Follow these four steps to help your small business forecast for tax season and develop a plan for paying your taxes.
Tax season will be here soon, and for many small business owners, determining the amount of taxes they’ll owe is a shot in the dark. But your tax liability doesn’t have to be a mystery.
If you get an early start and check all the right boxes, with help from your professional tax advisor, you can forecast appropriately for the taxes you’ll owe. That way, you’ll have time to make last-minute adjustments and prepare to pay the taxes owed.
Don’t procrastinate or avoid thinking about your tax liability. Instead, get proactive about taxes by following these four steps.
1. Determine the net income of your business for the year.
It’s impossible to figure out how much you owe in taxes without knowing how much your business earned for the tax year. Basically, you determine net income by calculating your business’ gross revenues and then subtracting business expenses.
Most businesses have an accounting system that can keep track of these figures for them. If you use an online accounting system and you’ve entered all income and expenses, the system will automatically provide you with a gross profit figure. If you use spreadsheets or another form of manual accounting, this step may take a little extra time—but take the time to do it now so you can forecast what you’ll owe before tax season gets here.
2. Determine whether your business is a pass-through entity, meaning business tax liability passes through to you, the owner.
Most small businesses are pass-through entities, which include sole proprietorships, LLCs and S corporations. If you aren’t sure which type of entity your business is, the IRS probably views it as a sole proprietorship, which is the default for businesses that haven’t filed paperwork as a corporation, partnership or LLC.
If your business does qualify as a pass-through entity, you may owe less in taxes for 2018. The Tax Cuts and Jobs Act, which went into effect in January 2018, allows a 20 percent tax deduction on qualified business income from pass-through businesses. Generally, the deduction is available to eligible taxpayers whose 2018 taxable income is below $315,000 for joint returns and $157,500 for individual filers, according to the IRS. Some types of pass-through businesses may not qualify for this deduction: The IRS regulations detail the limitations.
If your business is a pass-through entity, its taxable income must be reported on your personal income tax return and the amount you owe will depend on your personal income tax bracket. For 2018, personal tax brackets range from 10 percent (for individuals earning up to $9,525 and joint filers earning up to $19,050) to 37 percent for individuals earning more than $500,000 and joint filers earning more than $600,000.
2018 Income Tax Brackets
|Rate||Individuals||Married Filing Jointly|
|10%||Up to $9,525||Up to $19,050|
|12%||$9,526 to $38,700||$19,051 to $77,400|
|22%||$38,701 to $82,500||$77,401 to $165,000|
|24%||$82,501 to $157,500||$165,001 to $315,000|
|32%||$157,501 to $200,000||$315,001 to $400,000|
|35%||$200,001 to $500,000||$400,001 to $600,000|
|37%||over $500,000||over $600,000|
3. If your business is not a pass-through entity, it’s a C corporation and the new Tax Cuts and Jobs Act simplified taxes for you.
Most C corporations are larger businesses and don’t qualify as small businesses. However, if your business does operate as a C corporation, filing for taxes will be easier this year. Instead of the eight different tax brackets previously in place for C corporations, they now all pay a flat tax rate of 21 percent. C corporations will be taxed twice, at the business level and the shareholder level.
4. Remember other taxes you owe besides income taxes.
In addition to paying income tax, most businesses also have to pay employment taxes on wages paid to employees and to the owner (you). Employment taxes include Social Security, Medicare tax and federal unemployment tax (FUTA).
Social Security tax is 12.4 percent of all wages paid up to $128,400 in 2018, (increasing to wages paid up to $132,900 in 2019), with half paid by the employee and half paid by the employer. Medicare is equal to 2.9 percent of wages paid (3.8% on wages in excess of $200,000 ($250,000 for joint returns, $125,000 for married taxpayers filing a separate return), half paid by employee and half paid by employer. FUTA is generally equal to 6 percent of the first $7,000 of each employee’s wages, and is paid by the employer.
If you are a self-employed solo business owner, you’ll have to pay the total amount of your Social Security and Medicare taxes, since you don’t have a separate employer to pay half the tax for you. This is known as the “self-employment tax.”
How to pay your business taxes
Even if you believe you have a good idea about your tax liability for the year, it’s a good idea to sit down with your tax professional to make sure you’re not overlooking anything. He or she also can help you make sure you’re taking all the deductions and credits for which you qualify.
Once you’ve determined the amount you owe, it’s time to make a plan for actually paying the taxes. Ideally, you have been paying estimated taxes each quarter throughout the year and you’ll be able to pay the final estimate, along with any additional taxes due, by April 15, 2019.
If you have not paid estimated taxes, you will need to pay the full amount due by April 15. In addition, you may be required to pay a penalty for not sending in estimated tax payments throughout the year.
While nobody enjoys paying taxes, the ability to make payments online does make the process easy. Business owners can pay federal taxes online at the Electronic Federal Tax Payment System website. Simply set up an account, link it to your business checking account or credit card, and submit the amount you owe by the deadline.
After you’ve settled your 2018 tax bill, start planning ahead for 2019. By keeping a close watch on your business income and expenses on a monthly or quarterly basis, you can maintain a ballpark estimate of your tax liability and ensure that you’ll be prepared for it.
This article is intended for informational purposes only. Readers should consult their own financial advisers, attorneys or other tax advisors regarding any financial or tax strategies mentioned in this article.
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