, it’s best to save receipts and records, which you can do with a receipt scanner app. Not only will this shield you in the event of an audit, but it can make it easier for you to keep track of your expenses when filing your income taxes. In the event of an audit, the IRS will require you to provide documentation of expenses you have written off.

If you can book your lodging and transportation online, you’ll already have written documentation of some of these expenses, and restaurant receipts can easily account for the rest.

Transportation

Numerous business travel expenses are deductible. You can deduct the cost of airfare including both the cost of the ticket and any associated fees, such as baggage fees. 

Once you’ve landed, you can also deduct the cost of ground transportation, such as trains, buses, and taxis. 

If you drive your car, you can deduct either the actual cost of gas and oil or the standard mileage rate. You or your accountant can decide which deduction is more beneficial to you. Also, you can deduct the cost of parking and tolls. 

Lodging

When traveling for business, many lodging expenses, including room service, can be tax deductions. 

However, there are some restrictions. For example, if you are traveling for leisure as well as business, only a portion of your lodging expenses may be deducted. 

Additionally, your deduction may be limited if your lodging costs exceed a certain amount since expenses must be considered reasonable and ordinary. 

Meals

In general, any meal that is considered essential to the conduct of business can be deducted. This includes both business meetings and meals taken during extended business trips. 

There are a few restrictions to keep in mind when deducting meal expenses. First, the meal must take place during business travel. Additionally, only 50% of the cost of the meal can be deducted in most years. Although for 2022, you are allowed to deduct 100% of meals eaten in restaurants. 

Again, receipts or other documentation must be kept to substantiate the deduction. 

Shipping or Baggage

Shipping and baggage costs are deductible during business trips. If you have to ship materials or equipment for your business, you can deduct the cost of shipping. This also includes the cost of packaging materials. 

If you have to check bags when you travel, you can deduct the cost of the baggage fee. You can also deduct the cost of any other related fees, such as overweight baggage fees. Keep in mind that you can only deduct the portion of these costs that is related to business travel. So if you travel for both business and personal reasons, you can only deduct the portion of the costs that are attributable to the business portion of your trip.

Dry Cleaning and Laundry

When traveling for business, you may be able to deduct the cost of dry cleaning your clothes. 

To be eligible for this deduction, you must maintain records of your expenses and submit them to your employer. Additionally, your employer must be able to verify that the expenses were incurred while you were on business travel. 

If you are self-employed, you can deduct the cost of dry cleaning as a business expense on your taxes. Whether you are an employee or self-employed, the cost of dry cleaning can be deductible for business travel if you maintain accurate records and meet the required standards.

Wi-Fi and Cell Phone

You can also deduct the cost of Wi-Fi and cell phone services. This can be a significant deduction, especially if you frequently travel for business. For flights with paid Wi-Fi service, you can write off the charge if you are using the service for business purposes.

How much can you deduct for travel expenses?

We’ve listed the expenses that are deductible for business travel, but the IRS places limitations on some of the expenses. 

For example, the standard mileage rate changes each year based on market conditions such as the price of repairs and gas. The past several years have seen changes in the deduction for entertainment expenses and meals eaten in restaurants. 

Deduction Amount
Travel 100% of air, train, bus, rideshare, or other transportation fares as well as rental cars
Lodging 100% of the days you spend working 
Meals 50% of business meals are tax-deductible, but in 2022, the IRS temporarily increased the deduction to 100% for meals eaten in a restaurant.
Entertainment Prior to 2021, entertainment expenses were 50% deductible. Starting in 2021, these expenses are no longer deductible as business expenses.

When Your Trip Doesn’t Quite Qualify as Business

You may be spending the majority of your days on vacation, and just happen to meet with a client while you’re there. Or maybe you didn’t get the necessary documentation to support your claim that it was a business trip.

You can still write off 50% of for meals and entertainment you spent for business purposes. 

However, you can’t deduct any travel or lodging costs. 

Granted, this still may mean that the trip as a whole is more affordable since you’ll be deducting some of the expenses, but that doesn’t mean you’ll get the full benefit of a longer stay.

Several expenses are not deductible during a business trip. You cannot deduct any personal expenses you incur during the trip, including souvenirs, gifts for your family, or entertainment expenses unrelated to your business. If your friends or family travel along with you, none of their expenses are deductible.

When Family or Friends Come Along

For many entrepreneurs, traveling with family or friends simply makes sense. After all, if you could use some leisure time away, chances are your spouse is in the same boat. Tying this away time to your business trip can help the whole family save money, and if you have kids, this can be a great way to expose them to a new destination or a new cultural experience.

But before you book that trip to Walt Disney World, there are a few things you need to understand when it comes to friends and family joining you.

You can’t directly deduct any of their expenses. However, in many cases, they can ride on your coattails for less than the full cost. 

The following rules apply to deductions when traveling with guests:

  • Car Rental: As long as it’s the same “ordinary and necessary” car you would have rented if you were alone, nothing says there can’t be other people in the car.
  • Lodging: You can deduct the portion of hotel costs that you would have paid for a single room. For example, if you would have spent on a $100 single room when traveling alone but you’re in a $150 double with your significant other, you can still write off $100.

Travel Expenses for Employees

When an employee is required to travel for business purposes, their employer will often reimburse them for some or all of their travel expenses. 

The most common way to reimburse employees for travel expenses is through a per diem allowance, which reimburses the employee for each day of travel at a set rate. Even if you use a per diem allowance for meals, you still must track the business purpose.

Employers can choose to reimburse employees for their actual expenses. The employee would submit receipts for expenses incurred, including travel expenses. If the employee is driving, employers will often reimburse employees using the standard mileage rate (which changes each year) while using exact amounts for other expenses. 

Regardless of the method used, it is important for employers to track and claim employee travel expenses to deduct them from their taxes. The IRS may ask for documentation for any employee travel expenses in the event of an audit.

Employers should be sure to provide clear guidelines to their employees regarding what expenses are eligible for reimbursement. By taking these steps, they can ensure that they are effectively reimbursing their employees for business travel while also reducing their tax liability.

How Xendoo can help you with taxes

Need more help with deducting your vacation or business travel expenses? Our online bookkeeping and accounting team is here to answer any questions you have and file your tax return correctly so that you get every write-off you can. You can also view our small business tax deductions checklist for more opportunities to save money on your taxes.

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1099 Forms and Independent Contractors: A Guide

Whether you are running your own freelancing business or are looking to hire an independent contractor for your company, you’ve probably heard of a 1099 form. 

