Whether a business is large or small, it still has to appropriately file taxes each and every year. However, small businesses often have unique needs that are tricky to address when compared to large companies. Smaller budgets, less people power, and limited resources can make filing difficult for small businesses. Fortunately, there are plenty of resources available to small business owners to make the process go a bit more smoothly.

Employment Tax

When it comes to ensuring that businesses remain compliant to tax code in regards to employees, there are a few key things that small business owners should keep in mind. First and foremost, employee documentation must be completed properly. Obtaining proper employee documentation is vital because it dictates tax withholding amounts and protects a business in the long run by providing a clear record of employee status classifications.

Additionally, obtaining the appropriate employee documentation helps small businesses to determine which staff and wages are taxable. Understanding what exactly defines an employee will keep small businesses compliant with tax code. For instance, if a small business has the right to direct or control a worker, they are considered taxable employees. Independent contractors are not taxable employees and are responsible for filing their own taxes each year.

It is also key that small businesses recognize that they must also pay the Federal Unemployment Tax (FUTA). This is not something that is withheld from employee wages and must come from the business’s funds. While FUTA is not withheld from employee wages, it is tied to an employee’s wages with its equivalent being 6.2% of the first $7,000 an employee earns per year.

Federal Tax Reform

Every year the tax code has the potential to change on the state level, and with an upcoming national election, it is likely that there will be federal tax reform in the next couple of years. With changes to the federal tax code comes questions of whether or not a business should change what type of entity it is classified as. For instance, corporations might want to move to a limited liability company (LLC) structure. Conversely, an LLC might want to incorporate. It can be hard to pin down exactly how tax code might change in the future, so it is best for small businesses to focus on the concrete tax code that exists today.

The Tax Cuts and Jobs Act that took effect in 2018 included a fantastic boon to small business owners in the 20% pass-through tax. This affects S-corps, LLCs, sole proprietorships, partnerships and other pass-through entities with incomes under $157,500 (or $315,000 if they are married and filing jointly). Additionally, there was an expansion to small businesses' ability to immediately deduct the cost of equipment now allowing for the deduction to be applied to used equipment.

Ultimately it is in a small business owner’s best interest to seek out and hire tax professionals to assist with their business tax filing. Tax professionals not only save a business time but also keep apprised of ever-changing tax law. It is always up to any given small business owner to determine whether they want to employ a tax professional to assist with filing, but those that do can rest easy when it comes to audit fears.

Self-Employed Entrepreneurs

Being self-employed has a lot of intrinsic benefits for many entrepreneurs. The ability to set one’s own schedule and to be completely in control of a business from top to bottom can be incredibly appealing to many. It is also hard to ignore the fact that the 20% pass-through tax credit most likely applies to self-employed individuals with only a few restrictions.

One disadvantage that comes with being self-employed is that it is exceptionally difficult to obtain a business loan. Banks are less likely to give business loans to those who are self-employed because of the inherent lack of assets that self-employed business owners have as leverage. While it is still possible to obtain an unsecured personal loan for individuals who are self-employed, the interest paid on these loans is not tax-deductible, whereas interest paid on business loans is deductible.

Being self-employed also comes with the inherent risk of not having the sort of regular income that someone who is employed through a business has. While this can wreak havoc on an individual’s personal finances — with some months paying incredibly well and others leaving them financially wanting — it also affects how their taxes work. Many individuals who are self-employed are required to pay estimated quarterly taxes which are based on the previous year’s earnings. If a self-employed person has a lean quarter, they might not be able to pay their estimated tax, incurring fines in the process.

Being a small business owner can be extremely fulfilling and simultaneously stressful in equal parts. Having the responsibility of an organization's tax filings set upon someone can seem crippling, but there are ways to make things easier. Doing one’s homework on employment tax, staying up to date on federal and state tax code, and ensuring you’re prepared for the unique tax situation you might face can make things move smoothly.