One of the biggest tax mistakes I see small business owners make is treating taxes as a once-a-year task instead of an ongoing part of running their business. I know how important it is for small business owners to understand their tax responsibilities, so in today’s post, I’ve laid it all out in a step-by-step tax guide that explains what needs done and how the pieces fit together.

What taxes does my small business need to pay?

Which taxes you’re responsible for paying depends on your business structure, location, income, and whether you have employees.

Most self-employed entrepreneurs need to consider 3 main categories:

• Federal Income Tax: calculated based on your taxable income, including business profits and other income
• Self-Employment Tax: Social Security and Medicare taxes paid on your net earnings
• Sales Tax: tax that applies to products and some services that the business owner collects from customers and sends to state or local government

In addition to these, you may also need to pay state income taxes, payroll taxes, and franchise taxes.

For income tax, the important thing to keep in mind is that your business revenue isn’t necessarily the amount you’ll pay taxes on. Your deductible expenses, filing status, other household income, and any other available tax deductions and credits will affect your final tax bill.

For example, if you’re a sole proprietor, and your business earns $85,000 in revenue and has $25,000 in deductible expenses, the business’ profit is $60,000. That profit flows through to your personal federal income tax return, so you may owe both income tax and self-employment tax on those earnings.

Which forms do I need to complete to do my small business taxes?

As I’ve explained, the taxes you pay depend on your business structure and other factors, so the forms you’ll need to complete and submit will also vary based on those factors. However, the table below includes the most common federal tax forms small business owners use.

Reminder: These are federal tax forms; don’t forget you’ll also owe state taxes, so you’ll need to make a list of state forms as well.

How do I know whether I need to collect sales tax?

Sales tax is one of the first things business owners should investigate, especially if you sell products online. You may need to collect sales tax if you sell physical products, digital products, or even certain services.

Sales tax rules vary by state, and some states treat digital downloads, online courses, design services, and other online products and services differently. For example, a photographer selling prints through an online shop may have different sales tax obligations than a designer who sells consulting services or even from another digital artist selling downloadable artwork.

You may also have sales tax obligations in states where you have nexus, which means you have a connection to the state, like a physical presence or sales over a certain amount. This is true even if you own a completely online business.

If you need help figuring out how to stay compliant with sales tax requirements, I have a complete post about sales tax for small business that walks you through everything you need to know.

One thing to remember here is that the sales tax you collect from customers isn’t part of your business’ income. You collect sales tax on behalf of the government, so you need a system in place to track that money separately and to make sure you don’t accidentally use that money to pay yourself or cover your business expenses.

What’s the difference between self-employment tax and income tax?

This is one of the biggest confusions for my clients who are just starting out as business owners. Although both self-employment taxes and income taxes may apply to your business profits, they aren’t the same.

Income tax applies to your taxable income while self-employment tax covers Social Security and Medicare taxes and only applies to your net earnings. You may also be able to deduct half of your self-employment tax from your adjusted gross income to help lower your federal income tax bill.

Do I need to pay quarterly estimated taxes?

When you’re self-employed, you’ll likely need to make tax payments throughout the year. These are called quarterly estimated tax payments. If you expect to owe at least $1,000 in federal taxes, you’ll need to calculate and pay estimated taxes.

To calculate how much you should pay quarterly, you can estimate your annual tax liability and divide it by 4. You can use your previous tax returns to help you with the estimate.

Estimated quarterly tax payments are typically due on January 15 (for the previous year), April 15, June 15, and September 15.

Which receipts and records do I need to have to file my small business taxes?

Before filing, you should:

• Reconcile your business bank and credit card accounts
• Organize your receipts
• Double check that you’ve recorded all of your income and expenses
• Update mileage logs if you have them
• Locate previous tax returns, estimated tax payment confirmations, and sales tax records
• Gather income documents like Form 1099s
• Use your bookkeeping software to generate a profit and loss statement for the tax year

You can also find a complete checklist in my previous blog post that answers the question What Records Do I Need to Keep for Taxes?

How much does my business need to make before I have to report it to the IRS?

You don’t necessarily need to earn thousands of dollars before you’re required to report business income to the IRS. If you’re self-employed and have net earnings of $400 or more, then you should be filing self-employment taxes, even if your total income is low.

It’s also important to understand that even if you don’t get a Form 1099 after performing work and getting paid, you’re still required to report that business income.

Is it worth it to hire a CPA to help me file my small business taxes?

You already know that my answer to this question is yes! Please just give me a minute to tell you why that’s my answer.

First of all, a CPA can help you do way more than just prepare your annual return. We can also help you identify potentially overlooked deductions, review your business structure, estimate quarterly payments, help you plan for major purchases, and evaluate tax-saving opportunities in all aspects of your business.

Many CPAs can also provide bookkeeping services or refer you to a service that can reconcile your accounts, track transactions, prepare financial statements, make quarterly tax payments, and file required tax forms.

Working with a CPA is the best way to ensure that you have the right advice and plan in place for your business. This is the best way to avoid expensive tax mistakes and to maximize your tax savings.

If you’re looking for answers and help from a CPA but aren’t quite sure if you’re ready to hire one, I’ve created a completely free online course for you. Know Your Worth® gives small business owners simple, clear guidance through easy-to-understand lessons and practical resources. You can check it out any time!

I also have lots of other free content for small business owners. If you’re just getting started figuring out your business taxes, I’d recommend these posts:

• Step-by-Step Instructions to Complete Your Schedule C
• Self-Employment Taxes Explained and Simplified
• Understanding Your Quarterly Estimated Tax Payments
• Tax Deductions vs. Tax Credits – and How to Use Both to Pay Less in Taxes
• Business Expenses vs. Tax Deductions: What Small Business Owners Need to Know
• Sales Tax for Small Businesses: What You Need to Know to Stay Compliant and Avoid Costly Mistakes
• What Records Do I Need to Keep to Do My Taxes? Tax Documentation Made Easy
• Top 5 Tax Questions from Small Business Owners
• How to Do Payroll for a Single Member S-Corporation