Small Business Taxes: 8 Common Questions Answered Ahead of Tax Season 2023
“The hardest thing in the world to understand is the income tax.” — Albert Einstein
When even geniuses like Einstein struggle to figure out taxes, it’s no wonder that regular humans like us feel stressed out about it!
If your taxes are keeping you up at night, keep reading. I’m answering some of the common questions small business owners have about taxes!
1. Should I pay taxes annually or quarterly?
When it comes to estimated tax payments, this is a common question among business owners. Do you need to pay your taxes every quarter or once a year? The simple answer is: It depends on how much tax you owe the IRS.
If you expect your total tax bill to be less than $1,000, you can make a single annual payment. However, if you expect to owe $1,000 or more in taxes, you need to make quarterly estimated tax payments.
What happens if your tax bill is more than $1,000 but you don’t make quarterly payments? IRS charges an Underpayment of Estimated Tax by Individuals Penalty if you miss a payment or don’t pay enough of your estimated tax.
Not sure how much you should pay for your quarterly estimated tax payments? Read more on our blog post All About Estimated Tax Payments or check out the IRS Tax Withholding Estimator. For more expert guidance and education, The Exceptional Business Membership is an excellent resource to walk you through getting your tax payments set up and running smoothly.
2. What is a valid tax deduction for businesses?
Deductions are a very important part of your tax return. They can significantly reduce your tax bill, so applying valid tax deductions in your business can make a huge difference.
An easy rule of thumb to gauge whether an expense can be considered a valid business deduction is to check if it is ordinary and necessary for your business.
The IRS defines “ordinary” as something that is commonly purchased in your industry. Office supplies, legal and professional fees, business education, training events, and workshops are some examples of ordinary deductions. Necessary purchases are expenses that are essential to be able to run your business or advance it in some way.
If your expense checks these two boxes, then you can include it as a valid business deduction on your tax return.
3. When is the tax deadline for 2023?
The general deadline to file federal income tax returns is April 18 for 2023.
4. Should I file a tax extension?
If the deadline to file your taxes is just around the corner and you realize you may not be able to get all your documents in order before then, you should definitely file for an extension. Doing so will give you an additional six months to file your tax return without a late filing penalty.
Some situations where you may consider filing for a tax extension include:
- If you are still trying to figure out or include additional deductions
- If your bookkeeping is not up-to-date
- If you are trying to figure out whether you have sufficient cash flow to make a retirement contribution
5. What do I do if my taxes are late?
If the deadline to file your taxes has passed and you have not filed your taxes yet, do it as soon as possible! This will prevent additional penalties and interest from accruing on your account.
If you have an extension, you may have additional time to file your taxes. However, keep in mind: Just because you have a tax extension on filing your returns does not mean you have an extension to pay your taxes!
The IRS still requires that you make payments on time (through quarterly estimated payments) even if you have additional time to file your return. If you fail to pay your taxes on time, the IRS will charge a penalty and interest on those outstanding payments.
6. What does an IRS audit mean for my business?
It may sound scary but an audit simply means that the IRS has chosen to investigate or do a deep dive into a particular aspect or theme of your tax return to ensure you have filed your tax return correctly.
There are different types of audits. The IRS could choose to look at your business income or certain expenses, or they may be trying to ascertain if your business qualifies as a business and not a hobby. Other audits could be related to claiming credits that do not apply to you or your business.
What happens if you get audited? You will probably receive a letter from the IRS requesting additional information, proof, or supporting documents depending on which area of your tax return they are assessing and more information on what your next steps should be. Learn more about IRS Audits here.
Keen to avoid getting audited? Look out for these 10 red flags when filing your taxes.
7. What should I do if I owe a balance?
There are three main options if you owe the IRS a balance.
- Pay in full
You can make a full payment of your outstanding balance to the IRS in several ways.
Direct Pay allows you to make a payment using your account number and the routing number of your bank. You can also set up scheduled payments for your estimated quarterly tax payments. You do not need to register in advance to use Direct Pay and there is no fee to set it up.
The second option is using the free Electronic Federal Tax Payment System® (EFTPS). You can pay any tax due to the IRS using this system and set up future payments as well. To use EFTPS, you must register your account and receive a PIN via mail to verify your identity.
Other options to make payments to the IRS are by check, mail order, debit or credit card, and even cash through selected IRS local offices. There are many avenues that you can make your payments to the IRS – simply choose the one that works best for you.
We recommend completing all payments online as this will give you a confirmation number that you can use to keep track of the payments you have made.
- Get an extension (short-term payment plan)
If you need more time to gather funds to make your payment to the IRS, getting an extension could work for you. The IRS offers a short-term payment plan option (make the full payment in 180 days or less) to individuals who owe less than $100,000 in combined tax, penalties, and interest. This can apply to sole proprietors and independent contractors. There is no fee for this service.
- Set up a payment plan
The IRS offers businesses the option of setting up a long-term payment plan (installment agreement) if you have filed all required returns and owe $25,000 or less in combined tax, penalties, and interest. There are different options to make monthly payments under this arrangement and fees differ accordingly. You can also make changes to the arrangements you have with the IRS as new payments become due.
Setting up a payment plan, whether short-term or long-term, allows you to ensure that the IRS does not take collection action on your account.
8. Who should I ask for help with my taxes?
Navigating taxes on your own as a small business owner can feel complicated, confusing, and overwhelming. Exceptional Tax Services can help!
Nacondra Moran, our CEO and tax specialist offers detailed and customized support for your business and guides you through every step of the process. If you are looking for more of a DIY option, check out The Exceptional Business Membership, which includes modules on preparing and filing taxes. Get the tax support you need with Exceptional Tax Services today – set up your free consultation call today!