There are many different types of 1099 forms. When it comes to independent contractors, you’ll typically deal with the 1099-NEC.

In this article, we’ll go into the specifics of 1099 tax forms, the pros and cons of independent contractors, and what it all means comes tax season.  

What Is a 1099 Tax Form?

In general, the IRS uses 1099 forms for taxpayers to report income that is not subject to withholding. For example, a regular employee does not use 1099 forms because their income tax is withheld during each payment period. 

On the other hand, taxpayers use 1099 forms to report income from freelance work, interest, dividends, and capital gains. 

The payer of the income is responsible for sending a 1099 form to the payee and the IRS. The payee then uses the information on their 1099 form to file their taxes. In other words, if your business has paid more than $600 to an independent contractor or freelancer this year, you’ll need to send a 1099 form to them.

Types of 1099 Forms

There are about 20 different types of 1099 forms, so it can sound overwhelming. Luckily, when it comes to independent contractors, you usually come across two—1099-NEC and 1099-MISC.

1099-nec

Most often, you’ll be using the 1099-NEC. To send a 1099-NEC form, you first need to have independent contractors fill out a W-9 form, which contains information like their name, address, and tax ID or social security number.

What Is a 1099-NEC Form?

The 1099-NEC form is an IRS tax form used to report nonemployee compensation (NEC). How do you know if you need a 1099-NEC form? You’ll likely need to use this form if you meet the below requirements.

  • Over $600 – Businesses must complete and send a 1099-NEC form to the IRS and to each person they paid $600 or more during the year.
  • Non-employees – Payments must be made to non-employees. This includes independent contractors, freelance workers, and other self-employed individuals. 

There are some unique cases where you may not send a 1099-NEC form. These include: 

  • Corporations – You are not required to send a 1099 to a corporation (either a C-corporation or S-corporation). You do not need to send one if an LLC is taxed as a corporation. There is no penalty for sending a 1099 to a corporation, so if you are unsure, you should send it anyway.
  • 1099-K and freelance marketplaces – If you hire and pay freelancers through third-party platforms like Upwork and Fiverr, you won’t prepare a 1099-NEC or 1099-MISC. Because these are classified as “payment settlement entities”, the platforms send a 1099-K to freelancers. However, always double-check with the platform you’re using and the IRS to avoid penalties. 

The 1099-NEC form is an important document for both payers (companies) and recipients (independent contractors). Payers must ensure that they correctly report all NEC payments, and recipients need to use the form to correctly file their taxes. The 1099-NEC form helps to ensure that everyone pays their fair share of taxes.

What Is an Independent Contractor?

The IRS also has specific guidelines for classifying workers as employees or independent contractors. 

Employees fill out W-4 forms when they start a new job or need to make updates to their information, and they must receive a W-2 form from their employer for taxes. Independent contractors, on the other hand, fill out W-9 forms and receive 1099 forms. 

1099 Form Independent Contractor Requirements

Independent contractors have a lot of advantages. They are their own boss, set their hours, and can deduct a lot of business-related expenses come tax time. But there are also some cons, one of which is that they have to pay self-employment tax.

As a business, hiring independent contractors can supplement your workforce and provide specialized expertise. Plus, independent contractors can come with more flexibility and lower costs than an in-house employee. 

So, what exactly does it mean to be an independent contractor? According to the IRS, to be considered an independent contractor, an individual must:

  • Be in control of how they do their work – In other words, the client can’t enforce how many hours or what days of the week to work.
  • Not employed by the company – They must be self-employed.
  • Use their own tools to complete their work – This is usually applied to tradesmen who may bring their own tools to a job site.

Filling out the wrong forms can lead to costly mistakes, so it’s important to understand the difference between employees and independent contractors.

Employees vs. Independent Contractors

A company hires an independent contractor to do a specific job. Because a contractor isn’t considered an employee, they are not eligible for the same benefits as employees, such as health insurance and paid vacation days.

As a result, independent contractors are also not subject to the same tax laws as employees.

An employee is also typically expected to comply with the company’s rules and regulations. An independent contractor has more flexibility. 

Another key difference is that an employee may work full-time or part-time and have defined tasks and requirements. An independent contractor works on a contract basis and you have less control over how they perform their work. 

Independent Contractors vs. Self-Employed

Self-employed means that you make your income by being your own boss. All business owners are self-employed, but not all self-employed are business owners. For example, an independent contractor can be self-employed without running their own business.

The IRS may consider an independent contractor also self-employed. For example, if you earned more than $400 per year, you also need to pay self-employment taxes, which refers to Social Security and Medicare taxes.

1099 Form Independent Contractor Example

For example, if you are a freelance writer or graphic designer, you would receive a 1099-NEC from each client that paid you more than $600 in a year. You would then use the 1099s to report your earnings for the year.

What’s the Difference Between 1099-NEC and 1099-MISC Forms?

A 1099-MISC form is used to report payments made to non-employees for services that do not fall under non-employee compensation. Types of miscellaneous income you might report with a 1099-MISC form include: 

  • Rents
  • Royalties
  • Prize winnings
  • Other income (not subject to self-employment taxes), and medical and health care payments

The payer must provide a 1099-MISC form to the recipient by January 31st of the year following the payment. If you receive or submit a 1099-MISC form, you can see exactly what it looks like below or by going to the IRS website. 

1099-misc

The 1099-MISC form does not include withholdings for Social Security and Medicare taxes. Despite its simple appearance, the 1099-MISC form plays an important role in the tax system. 

1099 Form vs. W-9

The main difference between 1099 and W9 forms is that 1099 forms report income from sources other than employment. W9 forms provide contractor information to employers. You can see how the W-9 form differs in the image below, and you can view the full form on the IRS site

w-9 form

Employers use W-9 forms to obtain contractor information such as name, Social Security number (or tax identification number), and address. Before an independent contractor starts work, they should fill out a W-9 form.

What Do You Need to File a 1099 Form for Independent Contractors?

To summarize, as a business, you need to file a 1099 form for an independent contractor if you pay them $600 or more during the tax year.

Specifically, you’ll need to prepare a 1099-NEC form and send it to the IRS and the independent contractor. You can file either by paper or electronically using IRS-approved software. 

Also, you need to send the form to the contractor by January 31st of the year for the previous year.

