5 Common Small Business Tax Questions Answered

Your first year of business has come to an end. Congratulations, you made it! But this tax season isn't like others because you're not dealing with W-2 forms. There are multiple considerations and documents you'll need in order to correctly file your small business tax returns, depending on your business's filing status.

Whether you hire an accounting professional to oversee your taxes or opt to file on your own, preparing in advance can save you valuable time and money come tax time. We've rounded up the five most common small business tax questions to help diffuse your anxiety and be at the top of your game going into tax season.

What's an EIN and do I need one to file my taxes?

An Employer Identification Number (EIN) is a unique number assigned to a business that the IRS uses for tax administration purposes. You can file your tax return with your social security number if you're a sole proprietor. However, if your business is registered as an LLC, S-corp or C-corp, you'll need to file your taxes under an EIN. Don't have an EIN? Luckily, applying for one is a breeze. However, even if you are registered as a sole proprietor, getting an EIN can still be valuable and help protect your business against potential fraud or identity theft. 

Are all business expenses tax deductible?

The good news is almost all of your business expenses are tax-deductible, as long as you can justify the business purpose of the expense. Some expenses cannot be deducted because the IRS doesn't consider them legitimate business expenses (ex: gym memberships, political contributions, government fines and penalties). To learn more about what business expenses you cannot deduct from your tax return, head to the IRS website for a complete breakdown.

Should I itemize or claim the standard deduction?

First, let's define the difference between itemized and standard deductions. Itemized deductions are business expenses that can decrease the amount your business owes come tax time. There are dozens of expenses your business can potentially write off. On the flip side, the standard deduction is a fixed flat-rate deduction to your adjusted gross income. You can take one or the other, but you cannot claim both. 

But what deduction saves your business the most money? From 2017 to 2018, the standard deduction nearly doubled, making it harder to justify itemizing your deductions. In 2021, the standard deduction was $12,550 for single filers and $25,100 for married taxpayers. So if your standard deduction comes out to less than your itemized deductions, you'll save more money by itemizing. However, if the standard deduction ends up surpassing your itemized deductions, save yourself the time from itemizing your expenses and claim the standard deduction instead.

Still, if your business racked up a fair amount of startup expenses in its first year, it may be worth tallying up your itemized deductions to get the most out of the tax savings available to your business.

When do I have to issue a 1099-MISC form?

All businesses are required to issue a 1099-MISC form by January 31st to every contractor and freelancer who was paid $600 or more for their services. A contractor is anyone your business hires to complete a project or service that helps your company generate income. The contractor is not an employee and does not receive benefits from your company. Examples of contractors include social media consultants, copywriters, or videographers. You should also have your contractors complete a Form W-9 before paying them for their services. 

Should I hire a CPA or use tax preparation software to do my taxes?

If you're already using a bookkeeping software like Quickbooks or Wave to keep track of your revenue and business expenses, the software will also integrate with a tax preparation software like TurboTax. Depending on how much profit your business pulled in, this option can provide the most bang for your buck. Tax software makes filing accessible and convenient. 

However, while many small business owners manage to file their taxes every year without incident, you can still benefit from hiring a CPA. Your tax professional can save you time, optimize your tax returns and ensure your business stays compliant with the most up-to-date tax regulations. 

Preparation is key

Tax season can be a stressful time, especially for new business owners. But with a reliable action plan for tax filing, you can prepare like a pro and take it one task at a time. Brainstorm a list of everything you need to get done, develop a plan of attack, block out some time on your calendar, and get it done in phases.

Don't forget to stay in the loop on the most up-to-date tax code and laws to ensure you don't overlook any details. It's also a good practice to keep your forms organized and pencil in reminders for tax deadlines so you can be ready to file without any setbacks when the time comes.

Ash Czarnota