Tax season is quickly approaching, and small businesses need to be prepared. The stakes are high, as failing to file taxes on time or accurately can cause penalties and interest.
To help you plan and file your 2023 taxes, we have co-authored this blog with Miles Brooks, the Director of Tax Strategy at CoinLedger, a global cryptocurrency tax solution.
This guide will walk you through everything you need to know to file taxes correctly and on time. We'll cover topics such as:
- Understanding your tax obligations as a business owner
- Gathering the necessary documentation
- Choosing the right softwares
- Tax filings on time
- Dealing with any tax-related problems
We also provide tips and tricks to help you save money on your taxes. So whether you're a seasoned small business owner or just starting, this guide is for you. By following these steps, you can ensure that you correctly file taxes, so you can focus on growing your business. So let's get started!
What is Tax Season for Businesses?
Tax season is a timeframe within a year when business owners across the U.S. diligently organize and prepare to file their income taxes for the preceding tax year. This period typically spans from January 1st to April 15th of every year.
All businesses, except partnerships, must submit their annual tax returns. The specific Form you should fill out depends on the organizational structure of your business. The business structure guidelines also determine the returns you must file regarding your entity.
Top Highlights of Tax Season 2023
Experts expect tax season 2023 to differ slightly from previous years because of a few changes in the tax code. Here are some key things to keep in mind:
- The 100% bonus depreciation amount is scheduled to be reduced every year. This means that businesses can write off the cost of assets in one shot, but the amount that can be written off will decrease over time.
- The standard deduction for individuals has been increased. This means that more individuals can itemize their deductions, which could save them money on their taxes.
- The child tax credit has been increased. This means that families with children will receive a more significant tax credit in 2023.
- The IRS is cracking down on businesses that fail to report their income correctly. If you need help with how to report your income, consult a tax professional to avoid any troubles with the IRS.
- The IRS is also increasing its focus on businesses that claim excessive deductions. If you're claiming deductions, keep good records to support your claims.
- The IRS is offering new tax incentives for businesses that invest in certain types of equipment. If you're planning to make any investments in equipment, be sure to check with the IRS to see if you qualify for any tax breaks.
Why Should Businesses Pay Heed to Tax Season?
- Timely payment of taxes ensures the financial stability of businesses. Getting familiar with the US tax filing deadlines is crucial for all businesses, as underpayment of taxes increases the likelihood of being targeted for a tax audit.
- The IRS is pulling up small businesses that do not report their income correctly. This includes businesses that fail to report all of their income or under-report their income. The IRS has many tools to identify businesses that are not reporting their income correctly, including data matching and audits.
- The IRS is also increasing its focus on businesses claiming excessive deductions it does not entitle them to. The IRS has several rules to prevent businesses from claiming excessive deductions, and they are becoming more aggressive in enforcing these rules.
- Business owners may be eligible for credits or deductions related to specific expenses. Many tax credits and deductions are available to small businesses, and the specific credits and deductions available will vary depending on the type of business and the expenses the business incurs.
- Failing to report income correctly or claiming excessive deductions can cause fines, penalties, and even potential legal action. The penalties for failing to report income correctly or claiming excessive deductions can be significant, and sometimes, businesses may even be subject to criminal prosecution. Thus, businesses should ensure that they report their income correctly and only claim the deductions they are entitled to.
Most Important Taxes Businesses Have to File in 2023
Businesses have various tax obligations they need to fulfill. Although there are five general types of business taxes, a company's most prevalent state and local tax obligations typically revolve around income and employment taxes. Below are the five taxes that businesses should file:
1. Income Tax
It is the most essential tax governments impose on the income earned by businesses operating within their jurisdiction. According to legal requirements, businesses must annually file income tax return to determine the amount they owe in taxes. The tax rates and regulations depend on the state and business structure. Form 1040 is the official document businesses use to file income tax.
2. Self-Employment Tax
The self-employment tax encompasses the employee's contribution and the employer's share of Social Security taxes and Medicare. This is because self-employed individuals fulfill both the role of an employer and an employee within their own business.
The self-employment tax rate for 2023 is 15.3%, and it is divided as follows:
- 12.4%: Social Security tax
- 2.9%: Medicare tax
Inevitably, every individual involved in a small business must fulfill their self-employment tax responsibilities. Employers and employees are required to fill out the W-2 Form. The W-2 Form is an essential document employers must provide to their employees and the IRS by the year's end. This Form outlines employees' annual wages and the specific amount of taxes withheld from their paychecks throughout the year.
