As a small business owner, you have lots of projects and moving parts. From developing and delivering your products or services to tweaking marketing strategies and providing excellent customer support, there’s always something demanding your attention. And then, there are taxes. Which are a huge responsibility. To make things easy for you, read on for small business taxes: what you need to know in 2025 and beyond. Learn about all things related to small business taxes, including different types of taxes, relevant forms, available deductions and credits, and the importance of filing extensions.
Small Business Tax Basics Every Entrepreneur Should Know
Whether you are starting out or an established entrepreneur, it is important to understand your business tax structure and requirements. Here is everything that you need to know about small business taxes in the US:
Different Types of Small Business Taxes
Depending on your location and the nature of your business, these are the main small business taxes to track and report:
1. Income Tax
Income tax is the fee charged on the total income your business generates within a specific time period. The tax is paid at both the federal and state levels, and the amount may depend upon your business structure (sole proprietorship, LLC, corporation, etc.).
2. Self-Employment Tax
Self-employment tax is a payment made by small business owners to cover Social Security and Medicare taxes. It is similar to the taxes withheld from the paychecks of regular employees. However, self-employed individuals are responsible for both the employee and employer portions.
The current self-employment tax rate is 15.3% divided as follows:
- 12.4% for Social Security
- 2.9% Medicare
2. Sales Tax
As a consumer, it’s never fun to pay sales tax. As an entrepreneur, it may be your responsibility to collect and then remit sales tax to the government. This Sales tax is a consumption tax imposed by the government on the sales of goods and services. It’s usually a percentage of the purchase price and is added to the final cost. As a small business owner, familiarize yourself with local sales tax laws and apply for a sales tax permit.
Four Most Relevant Small Business Tax Forms
Small business taxes are reported and document using various government forms. There are different tax authories, such as the IRS and local state taxes, so be sure to check for what is relevant for your small business. Some common examples include:
1. Form 1040 - ES
Form 1040-ES is used by business owners to pay estimated income tax throughout the year. It’s designed for taxpayers who don’t have taxes withheld from their income, such as those with self-employment income, interest, dividends, or rental income.
2. Form W2
Form W2 reports the annual wages of your employees along with the amount withheld from their paychecks (social security, insurance, or Medicare). These forms are submitted to the Internal Revenue Service (IRS) and the Social Security Administration (SSA).
3. Form 940
It is the annual Federal Unemployment Tax Return (FUTA) that employers use to report their federal unemployment tax liability to the IRS. This tax helps fund unemployment insurance programs that provide benefits to workers who have lost their jobs beyond their control.
4. Form 1120
Form 1120 is also known as the U.S. Corporation Income Tax Return. It is a comprehensive document that reports a corporation’s annual income, losses, credits, and deductions.
These are just a few examples of the many forms to report small business taxes. These will vary depending on your location, sector, and size of your business. For a better understanding of your tax obligations, consult an accountant or tax specialist for expert advice and guidance.
Documents You’ll Need for Tax Return
This is a basic checklist of the key documents you’ll generally need to file your small business taxes. The individual circumstances may vary on your business model or particular tax laws:
General Information:
This includes your company’s legal name, address, and Employer Identification Number (EIN).
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Income Statements:
- Maintain detailed records of all sales transactions, bank statements, income from various sources, and rental income records.
Deduction Documentation
Gather receipts, invoices, and other supporting documents for eligible deductions (e.g., medical expenses, charitable contributions, business expenses). Don't forget vehicle mileage, business use of home, and meals which could be used to reduce small business taxes.
Common Tax Deductions and Credits
To incentivize taxpayers and encourage fair tax collection, small business owners can claim certain tax deductions (lower the taxable income) and credits (directly reduce their tax liability) on their taxes.
Small businesses can claim different deductions regarding employee wages, office rent, utilities, travel expenses, office supplies, and advertising and marketing expenses. Businesses can also deduct a portion of the cost of long-term assets (like equipment and vehicles) over time, reflecting their wear and tear.
A tax credit is an amount directly deducted from the tax you owe. It can reduce the payable amount or decrease your refund. You may be eligible for credits based on various factors, such as your income level, having dependents, paying for higher education, investing in clean energy, or offering health insurance to your employees.
Filing Extensions
If you are unable to collect all the required information before the annual tax deadline, request an extension. This grants you an extra six months to submit your return. However, it doesn’t buy you more time to pay your taxes. Always estimate and pay your taxes on time to avoid any possible penalties.
Learn More About Small Business at The Hagstone Blog
Small business taxes are an important part being an entrepreneur. Failing to file or not disclosing everything to the tax authorities has huge consequences for entrepreneurs. From penalties to having a federal crime on your record, the risks are real. So put the systems in place to accurately record all business income and expenses. And file on time to avoid penalties and keep your small business in good standing.
If you are a service business owner navigating the complexities of operations, customer service, or finances, stay connected with The Hagstone Blog for continuous growth, inspiration, and industry updates.