Before you can submit a 1099 form, independent contractors need to fill out a W-9 form. The W-9 form collects information for tax purposes, including: 

  • Social Security Number or Individual Taxpayer ID
  • Name and address
  • Any other pertinent information on the W-9

If you don’t file a 1099 form when required, you risk IRS penalties.

Final Thoughts

The rise of the 1099 independent contractors has been a great thing for workers and businesses alike. Businesses get more flexible work and efficiency. Workers earn income on their own schedules.

Businesses need to be aware of the different tax implications of hiring contractors versus employees and set clear expectations about deadlines, deliverables, and payment.

Self-employed workers are responsible for their own taxes, so they need to maintain good records.

If you’d rather not juggle all the tax forms and bookkeeping that goes along with hiring independent contractors, you can use an outsourced bookkeeping and accounting service like Xendoo. You’ll get a dedicated team of experts to help you with all your bookkeeping, accounting, and tax needs. View our plans or schedule a consultation.

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

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21 Small Business Tax Deductions You Need to Know

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Many small business owners miss out on tax savings simply because they aren’t aware of what tax deductions are available. As professional accountants, we know all the small business tax deductions that can save you money, and we’re sharing them in this tax deductions checklist. 

Before we get into the nitty-gritty of what you can count as a tax deduction, let’s define what a tax deduction is and isn’t.

What is a tax deduction?

You may also hear people refer to tax deductions as tax write-offs. Put simply, it’s an expense that you can deduct or subtract from your total taxable income. 

The benefit of tax deductions is that as you lower your total taxable income, you could lower the percent you pay. There are different tax deductions for small businesses and individuals. For this, we are focused on small business tax deductions. 

The actual amount that you’ll pay in taxes depends on many factors like your tax bracket (how much taxable income you have), where you operate your business, and what type of business you have (C-corp, sole proprietorship, LLC, partnership, or S-corp). The IRS Publication 535 has about 60 pages of details related to business expenses, tax deductions, tax credits, and more, so it can be confusing for new companies.

Tax Deduction vs Tax Credit

A tax deduction and tax credit can both save you money on taxes, but they are different terms. 

Tax deductions can lower the amount of taxable income. For example, tax brackets–a range of annual income–are used for income tax. If your income falls within a lower range, the percent of income taxed may be lower. 

Tax credits are set amounts that are subtracted from your total taxes owed. If you qualify for a business tax credit, the amount of that credit is subtracted directly from the amount of taxes you pay. 

  • Tax credit – If your business owes $40,000 in taxes and you qualify for a $10,000 tax credit, you’d owe $30,000. 

Now that we have a clear understanding of what counts as a tax deduction vs tax credit, let’s dive into the specifics, so you can start saving some money on taxes.

Top Small Business Tax Deductions Checklist

To figure out if you qualify for a small business tax deduction, first identify what business expenses you have. Most business expenses are tax-deductible, but it can be tricky to track and separate them from personal expenses. 

This small business tax deductions checklist will help you do just that. You can click on each section below to go directly to that tax deduction. Some of the common small business tax deductions are: 

  1. Home office 
  2. Office supplies 
  3. Rent expenses
  4. Business insurance 
  5. Bank fees 
  6. Interest
  7. Car expenses
  8. Travel expenses
  9. Phone expenses
  10. Employee wages
  11. Employee benefits
  12. Education and training
  13. Business meal expenses
  14. Contract labor
  15. Advertising and marketing
  16. Legal, accounting, and professional fees
  17. Conventions and trade shows
  18. Gifts
  19. Charitable deductions
  20. Equipment and depreciation
  21. Repair and maintenance

Let’s take a look at each of these small business tax deductions in-depth.

1. Home office 

Many people have questions regarding a home office deduction. So many people have been working from home since the Covid-19 pandemic, but only those who meet the home office guidelines can include this expense in their small business tax deductions.

If you use part of your home as an office and you run a self-employed, partnership, or other business, you may qualify. However, your home office needs to meet certain criteria. If it fits any of these descriptions, you likely qualify for a home office deduction.

  • Your home office is your primary place of business. If you designate a physical store or other location as your office, then you wouldn’t qualify. 
  • It is where you conduct business, meet regularly with clients, and complete orders. 
  • It is a separate structure (like a guest house or studio) that is not connected to your place of residence. 

If you do qualify, you can deduct office expenses like utilities, mortgage payments, and even repairs. You can do this by using one of two methods–simplified or regular deductions.

Simplified Deductions

If you use the simplified option for claiming tax deductions, the IRS permits you to deduct $5 per square foot of office space. However, you’ll be capped at a maximum of 300 square feet, which often prevents you from claiming garage space as a work area.

Regular Deductions

Using the regular method, you’ll need to determine the square footage of your home office and express this area as a percentage of your home’s total square footage. You can then apply this percentage to all home expenses.

For example, if your home office represents 10% of your home’s total square footage, you can deduct 10% of expenses which include: 

  • Rent or mortgage interest
  • Property taxes
  • Utilities
  • Homeowner’s insurance
  • Homeowner’s association (HOA) fees
  • Cleaning services

Can you deduct the cost of your home’s Internet? Yes. Like your other utilities, you’ll simply deduct a percentage of the cost of the Internet service for the year, including monthly fees, equipment, and installation.

Just be aware that the IRS keeps a fairly close eye on these types of deductions. It never hurts to snap a few photos to document your workspace to demonstrate it’s used for business.

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2. Office supplies

There are many things to buy for an office, from purchasing all new supplies to ordering more printer paper throughout the year. These are some typical tax-deductible office supplies. 

  • Paper
  • Pens, highlighters, and pencils
  • Toilet paper
  • Business cards
  • Furniture
  • Mailing supplies
  • Cleaning supplies
  • Staplers
  • Breakroom appliances
  • Drinks for employees

Mailing supplies may not fit into the office supplies category. If your small business sells homemade crafts and buys mailing envelopes to mail those crafts, that falls into a separate category for the cost of goods sold. Sending letters to customers or mailing a check to pay rent would be considered office supplies for small business tax deductions. 

3. Rent expenses

For many small business owners, rent is a rather large expense that can be deducted from your taxable income. However, you can only subtract business rent expenses, not personal living expenses. 

If you have a physical store or business that you pay rent for, it qualifies for a tax deduction. The exception to this is rent paid for a residential dwelling out of which you work. Even if you have a home office, you can’t deduct your home’s rental expenses from your taxes.

