Making key financial decisions for your business is hard enough as it is, but money matters become increasingly complex when you start throwing in tax terminology and filing practices. But if you’re setting up an online business, it’s a good idea to speak to a professional accountant before submitting your small business taxes in America. That way, you can maximize your deductions, submit your documents on time, and avoid potential audits.
1. Most Small Businesses Pay Quarterly Taxes
If you expect to owe $1,000 more in taxes as a self-employed individual, or $500 or more as a corporation (C corp, S corp, and some LLCs), then you have to pay quarterly taxes. If it’s your first year doing business, you have to estimate your quarterly tax burden using Form 1040-ES.
Quarterly taxes are due on April 15th, June 15th, September 15th, and January 15th (of the following year) or the following Monday if the deadline falls on a Saturday or Sunday.
2. Small Business Taxes Start at 15.3%
All business owners start as sole proprietors unless they change their business structure. Sole proprietors are still classified as small businesses and are responsible for paying 15.3% plus income taxes. Small businesses must save a portion of their income for tax purposes.
3. You May Qualify for Small Business Tax Credits
Tax credits are offered as incentives for activities that benefit certain industries, employees, or society. Your business could qualify for dozens of credits, such as the New Markets Credit, Work Opportunity Credit, Disabled Access Credit, and Alternative Fuel Credit.
Many pandemic-based credits are still available. You should see if you qualify for the ERTC (Employee Retention Credit) and the Paid Leave Credit, as they can help your startup recover.
4. Take Advantage of Small Business Deductions
Small businesses can save even more money on taxes by taking advantage of deductions. Deductions cut your taxable income and become more valuable as your income rises. You can deduct most of your business expenses, charitable donations, and healthcare premiums.
5. Americans Have to Pay Income Tax Overseas
If you’re a sole proprietor (i.e., independent contractor or freelancer), you’ve likely considered moving to another country due to cost of living increases. Unfortunately, American citizens have to pay self-employment and income taxes overseas, even if their clients aren’t from the US.
You’ll have to give up your citizenship if you want to reduce your tax burden. Alternatively, you could change your business structure (to an LLC or S Corp) to keep more in your pocket.
6. You Must Claim All Income Reported to the IRS
Self-employed individuals and single-member LLCs will receive a Form 1099-NEC from their clients. While these small business structures don’t have to mail their own 1099-NEC to the IRS, they do need to match the income reported on these forms. Otherwise, you could get audited.
7. Business Plans Can Help You Estimate Your Taxes
Creating a business plan isn’t necessary if you’re a sole proprietor but is needed if you classify your business structure or if you need to acquire funding from a bank. Even in instances where you don’t have to draft a business plan, you should do it anyway if you want to save money.
For example, a business plan can determine if you have enough cash flow to contribute to your retirement fund (to reduce your tax burden) or if you should wait another year. You’d delay paying into your retirement fund if it would prevent you from paying your quarterly taxes in full.