3. Estimated Tax
Estimated tax refers to the taxes businesses must pay throughout the year based on their projected earnings and income. If you are a sole proprietor or partner, you must file estimated tax payments and anticipate owing $1,000 or more on your tax return.
Estimated quarterly breakdown of tax deadlines for 2023:
- January 17th 2023: Q4 2022 estimated taxes due
- April 18th 2023: Q1 2023 estimated taxes due
- June 15th 2023: Q2 2023 estimated taxes due
- September 15th 2023: Q3 2023 estimated taxes due
- January 16th 2023: Q4 2023 estimated taxes due
Note: If any due dates fall on a holiday, taxes will be due the next business day.
4. Excise Tax
Excise tax, or excise duty, is a form of taxation imposed on specific goods and services. Regarding excise tax, SMBs do not make direct payments to the government. Instead, the responsibility of paying taxes lies with business owners who sell excise items. If your business does any of the following, you might have to pay excise taxes:
- Environmental taxes
- Communication taxes
- Air transportation taxes
- Fuel taxes
- Retail (truck, trailers chassis and body, and tractor)
- Ship passenger taxes
- Manufacturer taxes (coal)
Note: Look at the IRS Excise Tax Overview for a complete list of goods and services where excise taxes apply.
5. Employment Tax
Employment taxes refers to various taxes deducted from an individual's paycheck. It is often synonymous with the FICA tax, which funds Medicare and Social Security. Employment tax is typically a fixed percentage applied to all taxpayers.
If your small business has employees, you have certain employment tax responsibilities. This is also known as Payroll tax.
Examples of employment taxes
- Social Security and Medicare tax: Employers must deduct Social Security and Medicare taxes from employee paychecks and pay a portion of these taxes independently.
- The Social Security tax rate is 12.4%, with 6.2% paid by employees and 6.2% paid by employers.
- The Medicare tax rate is 2.9%, with 1.45% paid by employees and 1.45% paid by employers.
- Federal income tax withholding: To file your federal and state taxes you must withhold income taxes from employee paychecks based on the W-4 allowances they claim.
- Federal unemployment tax: Employers pay a federal unemployment tax of 6% on each employee's first $7,000 income. State unemployment taxes may also be due, and the rates may vary.
What Do You Need to File Taxes?
The type of tax forms you’d need to know about, or file depends on your business structure. For instance, sole proprietors typically file Schedule C Form 1040, while corporations file Form 1120.
What Forms Do You Need to File Taxes for Businesses?
Most common IRS tax forms used to report small business taxes
- Schedule C (Form 1040): Report income for sole proprietors
- Schedule K-1: Report income for pass-through entities
- 1099-Misc: Report rental income or gross proceeds paid to attorneys
- 1099-NEC: Report non-employee compensation
- Form 1120: Report income for C corporations
- Form 1120-S: Report income for S corporations
- Form 1065: Report income for partnerships
- Form 720: Report excise taxes
- 2023 Tax Planning for Small Business: A CFO Guide
- Small Business Tax Deductions And Credits You Need to Know
2023 Tax Credits Business Owners Must Know
Before we begin, let's understand the difference between a tax credit and a tax deduction. This is because business owners often focus solely on tax deductions and ignore the potential to claim equally beneficial tax credits.
What’s the difference between a tax credit and a tax deduction?
Tax deductions reduce your taxable income, while tax credits reduce the amount of tax you owe.
For instance, a $500 tax credit is worth the same as a $500 deduction, but it's applied differently. A deduction lowers your taxable income, which could put you in a lower tax bracket and save you even more money. On the other hand, a tax credit is applied directly to the amount of tax you owe, so it's worth the same, no matter what your tax bracket is.
2023 Tax Credits Business Owners Should Know About
1. The Work Opportunity Tax Credit
Employers can claim a tax credit for hiring individuals from targeted groups, such as veterans. The amount of the credit depends on the category of worker hired, the wages paid, and the number of hours worked. For example, businesses that hire veterans can receive a credit of up to $2,400 for every new full-time hire.