4. Business insurance

Premiums for business insurance are a sizable overhead cost, but luckily, many qualify as a tax deduction. These business insurance costs are tax-deductible: 

  • General liability insurance
  • Professional liability insurance
  • Commercial property insurance
  • Workers’ compensation insurance
  • Data breach insurance

Typically, these policy types are regarded as common and necessary for the operation of your business, so you can deduct 100% of the full amount of your monthly premiums, as well as any additional fees required for maintaining the policy.

You may have other insurance policies that are unique to your niche. If you’re unsure, it’s a good idea to contact a tax accountant to verify whether or not they count as a tax deduction.

5. Bank fees

Small businesses should have separate bank accounts and credit cards that are solely for company use. This keeps personal and business expenses separate.

Since you’ll be relying on a business bank account, bank fees can be counted among your business expenses, though only those that relate to normal business operations. Monthly fees, for example, can be deducted, but overdraft penalties cannot.

Many small businesses use Paypal, Square, or other services to take credit or debit card payments. These services typically charge service fees. These fees from financial institutions can also be claimed as tax deductions. 

6. Interest

If you have a small business loan, credit card, or investor funding, you likely pay interest on it throughout the year. Interest paid on loans and other finances are tax deductions. 

You can deduct the amount of interest paid on:

  • Business loans
  • Business credit cards
  • Mortgage loans to buy or improve your home or business property
  • Home equity loans
  • Money borrowed for investment (if the investment has more interest than income, you can carry forward the overage to next year)

Keep in mind that this doesn’t include gifts or loans that are through family members. It is hard to verify the interest paid on loans that aren’t through qualified lenders. 

7. Car expenses

Traveling for business is common for many company owners as they meet with clients and pick up supplies. When a personal vehicle is used for business purposes, this use can be deducted based on a standard mileage rate or actual expenses. 

  • For the 2021 tax year, the standard mileage rate deduction is .56 cents per mile. If you drove your car 100 miles strictly for business-related activities, you could deduct $56 from your taxable income. For 2022, the mileage rate is .585 cents per mile. For 100 miles, you could deduct $58.5. 

Mileage rate deductions allow business owners to track how many miles they have driven for business purposes and multiply that by the average mileage deduction rate for that year. 

An actual expense method accounts for all costs related to car expenses. It requires receipts of gas and all vehicle costs–including repairs, insurance, fuel, and registration payments–to be supplied and multiplied by the number of miles driven. To decide which method to use, choose the one that gives you the greatest deduction. Most business owners go with the standard mileage rate.

8. Travel expenses

Outside of vehicle expenses, there are travel-related expenses that may be tax write-offs. To qualify as a travel expense, it has to be necessary business travel, not travel for entertainment. In general, businesses are no longer able to deduct entertainment expenses for taxes. 

If you reimburse employees for travel, you can count that as a tax deduction. For the most part, travel deductions are expenses that you incur while you’re traveling away from your tax home (where you usually pay taxes). 

For instance, If you need to travel across the country to meet with suppliers, then you can deduct those expenses. 

Other travel tax deductions include: 

  • Business meals and lodging
  • Travel fares for planes, trains, buses, or other transportation
  • Dry cleaning and laundry services
  • Parking fees 
  • Cab rides

Any travel performed in the operation of your business can be deducted from your taxes. In most cases, conference tickets can also be claimed as a business expense, provided that the conference is related to your company. You can find a full list of tax-deductible travel expenses from the IRS here.

9. Phone expenses

If you have a cell phone devoted to your business, you can deduct the cost of your plan. This would include the monthly fee, the cost of the phone itself, and any other charges associated with setup and activation.

If you rely on your personal cell phone, you’ll have to deduct the cost of the portion of the bill devoted to business use. This can be tricky since your cell phone is likely used for more than just phone calls, but you can make a reasonable estimate by examining data usage and time spent using the phone.

10. Employee wages

Salaries, including commission and bonuses, are fully tax-deductible. You can subtract the full amount. 

The exception to this is if your business is a sole proprietorship, LLC, or partnership, and you do not have employees other than yourself. Because you aren’t considered an employee, you wouldn’t deduct your income as an employee wage. 

If you have family members that work in your small business, there are some additional tax considerations.

Family members who legally work for your business and are under 18, may be exempt from paying FICA, also referred to as federal payroll tax. If a family member is under 21, you may not need to pay FUTA or federal unemployment tax for them. 

11. Employee benefits

Although employee benefits can be costly for employers, they improve the quality of the workplace and increase staff morale. Health insurance is quite expensive for employers, but it greatly benefits employees. Under certain guidelines, it may be tax-deductible. 

Other employee benefits include paid time off, vacation time, retirement, and life insurance. 

12. Education and training 

Many businesses require employee training for OSHA safety, insurance license exams, and other certifications. Plus, many employees today see personal development and education budgets as a job benefit. 

Paying for employees’ training and education is not only a good incentive for workers to continue working for the business, but it also helps decrease your taxable income.

You can write off 100% of the costs associated with training that is directly related to your business knowledge and expertise. Business education tax deductions include

  • Classes, seminars, webinars, and workshops
  • Business books
  • Subscriptions to trade publications
  • Transportation expenses to and from the education venue

13. Business meal expenses

Wining and dining clients is a common practice. As is, showing appreciation to your employees by providing food and beverages.

You can often deduct 50% of meal costs from your business taxes, but these dining experiences must follow specific guidelines. They must be necessary and not outside of typical business arrangements. You can also deduct meals with clients, but only when they happen during business meetings. 

If you and a client decide to see a movie or sporting event, these entertainment costs will not count among your normal and necessary business expenses. Therefore, there is no deduction for them.

Here are some examples of business meal expense deductions.

  • The amount spent on food for recreational business activities like holiday gatherings or pizza parties.
  • Providing food delivery for remote employees for a virtual event. 
  • Meals that are purchased while an employee is traveling for business. 

As part of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the IRS temporarily allowed for 100% meal-related tax deductions. This will end in 2023.

Business meal expense deductions can save you a lot of money on taxes, but it’s important to know what qualifies and what doesn’t. If you aren’t sure, a professional accountant can help you get the proper amount to write off, but you should keep track of all receipts for food expenses.

14. Contract Labor

In addition to the expenses of W-2 employees, business owners can deduct the fees associated with independent contractors and freelancers (1099 employees), as long as:

  • The contractor must not be an employee
  • They must have provided services for business purposes only

15. Advertising and marketing

Many business owners set aside a large budgeted amount each year for marketing expenses. Marketing and advertising are a huge part of getting the word out about your business–and they are a tax deduction. 

