How to File Small-Business Taxes in 2021

If you’ve never filed small-business taxes before, the process can feel overwhelming. And even if you have filed taxes before, 2020 was an unprecedented year that required a lot of extra paperwork for many small-business owners. If you don’t know where to start, our four-step guide on how to file business taxes has you covered.

Your taxpayer identification number (TIN) is your unique number that the government uses to identify your business. If you are a sole proprietor, then your tax number will be your social security number. If you are a registered business owner, in either a corporation or a partnership, then your TIN will be your employer identification number (EIN).

Accounting records include things like your income statements (also known as profit and loss statements), balance sheets, and payroll documents:

• Income statements show your gross and net income through the entire tax year. This statement will determine your taxable income after you’ve calculated your deductions.
• Balance sheets show your equity, assets, and liabilities. It will play an important role in filing your business tax return.
• Payroll documents provide exact insights into how much your business paid employees, contractors, and yourself over the previous tax year.

Again, if you use small-business accounting software, these documents will be super easy to generate. If you don’t use software, we recommend downloading a template. Alternatively, you can sign up for free accounting software to get all your accounts in order before filing taxes.

Every small business owner should have a separate bank account and credit card for their business. At the end of each calendar year, your financial institution will generate a year-end report that shows you exactly what you’ve spent throughout the year. You can use this report to double-check your own financial records and ensure you’re filing the right amount in taxes.

Paying taxes is painful, but tax deductions can soften the blow. What you can deduct depends on the type of business you run, though there are a few deductions nearly every business owner can claim every year. For more information, read through IRS Publication 535. It details business deductions and explains how to calculate them.

Business owners can deduct certain expenses related to the cost of owning and operating a vehicle for business purposes. While you can’t usually deduct the cost of commuting from home to work and back again, you can claim deductions based on mileage or on actual car expenses (gas, repairs, insurance, registration, etc.).

For the 2020 tax year, the mileage reimbursement rate is 57.5 cents a mile. If you didn’t track the exact number of miles you traveled for work this year, you’ll need to calculate actual car expenses instead. Where the IRS is concerned, you can’t just estimate how many miles you traveled for work—you need a firm, accurate number backed up with itemized receipts. IRS Publication 463 explains more about how to calculate and claim car expenses on your taxes.

Typically, if you rent an office space, you can deduct your rent payments. Similarly, if you have an in-home office, you can claim a deduction. However, the portion of your home you deduct must be used only for business purposes. If the room in your home serves any other purpose, you cannot claim it as a tax deduction. For instance, if you’re also using that home office to store your workout equipment, you can’t count it as a deduction.

Additionally, to deduct home office expenses, your home office must be either your business’s main location or where you meet with clients. If you work from home every few days and in an office the rest of the time, you can’t claim a home office deduction.

To calculate your home office deduction, you can use either the simplified method or regular method. For the first, you’ll deduct $5 for every square foot of your office (for a maximum of 300 feet). For the second, you’ll determine which percentage of your house you use for office space. It’s a little tricky, so check out IRS Publication 587 for more details.

In general, you can deduct 100% of the premiums on your small-business insurance coverage.

Small-business owners can register their business as a sole proprietorship, partnership, C corporation, S corporation, or limited liability company (LLC). Each entity pays taxes differently and uses different forms to file.

A sole proprietor is an exclusive, individual business owner. Sole proprietors are responsible for business debts, but they’re also entitled to all of their business’s profits. If you’re a freelancer or contract worker, you will file taxes as a sole proprietor.

Legally, sole proprietors aren’t viewed as distinct from their business. This means you’ll file an individual income tax form, Form 1040. You’ll also attach a Schedule C form, which reports on your business’s profits and loss over the last year.

A partnership is a business with multiple owners. The partnership itself doesn’t pay income tax—instead, the company profits go to each partner, and each partner then reports the income on their individual tax return using Form 1040. You’ll also submit a Schedule K-1, which lists your individual share of the partnership’s dividends and liabilities.

Note that Schedule K-1 is a part of Form 1065, which is the form that reports on your partnership’s profits and losses. While you need to file Schedule K-1 alongside your individual tax return, Form 1065 should be filed on behalf of the partnership as a whole. Typically, your partnership’s accountant will file Form 1065. If you don’t have an accountant, we recommend consulting one around tax time so you can ensure you’ve filed all the right tax forms.

If your partnership employs additional staff, you’ll also use Form 941 to cover quarterly employment taxes (such as Social Security, Medicare, and income tax withholding) and Form 940 to cover federal unemployment tax (FUTA).

Small-business owners can structure their business as a corporation if they want corporate taxation rates. The legal system recognizes a corporation as its own legal entity—meaning that, legally speaking, it’s independent from the owner(s). So if the business is sued, the owners’ assets aren’t on the line.

C corporations must file a corporate tax return using IRS Form 1120. S corporations will use Form 1120-S.

Just like partnerships, corporations are also responsible for filing quarterly employment taxes. Use Form 941 to pay the employer portion of your staff’s social security and Medicare taxes, as well as the income tax withholdings from each employee’s paycheck. Use Form 940 to file your federal unemployment (FUTA) tax.

Just like a corporation, an LLC is a separate and distinct legal entity from its owner or owners. Some business owners opt for this set up so that they aren’t personally liable for any business debts if the LLC struggles financially.

Depending on how you set up your LLC with the IRS, you might file business taxes as a corporation, a partnership, or a single-member LLC. An LLC taxed as a corporation uses Form 1120 to file taxes. If your LLC has multiple owners, it’s taxed just like a partnership: you file using Form 1065 and Schedule K-1. A single-member LLC pays taxes as if it were a sole proprietorship, meaning you use Schedule C to account for your tax payment and attach it to Form 1040.

No one wants to pay penalties to the IRS for missing deadlines, so it’s important you meet yours. While it shouldn’t take long to actually file your taxes, give yourself a week or two before the following deadlines to make sure you have all your records in order.

If you anticipate owing $1,000 or more on annual taxes, you are required to pay estimated taxes quarterly and file a tax return annually. This includes freelancers and many other sole proprietors.

Estimated quarterly taxes are due on the following dates:

• January 15, 2021
• April 15, 2021
• June 15, 2021
• September 15, 2021

Usually, April 15 is both the date your estimated taxes for the previous quarter are due and the day your annual tax-filing paperwork is due. However, the IRS has moved the individual tax-filing deadline for the 2020 tax year to May 17. The IRS hasn’t given too many additional details, so we recommend consulting with an accountant to learn more about when your quarterly taxes are due this year.

Tax season is undeniably stressful. But here’s the bright side: once you’ve checked off these four steps, you don’t need to worry about tax filing for an entire year. Good luck!

Are you filing taxes as an independent contractor? Read our contractor-specific tax-filing guide.

Disclaimer

At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.