Small Business Taxes 101

Business taxes share some commonalities with individual taxes. There are also some very important differences. As a person who owns and operates a small business, your personal and professional tax obligations will depend on a wide range of different factors, including the structure of your business. For example, with some businesses—such as a partnership or S-Corporations—income is taxed on a “pass-through” basis; whereas with other types of businesses—C-Corporations—, income is taxed as corporate income. Perhaps the most notable difference between business taxes and individual taxes is that businesses must pay taxes on their net income. In contrast, individuals are taxed on their taxable income. In effect, this means that businesses can (and should) deduct certain expenditures, such as the cost of goods sold, before they calculate their taxes. For small businesses, thorough and well-organized financial and business records can make tax season much less complicated.

Taxable income is defined as “any gross income earned that is used to calculate the amount of tax you owe.” In other words, the amount of tax that a small business owes will depend on its taxable income. The basis of taxable income is actual income. The more that a small business earns in income, the greater its tax liability is likely to be. Of course, the reality is not quite that straightforward. Small businesses can reduce their taxable income—thereby reducing their actual out-of-pocket tax liability—in a number of different ways. How do small businesses reduce taxable income? Common strategies include: 

1. Utilizing all available tax deductions; 
2. Taking advantage of all available tax credits; and
3. Make sensible, well-timed investments. 

It is no secret that taxes are complicated. Taking an illegal deduction or an improper tax credit is not a smart strategy to save money for your business. Instead, doing so could lead to serious penalties, including financial sanctions and, potentially, even personal liability. A tax advisor with experience providing professional guidance and advice to small businesses can help to ensure that your company takes advantage of all tax deductions, tax credits, and investment opportunities to effectively reduce taxable income.

Federal, state, and local business taxes are not optional. Small businesses are legally required to make timely, full payments to resolve their tax liability. What happens if you do not pay your business taxes? Your business will almost certainly face immediate collection efforts and enforcement action from the IRS or a state/local tax authority. As far as federal taxes are concerned, a small business that fails to file or pay taxes can expect to receive one or more of the following notices from the IRS: 

• CP 2566: IRS has not yet received your tax return and has calculated your tax liability—inclusive of penalties—on its own. 
• CP 504: The IRS believes that your business has an unpaid tax balance. The agency is providing a Notice of Intent to Levy if you do not resolve the matter.

What actually happens if you are late on your small business taxes? The short answer is that your company is likely going to face penalties—and potentially enforcement action—from the IRS. Here is an overview of the common penalties for not filing/paying business taxes on time: 

• Failure to File Penalty: To start, you must file your tax return in a timely manner. There is a penalty of five percent of the balance due for each month a return is not filed—up to a maximum total penalty of 25 percent of the balance due. Always file your small business tax return even if you cannot pay on time. 
• Failure to Pay: The IRS charges a 0.5 percent monthly penalty for each month that taxes are left unpaid. Once again, this specific penalty maxes out at 25 percent of the total balance due. Though, the more a business can pay, the lower the total penalty. 
• Interest: To be clear, those aforementioned penalties are not interest. The IRS will also charge interest on unpaid tax liability. The interest rate varies based on the federal interest rate at the time. There is no maximum cap on interest charged for unpaid taxes. 
• Enforcement Action: Beyond the financial penalties for not paying taxes, the IRS can take enforcement action against a small business. The IRS can garnish the wages of a delinquent taxpayer. This is especially important for self-employed small business owners. The IRS can also file a tax lien against real property or a tax levy against a bank account, including a business bank account. Finally, while less common, the IRS also has the power to pursue criminal tax fraud charges.

Yes—at least there can be depending on the type of business. As explained by the Internal Revenue Service (IRS), the tax deadline for certain businesses is actually one month prior to the tax deadline for individuals. For individuals, federal taxes are generally due on April 15th (April 18th in 2023 due to a holiday). However, the taxes for certain types of businesses are generally due on March 15th. Most notably, taxes are due a month earlier (March) for the following types of business entities: 

• Partnerships; 
• S-Corporations.

For sole proprietorships and single-member LLCs—the business categories that cover most self-employed people—the federal tax deadline is the same date as it is for individual taxpayers. For C-Corporations, the tax deadline will depend on their “calendar.” For C-Corporations with a traditional calendar, taxes are also due in April, on the same date as individual taxes. However, for C-Corporations that operate on a fiscal year (FY) calendar, taxes are due in June.