All expenses associated with marketing and promoting your business are tax-deductible. This includes:

  • Social media campaigns
  • Local newspaper ads
  • Radio or television spots
  • Digital marketing

There are also some less well-known marketing tax deductions to consider like: 

Design or content creation contractors

If you hire a designer or copywriter contractor–not an employee–to produce content for your business, you can deduct their wages, just as you would any other 1099 worker.

Marketing software and tools

You can also deduct marketing tools that you use to run email campaigns or manage your social media calendar. If you use subscription-based services, like Mailchimp or Hubspot, the cost of your annual subscriptions also counts toward tax deductions. 

Promotional products

T-shirts, pens, or promotional products that have your company name or logo on them are considered advertisements. These swag products are tax deductions as well as great tools for marketing.

For many business owners, these write-offs are an encouragement to invest in marketing. You’ll gain more exposure for your business while finding yourself in a more favorable position during tax season.

Many small businesses don’t realize that they can deduct costs to hire lawyers and accountants. Because legal and accounting are necessary expenses to operate a business, they count as tax write-offs.

This small business tax deduction covers any consultants you hire for running your business, including attorneys, accountants, tax preparers, and advertising agencies.

However, the tasks that these professionals conduct must be strictly for your company. Personal legal and accounting fees like estate planning are not tax-deductible. 

17. Conventions and trade shows

For many artists and home-based small businesses, trade shows and conventions are necessary to obtain customers and sales. These shows can get expensive when you’re paying for hotels, meals, booth fees, and other related expenses.

You can deduct these expenses from business taxes so long as they are necessary. Many of the common things businesses pay for at these shows include:

  • Registration fees
  • Supplies
  • Travel expenses
  • Hotels away from home
  • Marketing expenses

While these expenses add up, they can be substantial small business tax deductions.

18. Gifts

If you gift employees or customers gifts, you may be able to deduct the cost. However, compared to other expenses, it is a pretty low amount. According to the IRS guidelines, there is a limit of $25 per tax year for gifts. 

19. Charitable business deductions

For many businesses, charity work is a great way to give back to the community that they work hard to serve. Companies donate to charities in the form of physical goods or monetary donations. So long as these are given to qualifying charities, you can deduct these contributions. 

Keep receipts for any goods purchased for the charity as well as for cash donations. If the gift is over $250, you’ll want to get a receipt or acknowledgment from the organization.

In addition to goods, you can deduct costs associated with volunteering. According to the IRS, travel and other out-of-pocket expenses not reimbursed by the charity are eligible for a deduction. Expenses include flights, gas, hotels away from home, and meals.

20. Equipment and depreciation

Equipment deductions apply to any machinery, computers, or other items necessary to perform a business. These items will often depreciate with time, so you may be able to count a depreciation deduction. 

For a small business that creates custom T-shirts, equipment might include a heat press or a vinyl cutter. For a woodworking shop, equipment might consist of drills, a saw, and a nail gun. 

Equipment should not be confused with supplies, including T-shirts for the first company or nails, screws, and wood glue for the second company. 

21. Repair and maintenance

You will eventually need to get equipment repaired or routinely serviced. This can be a tax deduction, but it is considered separate from an equipment purchase. For instance, whenever you require something like a computer repair, this would fall under the equipment repair category.

Businesses that use large, heavy machinery that is prone to breaking down can use this deduction to deduct costs associated with repair and maintenance. Also, real estate owners may be able to deduct non-equipment repair costs for routine maintenance items like painting a building. Be careful to check before investing money into particular projects, because there are strict guidelines around what qualifies as repair or maintenance. 

Preparing taxes comes with many questions for those who don’t do it daily. It can lead to an immense amount of time browsing the IRS website to answer questions that a professional can answer in minutes. 

Tax season can be a stressful time for many businesses. There are so many deductions to consider. Preparing taxes comes with many questions for those who don’t do it daily. It can lead to an immense amount of time browsing the IRS website to answer questions that a professional can answer in minutes. 

When questions arise concerning state and federal taxes or possible deductions, it helps to have a tax prep professional ready to answer any questions. Our staff is certified by the IRS to perform tax preparation. Finding answers to questions regarding qualifications for small business tax deductions is simple.

Business owners can ask questions without paying by the hour to an individual accountant. Instead of spending hundreds of dollars for an hourly CPA, save money with Xendoo’s tax preparation service and set monthly rate.

An accountant reviews tax forms.

How Long Does It Take an Accountant to Do Taxes?

An accountant reviews tax forms.

As tax season looms, you may be wondering whether you should have an accountant prepare your taxes. In addition to considering how much an accountant costs, you’ll also want to consider how long an accountant will take to do taxes compared to trying to do it yourself.

How do you know when to bring in a tax professional? Complicated tax situations like inheritance, small business taxes, or other big life changes usually warrant bringing in a certified public accountant or CPA. 

How Much Time Does it Take an Accountant to Prepare Taxes?

The time it takes an accountant to do taxes depends on the complexity of your return and how quickly you make your tax information and necessary documents available to them. 

It is better to plan ahead before the tax filing deadline. You can ask an accountant to have a better understanding of the timeline required to complete the process. There are a few ways that you can speed up the process.

Cost and Time Considerations

A number of factors affect the time it takes to file taxes. Not all of these will be the responsibility of the tax preparer. 

First, you must make sure that you have all of the required documentation available for the tax preparer. Documentation includes any statements of income you have received from an employer or other entity, as well as any other tax forms for expenses. 

Some of the most common forms include: 

  • W-2
  • 1099-NEC
  • 1098 

The W-2 is used to report income earned from an employer, as well as the payment of any taxes. A 1099-NEC includes independent contractor earnings. The 1098 form is a statement of any mortgage interest or insurance premiums paid. 

Deductions are another consideration. If you prefer to itemize rather than take the standard deduction, you’ll need to have receipts available. 

Typical items that are itemized include:

  • Medical and dental expenses
  • Mortgage interest
  • State or local property tax

All of your receipts should be organized and provided to your tax preparer.

Tax Preparation for Small Business Owners

Business owners will have more complex taxes. Businesses are able to claim certain deductions for expenses incurred throughout the year, but they need to have appropriate evidence of these expenses. 

Gathering this documentation may take some time, especially if you haven’t kept track of your receipts during the year. Online accounting software can assist in managing small business income and expenses.

