How to file Small Business Taxes, Types, and Deductions

Michael Clark

Owning a small business is rewarding, but it comes with responsibilities, including taxes. Small businesses typically face various types of taxes, such as income tax, self-employment tax, payroll tax, and sales tax. Your specific tax requirements will depend on factors like your business structure whether it’s a sole proprietorship, LLC, or S corporation the state you operate in, and whether you employ staff. Familiarizing yourself with these taxes can save you from costly penalties and help keep your business financially healthy.

Types of Small Businesses Taxes

Income Tax

Nearly all businesses must file an annual income tax return, but the rate and form depend on your business structure. Sole proprietorships, partnerships, and S corporations pass their income directly to the owner’s personal tax return, meaning profits are taxed at the individual level. In contrast, C corporations face double taxation, where income is taxed both at the corporate level and again when distributed as dividends to shareholders. Choosing the best structure for your business can help reduce income taxes and align with long-term goals.

Form 1040 Schedule C (Sole Proprietorships) Used by sole proprietors to report income and expenses.

Form 1065 (Partnerships) File by Partnerships to report income, deductions, and other tax information.

Form 1120 Used by C corporations to file separate corporate tax returns; the corporation pays taxes directly.

Form W-2 Issued to employees to report wages, withheld taxes, and other employment income details.

Form 1099-NEC Issued to contractors for reporting non-employee compensation.

Self-Employment Tax

For sole proprietors and partners, self-employment tax covers Social Security and Medicare, calculated at 15.3% of net earnings. Half of this tax is deductible, which helps reduce taxable income. Keeping precise records of income and expenses ensures an accurate self-employment tax calculation, and many small business owners find that working with a CPA or tax software helps them manage this responsibility effectively.

Payroll Tax

Businesses with employees must withhold federal and state taxes from their wages and cover additional employment taxes. This includes Social Security and Medicare contributions, which the employer matches. Payroll taxes require careful management, as errors can lead to penalties. Many business owners use accounting software to handle payroll taxes efficiently, ensuring they stay compliant with IRS regulations.

Excise Tax

Excise tax applies to specific products like fuel, tobacco, and alcohol, often paid by the manufacturer or retailer rather than the consumer. Small business owners selling these goods must ensure they comply with both state and federal excise tax requirements to avoid penalties. Many businesses include excise tax costs in their pricing to cover this expense, and working with a tax professional can help manage accurate tax payments.

Estimated Taxes

Employment tax covers Social Security, Medicare, and income tax withholding for employees. Employers must match contributions for Social Security and Medicare, which adds to payroll costs. Many small businesses use payroll software or services to handle employment tax, ensuring compliance and accurate records. Staying updated on tax rates helps business owners avoid errors and penalties.

Sales Tax

In most states, businesses must collect sales tax on goods and some services, then remit it to the state. Sales tax rates vary depending on location, with some municipalities adding additional rates on top of the state rate. Regularly setting aside the collected tax ensures you have funds ready when it’s time to remit, helping avoid last-minute shortages and penalties.

State and Local taxes for Small businesses

Property Tax: If your business owns real property or equipment, you may need to pay property tax. Local governments assess property values and apply tax rates that may vary each year. Property tax can significantly impact your budget, so planning for it in advance can help maintain cash flow, especially if rates increase.

Income tax: Nearly all businesses must file an annual income tax return, but the rate and form depend on your business structure. Sole proprietorships, partnerships, and S corporations pass their income directly to the owner’s personal tax return, meaning profits are taxed at the individual level. In contrast, C corporations face double taxation, where income is taxed both at the corporate level and again when distributed as dividends to shareholders. Choosing the best structure for your business can help reduce income taxes and align with long-term goals.