2. Federal Research and Development Tax Credits
The Research and Development Tax Credit (R&D tax credit) was created in 1981 to encourage innovation in the United States. The credit is available to businesses of all sizes, including startups, and can offset both federal and state taxes. The R&D tax credit can also apply to various activities, not just traditional lab work.
For example, the credit can offset the costs of developing new products, processes and technologies, testing and validating new products, and improving existing products and processes.
3. Employee Retention Credit
Any employer who kept employees on payroll during COVID-19 can claim this tax credit. The credit is worth 50% of up to $10,000 in qualifying wages for each full-time employee in 2020. This tax credit has now increased to 70% of $10,000 in qualifying wages for each full-time employee (up to $21,000 credit for each employee) in 2021.
In addition to exploring tax credits at the federal level, small businesses can look into the hundreds of local and state credits available. Here are a few to begin with:
- Alternative Motor Vehicle Credit
- Empowerment Zone Employment Credit
- New Markets Credit
- Credit for Increasing Research Activities
- Plug-In Electric Drive Vehicle Credit
- Retirement Plans Startup Costs Tax Credit
- Health Coverage Tax Credit
How Can Businesses Prepare for Tax Season?
Like any other planning phase, finance teams must consider many factors to ensure they file taxes correctly and on time. From accurately reporting deductions and income to staying informed about recent developments in accounting laws, preparing for tax season can be a daunting task. A quick checklist enlisting all the important dates and tasks ahead of time is the best way to do your taxes accurately and on time.
5 Tips to Ensure Seamless Business Tax Filings
1. Organize all information
Organizing all your data and forms is paramount when preparing for the tax season. Ensure you manage all relevant documents, such as bank statements, in one location. Another effective way to stay on top of your business’s tax obligations is by diligently tracking your yearly expenses. Also, retaining receipts for significant purchases becomes useful as they can serve as tax deductions.
2. Have All Your Necessary Documents Ready
As the tax season looms, ensuring you're audit ready is crucial. Collecting and organizing every relevant document in advance is recommended to navigate this process effectively. These may include W-2s, bank statements, and 1099s. Employing a secure tax filing system to store your records is highly recommended. Opting for cloud-cased folders and encrypted drives provides a reliable location for all your information, as well.
3. Visit the IRS Website Regularly
A convenient option to access reliable and up-to-date information is visiting the official IRS website. With just a few simple clicks, you can find comprehensive instructions and forms that will assist you in accurately preparing your taxes. Regularly checking the website will also help you avoid any surprises during the tax filing process.
4. Consider Hiring an Accountant
Hiring an accountant can be highly beneficial if you need extra help and guidance with your taxes. An accountant can provide valuable support and advice, helping you navigate the complexities of the tax system. They can also offer insights on potential tax breaks and deductions that could benefit you.
5. Utilize a Tax Software
Using tax software is another viable option if you prefer a do-it-yourself approach. There are numerous user-friendly software applications available that can walk you through the tax filing process step-by-step. These programs often provide tips and guidance to help you maximize your deductions.
Best Tax Software for Businesses 2023
Tax season is always around the corner, so it's time you plan for your tax filings to stay ahead of the game. If you're looking for a tax software to file tax online, here are the top 5 tax software providing the best way to file taxes online in the US:
- H&R Block
1. H&R Block
The H&R Block tax software program caters to small business owners and offers an exceptional user experience. Whether the user opts for the downloaded software or the online version, they will benefit from the user-friendly interface that facilitates accurate tax filings right from the start. Reviews and ratings suggest it is the best way to file taxes online.
- Federal data is transferred to state returns quickly.
- Multimedia guidance keeps you updated on changing tax laws.
- Available as a stand-alone product when purchased with another stand-alone product like Basic.
Pricing: Custom pricing
Quick and trusted ratings & reviews:
- G2 - H&R Block At Home Premium & Business Reviews (Ratings: 4.2/5)
- Capterra - H&R Block Reviews (Ratings: 4.4/5)
Developed by Intuit, TurboTax is one of the most widely used tax software and service providers. It also mainly serves SMBs that file income tax return. Whether you prefer to handle your tax filings independently or seek varying degrees of support from tax specialists, TurboTax offers flexible options to accommodate your needs. It’s reviews and ratings across platforms also suggest it is the best way to do taxes for SMBs.
- TurboTax uses the latest tax laws and regulations and files taxes online correctly.