The cost of the tax preparation and filing varies. More complex returns will incur higher fees. Often you may offset the cost of these services with your tax refund if you are eligible for one.

If you choose to use a local accounting firm that specializes in tax return preparation, you will pay significantly more. However, if your tax situation is complex, it pays to engage the services of true tax professionals. 

Xendoo has a variety of plans that are priced to meet tax needs for businesses of all sizes. The accounting team will be familiar with tax law and tax code and can make sure to include all deductions available to you. Xendoo’s team can also assist you with tax planning to mitigate your tax expense in future years.

How Much Time Do You Spend Preparing Your Return?

If you have filed your own tax return in prior years, you may have spent a significant amount of time to ensure you filled it out properly. When you did, you likely had to gather all of your tax forms and expense records. Then, check that you included each applicable tax form, including form 1040

You may have struggled with situations that required more complexity, such as capital gains or business deductions. Perhaps you had significant medical expenses that required you to itemize rather than take the standard deduction. 

Whatever the reason, you likely spent significant time and effort preparing your own tax return. At the end of the process, you may not have even been entirely comfortable that your return was correct. This oversight is why it makes sense to hire someone to handle tax preparation for you.

Plus, if you have errors in your tax preparation, it can slow the process down. Tax professionals can prevent common errors so that your taxes are filed faster. 

Is It Worth Getting an Accountant to Do Your Taxes?

There are three main types of qualified tax preparers. These include enrolled agents (EAs), certified public accountants (CPAs), and tax lawyers. Other individuals may prepare taxes through retail firms, but often they will not have received education specific to tax. 

Thus, if your tax situation is complex, it makes sense to hire someone to prepare your taxes who has the education and experience that fits your particular situation.

While there is an expense associated with hiring a qualified tax preparer, doing so saves you time, energy, and potentially even money. Tax preparers are generally familiar with most of the IRS tax code and must stay up to date on any changes that are made. They will be aware of deductions that you may not know you qualify for. 

If you own a business, it is likely that you will need the services of a tax preparer. Business taxes are typically much more intricate than personal tax returns. 

They involve a number of different considerations, especially if your company has employees, equipment, or investments. Tax consulting services can assist you with ensuring your business tax return is properly completed.

Tax Accounting Software

Some people decide that engaging the services of a professional isn’t necessary, especially if they have simple returns and have some knowledge of tax. They may choose to utilize tax software to prepare their returns. 

To prepare yourself for tax time, there are a few online accounting software options that may help.

When you get a Xendoo plan, you can also sync to online accounting software and tools through our partners. These include:

  • Xero 
  • Quickbooks

Although these tools can make the tax filing process easier, there is still some heavy lifting that you need to do. Xendoo comes with accountants that can advise you when filing tax returns.

There are a number of factors that impact how long it takes to complete income taxes. To speed up the process, store all of your tax-related documents throughout the year and keep them organized.

For small business owners and more complex tax needs, using a tax preparer like Xendoo can save time and money. If your return is complicated, consider small business tax preparation services.

A tax advisor helps a business owner file taxes.

How Much Is a Tax Consultant?

A tax advisor helps a business owner file taxes.

If you own a business or earn a significant income, you may be wondering how to manage your tax situation and how much a tax consultant costs. There is a lot to consider when weighing the costs and benefits of hiring a tax consultant. You might need help mitigating tax exposure and ensuring tax planning, charitable giving, and other complex tax needs.

A tax consultant can help with any of these issues. They can also help file taxes as a business owner. How much you can expect to pay for the services of a tax consultant? Read on to find out.

How Do Tax Advisors Set Their Prices?

A tax consultant will charge a fee based on different factors. One factor is the type of forms that you need to file. The National Society of Accountants (NSA) reports that tax consultants typically charge between $176 and $457. It may cost more if you are filing more complex and specialized tax forms.

It costs $323 on average for an individual filing a tax return Form 1040 and a state return with itemized deductions. Tax filings such as business, gains and losses, and estate are more complex and have higher fees associated with them.

However, the actual costs vary based on your tax situation. Some elements that play a role in tax consulting fees include:

Location

The location of a tax consultant plays a big role in their fees. You can expect to pay higher fees for accountants based in a larger city with a high cost of living. For example, filing taxes in California will likely cost more than in other parts of the United States.

Complexity of Services 

For simplified matters, such as preparing an average tax return, fees may be fairly low. However, you can expect to pay more in more complex cases that involve significant research or time.

If your situation requires specialized knowledge about tax codes, fees are usually commensurate with qualifications.

What Does a Tax Consultant Do?

A tax consultant is trained in tax law and financial accounting. They advise clients on income tax returns during tax season and help with financial matters, including trusts and estate planning. 

They also should know recent tax law changes on both a federal and state level. 

Tax consultants offer a wide variety of services. These may include:

  • Preparing your federal form 1040 and state return
  • Navigation business tax requirements and preparation
  • Looking for available deductions to lower your tax burden
  • Helping to manage capital gains taxes
  • Sorting through tax advantages of life events

A tax consultant may work with individuals, businesses, or both. Business tax law is often far more intricate than individual tax law. Companies can benefit from the services that a tax consultant provides. They will have an in-depth knowledge of legalities surrounding the business structure of an entity and the deductions that may be available to a given company. 

Tax forms as a first-time business owner can be complex, which means that it can be helpful to have someone help you navigate through them.

Is a Tax Advisor the Same as an Accountant?

A tax advisor is not the same as an accountant. Tax advisors may specialize in tax law, wealth management, and tax mitigation strategies.

While an accountant may have some tax training, their understanding is typically more basic unless they specialize in tax accounting. An accountant’s regular duties vary based on their industry. If they work in public accounting, they may oversee or conduct an audit of a public company’s financial statements.

If they work for a company, they may record journal entries, prepare financial statements, or reconcile general ledger accounts.

What Qualifications Does a Tax Advisor Have?

At a minimum, a tax advisor has usually obtained an undergraduate degree, typically in accounting or finance. They may also have received a master’s degree in finance, accounting, or tax. Oftentimes, they will hold a Certified Public Accountant or Enrolled Agent certification.

Highly specialized tax advisors may earn a law degree in taxation. This degree can assist them with more complicated tax matters, such as international tax or corporate business planning and strategy.

Why Do I Need a Tax Advisor?

A tax advisor can be quite helpful for complex tax matters. They may also serve to advise businesses on specific tax strategies, such as identifying available deductions or setting up a business entity. 

