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.
