Taxes

Answering the top 8 tax questions from small business owners

  • 4 min Read
  • November 29, 2021

Author

Escalon

Table of Contents

For small business owners, determining the firm’s tax liability requires staying on top of evolving IRS laws. But entrepreneurs’ manpower is limited as they must tend to other essential business processes that generate cash flow. Here, we provide answers to eight of the most common tax questions posed by small business owners.


Q1: How much and when do I need to pay federal income tax for my new business?



Answer:

If you are in business for yourself, you generally need to make estimated tax payments. Individuals, including sole proprietors, partners and S corporation shareholders, typically must make estimated quarterly tax payments if they expect to owe tax of $1,000 or more at the time their return is filed. 


To calculate and pay your estimated tax, individuals should use IRS Form 1040-ES. You will need to estimate the amount of income you project to earn for the year. 


Q2: When do I have to issue a Form 1099-MISC or Form 1099-NEC? 



Answer:

Businesses should now use the Form 1099-NEC for reporting independent contractor income, also referred to as nonemployee compensation, which by definition refers to individuals not on payroll but working on a contract basis to complete a project. Businesses submit this new form to report at least $600 paid for services provided by a person who is not an employee in tax year 2020 or later. (Note that prior to 2020, if your small business hired contracted work, you issued a 1099-MISC.)


Businesses that need to report at least $600 in miscellaneous compensation paid to a third party, such as rents, prizes and awards, and medical and health care payments, will use a Form 1099-MISC.


Q3: What are the tax rules for deducting business gifts?



Answer:

The IRS limits the deduction for business gifts to $25 per person per year, subject to certain limitations


Q4: I use my home for business. Can I deduct the expenses?



Answer:

If you have converted part of your home and use it regularly and exclusively for managing your business, you may be eligible for a home office deduction, regardless of whether you own or rent your home. There are two calculation methods for the home office deduction:


  • Using a standard $5 per square foot amount (up to a maximum of 300 square feet)
  • Using your actual expenses

Q5: Does a small company operating as a sole proprietorship need an employer identification number to file taxes?



Answer:

A sole proprietor who doesn’t have any employees and files any excise or pension plan tax returns don’t need an EIN. In this case, you can file your annual business tax return using your social security number. 


However, if you’re an LLC, an S-Corp or a C-Corp, you should file your business taxes with your EIN.  To be sure you need an EIN, or to apply for one, visit the IRS’ Do You Need an EIN? page. 


Q6: Can a married couple operate a business as a sole proprietorship, or do they need to be in a partnership?



Answer:

A sole proprietorship must be solely owned by one spouse, and the other spouse can work in the business as an employee. However, a married couple who jointly own and operate a trade or business may register their business as a qualified joint venture.


Q7: What business expenses can I deduct?



Answer:

Most reasonable and necessary business expenses are deductible, for example:


  • Technology and equipment and office supplies that keep the business functioning. 
  • Rent of office space.
  • Travel expenses of a business trip and business-related meetings or events.
  • Cost of uniforms and work clothes, mandatory for the job type or necessary for employees’ safety. You can also deduct their laundering and dry-cleaning expenses.
  • Health and retirement benefits.
  • Generally, business-related meal and dining expenditures are 50% deductible. However, Congress has authorized a temporary increase in deduction to 100% for amounts paid or incurred between December 31, 2020, and January 1, 2023, to help restaurants revive their businesses post-pandemic.

For further guidance, visit the IRS’ Deducting Business Expenses site.


Q8: Which is better for filing my taxes, software or outsourcing?



Answer:

  Tax preparation software tends to be budget-friendly and requires no appointments or interaction, but it isn’t necessarily always the best value. Outsourcing tax preparation to qualified experts may be optimal for busy entrepreneurs with complex tax situations. In many scenarios, the headache of knowing the latest tax policies, filing deadlines, deposit requirements and providing timely replies to queries is better handled by an outsourced tax provider.

Talk to our team today to learn how Escalon can help take your company to the next level.

  • Expertise you can trust

    Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.

  • Quality and consistency

    Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.

  • Scalability and Flexibility

    Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.

Contact Us Today!

Tap into the latest insights from experts in your industry

Small Businesses

The ROI of Outsourcing Business Services: How to Measure Your Investment’s Impact 

The ROI of Outsourcing Business Services: How to Measure Your Investment’s Impact  In a world where every dollar must count,...

Read More
People Management & HR

2025 Employment Law Updates: What to Know

As we step into 2025, businesses across the country face several important updates in labor laws and employee benefits. Staying...

Read More
Startups

5 Signs Your Startup Needs an Outsourced CFO  

5 Signs Your Startup Needs an Outsourced CFO   Startups often operate with lean teams, but as they grow, financial complexity...

Read More
Leadership & Growth

CG Startups: How to Keep Costs Low While Scaling Operations 

Consumer Goods Startups: How to Keep Costs Low While Scaling Operations  Scaling a consumer goods startup requires a careful balancing...

Read More
Press Releases

Escalon Expands Its Reach: Full Stack Finance and Early Growth Join Forces with Industry Leader 

Escalon Expands Its Reach: Full Stack Finance and Early Growth Join Forces with Industry Leader  In a strategic move that...

Read More
Taxes

Delaware Annual Review: What Series A-C Startups Must Know to Stay Compliant 

Delaware Annual Review: What Series A-C Startups Must Know to Stay Compliant  For startups incorporated in Delaware, staying compliant is...

Read More
Taxes

Tax Planning for Startups: Preparing for Your First Tax Filing

Tax Planning for Startups: Preparing for Your First Tax Filing as a Growing Business  For many startups, the first major...

Read More
Taxes

Unlock Tax Savings with the R&D Tax Credit

As a startup, managing cash flow and minimizing expenses are critical to your business's survival and growth. One often-overlooked opportunity...

Read More
Accounting & Finance

1099 Compliance for Early Stage Startups

1099 Compliance for Early Stage Startups As your startup grows from seed funding to Series A, B, or C, you’ll...

Read More