There are a variety of different activities that a tax advisor may assist you with. Some of the more popular services include:

Minimizing Taxes in Retirement

The goal of most individuals is to retire from their careers at an age at which they are still able to enjoy their time with minimal health issues. However, retirement planning is a lot more intricate than simply depositing funds into an employer’s qualified retirement plan. 

A good tax consultant can work with you to ensure that your income is protected from significant taxation as you age. With adequate resources, you can maintain your quality of life well into your golden years.

Helping to Mitigate Business Taxes

Business and corporate taxes can be complex, especially if you are the owner of a sizable organization. Having someone by your side who understands the tax code can prevent excess taxation and protect your business assets.

A business tax consultant will also be familiar with relevant state tax laws, sales, and local taxes.

Even if your business is not complex, a tax consultant can assist you with navigating potential small business accounting tax issues. For example, a professional can help you ensure that your employees are paid in compliance with federal and state payroll tax laws. They can also assist in completing relevant tax forms for the IRS, such as your estimated taxes and yearly W-4 tax filings.

Preparing Your Personal Tax Returns

If you have a lot of investments, operate as a sole proprietor, or have complex personal tax matters, you can definitely benefit from the help of a tax consultant. 

Oftentimes, investments can result in net investment or capital gains taxes that can be arduous for someone without tax experience to deal with. Tax consultants can advise you about strategies to prevent excess taxation on these holdings.

If you operate as a sole proprietor or a freelancer, you may be unaware of tax deductions that you can use when preparing your tax returns. Engaging the services of someone who understands tax codes can help you to save money on your taxes and ensure that you remain compliant.

If you have questions on a specific situation, you are much better off in seeking the assistance of a qualified tax professional than trying to go it alone.

When Should I Get a Tax Advisor?

No one is immune to the need for tax consulting services. Anytime you have questions surrounding a tax situation, no matter how small it may be, it’s a good idea to seek the advice of a tax professional. 

At Xendoo, our tax advisors can help with a wide range of situations, including retirement planning, business entity setup, and preparing your taxes. Get in touch to learn more today.

a person filing their schedule C form

Filing Your Schedule C: A Simple Guide

A real estate records her numbers for the week on a laptop,

Are you a small business owner? If so, you may be looking for advice on filing your Schedule C. The IRS Schedule C is used by sole proprietors and single-owner LLCs to report your small business taxes and is part of your personal tax return.

We understand that business taxes can seem confusing, if not overwhelming. That’s why we’re here to help you with filing your Schedule C so you can stay in compliance and get back to business.

Is it Worth Filing a Schedule C?

As with other details surrounding your small business taxes, it’s unfortunately not a question of whether it’s “worth” filing your Schedule C. Schedule C is required for the following business types:

  • Single-owner LLC
  • Sole proprietor

The only other business type that might need Schedule C is when two married people organize a special type of partnership known as a Qualified Joint Venture. In this instance, the couple will use two Schedule C forms when filing small business taxes.

Using a Schedule C doesn’t exempt you from paying your quarterly estimated business taxes, of course. You’ll still need to make these regular estimated payments to avoid any penalties and fees when it comes time to file your return. 

Your Schedule C will help determine your actual tax debt for the year, and you can then see how it compares with your quarterly estimates.

Can I File a Schedule C By Itself?

By itself, a Schedule C will not count as an acceptable tax filing form. Instead, a Schedule C must be submitted along with your personal income taxes using Form 1040. Your Schedule C can be submitted electronically with your personal income tax or stapled to your paper form.

To understand this better, consider the way that small business taxes are typically handled. Sole proprietorships and single-owner LLCs are legally considered pass-through entities. 

This designation means that your business is not considered to be a taxable entity by itself. Instead, the profits from your business go directly to you, the owner. This passthrough means that you’ll report business income when you file your personal tax returns each year.

Your Schedule C, therefore, contains detailed information about your company’s financial performance for the relevant tax year, including:

  • Income
  • Expenses
  • Cost of goods/supplies

 This information will be used to calculate a net profit or loss, which will be recorded on Form 1040. Keep in mind that there is no minimum income requirement. All sole proprietors and single-owner LLCs will have to file Schedule C each tax year.

A banner advertising Xendoo's small business tax services. A young accountant smiles, with buttons for business & personal tax returns, tax consultations and preparations, and best-in-class support appearing next to her.

What Do I Need to File a Schedule C?

Filing your Schedule C isn’t complicated, though you’ll need some time to complete the details, as well as the information necessary to complete the forms properly. You can expect to need the following pieces of business data for your Schedule C:

  • Your business income statement for the tax year
  • Your company’s balance sheet for the tax year
  • Receipts for any and all business expenses
  • Inventory records (if applicable)
  • Mileage records

If you operate more than one business, you’ll need a separate Schedule C for each one. This setup isn’t terribly common, of course, but if you receive income from multiple side hustles, you’ll have to report for each using its own Schedule C.

How Do I Submit a Schedule C?

Ultimately, you’ll use Schedule C to calculate your net profit or loss for the year. Your net business profit will then be recorded on Form 1040 as personal income. Calculating these figures isn’t challenging, but it can be a bit intimidating if you’re not used to doing your own business tax preparation. We’ll walk you through each step.

Step One: Gather Information About Your Business

Start by gathering as much information as you can about your business. This step is all about data. You’ll want to have records about items such as:

 

  • Your business income for that tax year
  • Cost of goods sold
  • Any business expenses

Remember, you can calculate business expenses the same way you always would, including items such as office supplies, mileage, utilities, meals, and others. 

You won’t have to show supporting documentation when filing your Schedule C, though anytime you’re dealing with the IRS, you’ll want to make sure to have receipts, business documents, and any other paperwork to authenticate your earnings and expenses for the relevant tax year.

Step Two: Calculate Your Gross Profit and Income

Now that you have your information gathered, you can start filling out your Schedule C. Under section I, you’ll report your sales and the cost of goods sold. Your expenses can be reported under section II. 

But here, you’ll also calculate your gross profit from your business. To calculate your gross profit, you’ll first need to determine your net receipts. You can accomplish this through the following calculations:

  • Gross sales – returns and allowances = net receipts
  • Net receipts – the cost of goods sold = gross profit

Once you have your gross profit, you can simply add it to any other income you’ve received to calculate your total gross income.

