The Basics of Filing Business Taxes and Reporting Income
While filing business taxes probably isn't your favorite part of running your company, it's an essential part of generating revenue and setting your operations up for success. Whether you need help with preparing your return for the first time or need a refresher of the key steps, there are some best practices you can implement to make tax filing easier and reduce the risk of making a costly mistake.
Income and expense tracking
The first step is to track your business income and expenses throughout the year. This way, you can calculate your profits when filing business taxes. As the owner, it's your responsibility to track and calculate this information properly. This can be a big change from the days when you were a W-2 employee and your employer's payroll service handled the work for you.
If you underestimate how much you earned and the IRS finds out, they could charge you interest and penalties on the unpaid amount, including a possible extra penalty for negligence. On the other hand, if you report too much income or miss out on deductions, you may end up overpaying your business income tax or need to hire an accountant to fix your mistake.
Bookkeeping best practices
Business bookkeeping is the system for recording your sales and expenses. Every time you have a transaction, record the date, a short description and the amount. This could include sales, bill payments, invoices, purchases and other transactions that lead to money coming in and out of your business.
The time when you recognize a transaction depends on the accounting system you picked when you first launched your business. If you use an accrual system, you recognize a transaction the day it happens, like sending a client an invoice. If you use a cash system, you recognize the transaction only when cash exchanges hand, so when the client pays the invoice.
You could handle your bookkeeping manually, using a journal, ledger or Excel. Alternatively, you could use bookkeeping software like QuickBooks or Wave. If you use a point-of-sale software system, many keep a ledger of transactions for you—a particularly helpful tool if you have high transaction volumes. These programs will help you track everything and have your information ready to go for filing business taxes.
Key tax forms and deadlines
During tax season, tally up your income and expenses to figure out your profit or loss for the year, which you report using a tax form. The forms and deadlines you need to follow depend on the type of business structure you're using.
- Sole proprietorship is covered under Schedule C, which allows you to report profit or loss from business under a sole proprietorship. It's due on April 15, along with your personal income tax return.
- Business partnerships must fill out a Form 1065 listing their incomes, profits and deductions. Each partner also receives a K-1 for their share of the income. The form is due on March 15.
- S-corporations fill out Form 1120-S, the US Income Tax Return for an S-corporation, plus a K-1 to each shareholder in the business. This form's deadline is March 15.
- C-corporations fill out Form 1120, the US Corporation Income Tax Return, due on April 15.
- LLC filings depend on whether you have a partnership, S-corp, C-corp or a sole proprietorship. For whichever structure you picked, follow its tax forms and deadlines.
Besides the business tax returns, you also need to report your share of the business profits as income on your personal tax return, due on April 15.
In your first year of doing business, you only owe business income tax when you file your return. But after that, you're expected to pay estimated taxes four times per year, based on what you think you'll owe. These deadlines are April 15, June 15, September 15 and January 15. To avoid interest and penalties, your estimated payments should add up to 100% of what you paid the year before, or at least 90% of what you end up owing for the year.
If you need more time to complete your return, you can request an extension. This delays your return deadline by 6 months. You're still supposed to have paid your taxes by the original deadline. The extension gives you more time to complete the forms.
Tax software can help you fill out these forms and calculate how much you owe. As a business owner, it could be a good investment to work with a tax professional. They can make sure you handle everything correctly, and their fees are usually tax-deductible.
Staying organized is the key to filing business taxes properly. By putting in a little work throughout the year, you can make your life easier come tax season.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.