Most individuals give a small groan when January rolls around. It’s not just the tight clothes from too many Christmas cookies—it’s also the knowledge that taxes are now due, documents will be coming in the mail, notifications will be filling email boxes, and the yearly headache is once again upon us.
For small businesses, side hustles, and others who are working for themselves, taxes can be an even larger headache, especially for new Solo Hustlers. So let’s spend a little time cutting through the confusion with an easy to follow checklist and tips of what you need to complete for Uncle Sam.
Disclaimer: This checklist is meant to be a helpful place to start. Consult tax professionals to ensure that you and your business are in complete compliance with IRS rules.
In this blog we’ll discuss:
- Knowing when taxes are due
- Understand what kind of taxes must be paid
- Paperwork you need to have ready to correctly complete tax filings
- Tips for ways to save on taxes
Don’t Miss Deadlines
There’s a good reason why people hate paying taxes (besides the obvious… $$$). The IRS is notoriously onerous, confusing, contradictory, unforgiving, and, frankly, frightening. (They caught Capone!)
First things first—you MUST understand when taxes are due and you MUST understand that taxes for businesses and independent contractors are not the same as personal income tax. So let’s review the choices you need to make to properly file your taxes on time.
Understand Your Tax Year
Taxes can be paid by the calendar year (January > December) or fiscal year (any 12 month period ending on the last day of any month except December). You choose your tax year when you file your first tax return using either a calendar or fiscal year, and once chosen you must remain on that schedule unless you receive permission from the IRS to change it.
Choosing a tax year does NOT happen when you do any of the following:
- File an application for an extension of time to file an income tax return.
- File an application for an employer identification number.
- Pay estimated taxes for the current year.
Any entity may choose to use the calendar year for taxes, but if any of the following are true you must use the calendar year:
- You keep no books or records.
- You have no annual accounting period.
- Your present tax year does not qualify as a fiscal year.
- You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations.
Remember Other Deadlines
- Sole proprietorship and single member LLC businesses owe taxes on April 15—the same as individual income tax deadlines.
- S corporations or partnerships owe taxes on March 15.
- If you have been in business for any part of a calendar year, you will owe taxes for that year. Taxes are not deferred until the first full calendar year.
What Kind of Taxes Need To Be Paid
Sadly, the IRS does not simply collect “personal taxes” and “business taxes.” So let’s review the kinds of taxes you need to be prepared to file and pay.
Income Tax
Unless your business is a partnership, you must file an annual income tax return. Income tax is “pay as you go”—it must be paid as it is earned. Individuals working for employers have tax withheld from their paychecks, and end of year tax returns allow for remainders to be paid or overpayments to be refunded.
Estimated Tax
As a sole proprietor you may be required to pay estimated taxes throughout the year. (Consult a tax professional to determine when and how taxes must be paid throughout the year.) Estimated tax payments are generally required to be paid if you expect to owe tax of $1,000 or more when your return is filed.
Estimated taxes are due:
- January 1 to March 31 – April 15
- April 1 to May 31 – June 15
- June 1 to August 31 – September 15
- September 1 to December 31 – January 15 of the following year
Self-Employment Tax
Self-employment tax is a Social Security and Medicare tax for individuals who work for themselves. You must pay self-employment tax if your net earnings from self-employment were $400 or more.
Employment Taxes
If you have employees, you are responsible for employment tax that you must pay and forms you must file. Employment taxes include the following:
- Social security and Medicare taxes
- Federal income tax withholding
- Federal unemployment (FUTA) tax
Excise Tax
Excise taxes are due if you do any of the following:
- Manufacture or sell certain products
- Operate certain kinds of businesses
- Use various kinds of equipment, facilities, or products
- Receive payment for certain services
The types of excise taxes include the following:
- Environmental taxes
- Communications and air transportation taxes
- Fuel taxes
- Tax on the first retail sale of heavy trucks, trailers, and tractors
- Manufacturers taxes on the sale or use of a variety of different articles
Excise taxes can be complicated and we strongly recommend consulting a tax professional to determine if your solo business requires payment of any variations.
Quick Checklist
In summary, sole proprietorship businesses may owe the following taxes:
- Income tax
- Self-employment tax
- Estimated tax
- Social Security and Medicare taxes
- Federal unemployment tax
- Excise taxes
- Information returns for payments to contractors, etc.
Paperwork You Need To File Taxes
First, understand the forms you need. After confirming the types of taxes you will be required to pay with your tax professional, pull the forms you’ll need to correctly file those taxes. Common forms will include:
- Form 1040 and Schedule C for sole proprietorships to report business income and expenses
- Form 1120 for C corporations
- Form 1120-S for S corporations
- Form 1065 for partnerships, along with individual partner information on Schedule K-1
To accurately fill out the required forms, you must document expenses, income, payments to employees or contractors, etc. In general, this includes:
- Records of gross receipts from sales of goods or services
- Documentation of refunds or goods received in turn. IMPORTANT: This prevents you from paying taxes on income that you did not receive.
- Interest or investment income from financial accounts you own in the name of your business. (1099-INT or account statements)
- Documentation of payments made to independent contractors or employees (1099-NEC and W-2)
Decrease Your Owed Taxes
Small businesses are eligible for a wide variety of tax credits and deductions, but they must be properly documented. Retain the following paperwork to get the tax savings you deserve:
- Insurance payments
- Supplies
- Utilities
- Professional fees, don’t involve a lot of extra documentation.
- Home office deduction
- Transportation costs
- Meals and entertainment
- Small business health insurance
- Advertising
- Internet, fax, phone line costs
Consult your tax professional to ensure that all eligible deductions are accounted for, and don’t assume that your business is eligible for all deductions.
Hot Tip: Sec. 179
Section 179 of the IRS Tax Code allows businesses to write-off the cost of qualified equipment and software in the year that it was purchased. This can include machinery, equipment, vehicles, and software such as Solo Hustle. It can be used instead of capitalizing on depreciation of assets, which provides smaller deductions over a longer period of time. For small businesses starting out, this immediate deduction can make it far more affordable to access the tools and resources they need now to grow their business.
Conclusion
Staying on top of paperwork and keeping an eye on the calendar can ensure that paying taxes for your small business is relatively simple and painless. Using tools like Solo Hustle simplifies the process of keeping accurate records, including contractor payments and refunds, to lessen your tax liability and stay on the good side of the IRS.
For further questions, consult IRS resources.