Step Three: Deduct Your Business Expenses

Check your form, and you’ll see that deductible business expenses are listed on lines 8 through 27. These lines account for expenses such as:

  • Depletion
  • Depreciation
  • Section 179 expenses
  • Employee benefits
  • Insurance
  • Interest
  • Legal and professional fees
  • Office expenses
  • Meals
  • Rental of vehicles or equipment
  • Travel expenses
  • Office supplies and furniture
  • Utilities
  • Wages and employment costs (e.g., benefits, unemployment insurance)

The more deductions you take, the greater your profits will be. But before you start taking deductions, be aware that there may be some stipulations associated with certain categories or expenses. If you’re ever in doubt, ask a tax professional.

Step Four: Deduct Your Home Office

Many small business owners work from home. If that applies to you, you’ll have two options for reporting the expense associated with your home office.

Option A allows you to take a deduction based on the total square footage of your home. 

Using Form 8829, you’ll take the total area of your home, then determine the percentage occupied by your home office. So if your home is 1,000 square feet, and your office is 100 square feet, it occupies 10% of your home. This percentage can be included on line 30 of Schedule C.

Option B is simpler, allowing you to take a standard deduction on home business space up to 300 square feet. 

The IRS allows you to take a $5 deduction per square foot on this space, to a maximum of $1500. This amount will also be reported on line 30 of Schedule C, and there is no separate form to fill out.

Just remember that to take this deduction, your home office space must be devoted to the regular and exclusive use of your business; otherwise, you cannot legally qualify for this deduction.

Step Five: Provide Other Details About Your Deductions

After this, you’ll complete parts IV and V of Schedule C. These are primarily information sections. Part IV asks for information about your vehicle relating to driving frequency, mileage, etc.

Part V will allow you to provide any additional details about other expenses you may be deducting. The total will be recorded on line 27 of Schedule C.

Step Six: Calculate Your Net Profit

You’re now ready to calculate your net income. To do this, simply follow the following steps:

  • Enter your total expenses on Line 28
  • Subtract Line 28 from Line 7. This total will give you your tentative profit on Line 29
  • Subtract business expenses from your home (Line 30) to get net profit (Line 31)

Profit will be reported as personal income, but a business loss must be accounted for on lines 32a and 32b to determine your risk.

Step Seven: Add Schedule C to Form 1040

The net profit/loss from line 31 of Schedule C can now be recorded on Schedule 1, line 12 of Form 1040. You’ll then file Schedule C along with Form 1040 (and any other tax paperwork) when you file your personal income taxes.

Is a Schedule C the Same as a 1099?

A Schedule C is a very different form from a 1099. Form 1099 is used to indicate that a company has paid an employee as a contractor or independent employee. So if you employed these individuals during your tax year, you’ll be responsible for filling out Form 1099s and distributing them to these contractors.

However, Form 1099 may be necessary to fill out Schedule C. Any money you spent on employees would be classified as a business expense, and therefore should be included when filing your Schedule C.

Specifically, part II of your Schedule C will provide space for you to record business expenses, which would include any money you paid to contract employees in the past tax year.

Skip the Headache: Let the Experts Handle Your Schedule C

Filing your Schedule C isn’t difficult, but the easiest thing of all is to turn to professional tax services for all of your tax planning and preparation. Xendoo offers tax preparation for small business so that you can stay focused on your company and not on your tax obligations.

To learn more, simply click here to get started. Our free trial can show you how Xendoo’s innovative features can take the stress out of your tax preparation.

 

A phone with Venmo, Cash App, and Zelle.

Tax-Reporting Change for Venmo, Cash App, and Others

New Year, New Tax Requirements

Do you use apps like Zelle, Venmo, and Cash App to accept payments from customers? How are you reporting those earnings? In the past, although all business owners were required to report their earnings on their Federal Tax Returns, only those who received payments of $20,000 or more through payment apps also reported their earnings using Form 1099-K. Recently, that rule was changed and will affect a larger pool of business owners going forward.

Will this new rule apply to your business? Keep reading to find out! In this post, we will discuss the new requirement, and how Xendoo can help you stay on top of your tax compliance in this evolving landscape. 

Tax Reporting for Payments of $600 or More

Previously, the reporting threshold was much higher – $20,000 in gross payments, with at least 200 transactions in the current year. The update set a new minimum requirement for filing a Form 1099-K by third party payment apps: business owners who collect payments of $600 or more will now receive Form 1099-K from the payment apps they use, in order to disclose their mobile app earnings to the IRS. 

The new requirement went into effect on January 1, 2022, and will apply to 2022 taxes, which will be filed in 2023. 

Note: This requirement only applies to business-related transactions, not personal transactions. For example, reimbursements from roommates for their share of the rent and monetary gifts from loved ones would not qualify. The selling of personal items at a loss is also excluded, such as a bed purchased for $300 and sold for $100. 

The best accounting practice is to keep personal and business finances under separate accounts, in order to save time and avoid confusion while filing taxes. Consider creating distinct profiles for your business under the payment apps you use.

Do Payment App Users Have to Pay More Taxes?

Now that the reporting amount requirement has been lowered to $600, it is likely that you (and many other business owners) will receive Form 1099-K from the payment apps you use, to file with your Federal Tax Return in the 2023 tax season.

The good news is that this does not mean that business owners now owe additional taxes. The use of Form 1099-K is only a reporting method and an update to the threshold in existing tax laws. 

Adding yet another item to the tax season to-do list may feel overwhelming, but you do not have to handle it all on your own. Below, we will discuss how online bookkeeping and accounting services can help your business remain tax compliant!   

Tax Compliance Done for You 

Business owners deserve expert support as tax compliance rules change. In order to remain tax-ready throughout the year and maximize your return, consider partnering with an online accountant at Xendoo! They will provide: 

  • Online Bookkeeping: Tax savings begin with consistent bookkeeping, which provides the financial visibility needed to make informed, data-driven decisions, now and during tax season. 
  • Small Business Tax Services: Your online CPA will keep track of the changing small business tax regulations on your behalf, so you can focus on what you love – growing your business! They are available when you need them, all year long.    
  • Catch Up Bookkeeping: Are you behind on your bookkeeping? You are not alone! 25% of business owners are behind on their books. Whether you are behind a few months or years, Xendoo can bring your bookkeeping up-to-date, complete with a year-end financial package to prepare your business for tax season. 

Our services are designed to save small business owners time, stress, and money, so they can enjoy financial peace of mind, even when tax requirements change. Are we a fit for your business? Let’s chat! Click here to schedule your free consultation.