- It has various help and guidance features to ensure you file taxes accurately, including step-by-step instructions, a comprehensive library of help topics, and expert help from certified public accountants (CPAs) and tax attorneys.
- It offers a variety of pricing options to fit your budget, so you can find a plan that works for you.
Pricing: Custom pricing
Quick and trusted ratings & reviews:
If you are a small business owner, TaxAct is good as it serves as a mid-level US tax filing solution. TaxAct is slightly more affordable than the previous two options, although additional fees may apply to those seeking assistance from tax specialists. The software provides essential features like year-round tax support and a deduction maximizer.
- TaxAct is easy to use, even if it's your first time filing taxes .
- It uses the latest tax laws and regulations to ensure accurate tax filing.
- TaxAct can help you file tax returns for your business, including sole proprietorships, partnerships, LLCs, and S corporations.
- Free plan available, deluxe plan starts at $50.95
Quick and trusted ratings & reviews:
TaxSlayer is a good choice for self-employed individuals seeking tax software. It is affordable and is designed explicitly for business filers who receive 1099s.
- TaxSlayer is simple to learn and easy to use.
- It has various pricing options; and files taxes online for free if your tax situation is simple.
- Uses the latest tax laws and regulations with experts who regularly update the software.
- Free plan available; classic plan starts at $34.95.
Quick and trusted ratings & reviews:
Tax Season 2023 Questions Answered
Business Tax Filing 2023: Do It Yourself or Hire a Professional?
The Internal Revenue Service (IRS) oversees the federal tax system, while county, municipal and other taxes are administered by local taxing authorities. This means businesses and individuals must file taxes with the federal government and their local jurisdiction. While most individuals choose to enlist the help of tax preparers and accounting professionals to help file their business taxes, others prefer calculating their own tax returns.
Caution: Business owners can file taxes themselves, but outsourcing or hiring tax professionals is always best. These professionals understand the nuances of tax law that you may miss, and they can ensure that your tax returns are filed accurately and that you receive the maximum possible tax benefits.
How can Business Request Tax Extensions?
If you need more time to prepare your tax returns, request a tax extension with the IRS. When you file for a tax extension, it's important to note that you must still pay by the original tax filing deadline.
Although you may not have your exact total tax liability, estimate and submit the payment for the amount you expect to pay. Once you file your returns, you may need to make an additional payment or be eligible for a refund if you overpaid.
How Can Businesses Avoid Penalties From the IRS?
Payment due dates are also known as deposit dates. With businesses, payments are often required before tax filing dates. Both late tax filing and late payment result in penalties and fines.
All businesses should know the specific tax deadlines of their state. While April 15th is the customary deadline for filing tax returns, it is advisable not to postpone this task until the last minute.
When can you file taxes 2023?
You can begin filing your taxes for 2023 from January 23, 2023, Monday to April 18, 2023, Tuesday.
Is the US Tax Filing Deadline for 2023 Extended?
Yes, the US tax filing deadline for 2023 has been extended for taxpayers in Alabama, Georgia, and California due to recent natural disasters. The original deadline was April 18, 2023, but it was extended to May 15, 2023, for taxpayers in these areas. The Internal Revenue Service (IRS) has announced that it will further extend the deadline to October 16, 2023 for taxpayers in these areas.
When Will I Receive My Tax Refund for 2023?
The IRS states tax refunds will be distributed within 21 calendar days of US tax filing.
Key Tax Season Dates in 2023: When can you start filing taxes
- January 13th, 2023: IRS Free File opens
- January 17th, 2023: Due date for the tax year 2022 fourth quarter estimated tax payment.
- January 23rd, 2023: IRS begins 2023 tax season and starts accepting and processing individual 2022 tax returns.
- January 27th, 2023: Earned Income Tax Credit Awareness Day to raise awareness of valuable tax credits available to many people, including using prior-year income to qualify.
- April 18th, 2023: National due date to file a 2022 tax return or request an extension and pay the tax owed due to the Emancipation Day holiday in Washington, D.C.
- October 16th, 2023: Due date to file for those requesting an extension on their 2022 tax returns.
Get Updated with the 2024 Tax Season
As a small business owner, it’s crucial to familiarize yourself with the US tax filing deadlines at an early stage. Since taxes can be complicated, always prepare early and timely for the next tax season. Regularly check the IRS website for any updates and changes and to see what to expect over the following season.
This blog has been edited by Shruti Kesavan.