As a small business owner, you can handle the occasional logistical hiccup or headache like it’s no big deal. It’s basically part of your job description. In fact, the thrill of it all is probably part of the reason why you decided to pursue your own entrepreneurial ideas in the first place. You relish the challenge of doing it all yourself. You’re not just a businessman (or woman) — you’re a business, man.
There’s an impressive level of gutsiness associated with small business ownership, one that’s essential to your company’s growth. But research has shown that if there’s one aspect of the gig that intimidates you, it’s getting your shit together come tax season.
Can you do small business taxes yourself?
You sure can, but you may not want to. In the latest edition of its quadrennial survey Small Business Problems and Priorities, the National Federation of Independent Business found that four of the 10 “most severe” problems facing modern small business owners were related to doing taxes.
While the 2017 Tax Cuts and Jobs Act has made filing federal returns simpler these days, “many small-business owners still find current rates a burden,” the NFIB wrote, calling the complexity of tax compliance and the frequency of changes in tax laws “equally problematic.”
Let’s go out on a limb, then, and assume you’re like most small business owners in that you’re perturbed by the idea of doing your business taxes solo. Not only are you daunted by all the complicated paperwork involved and the potential of filing errors, but your busy schedule just doesn’t allow for that sort of drudgery. (Nine to 5 just doesn’t exist when you own your own business.)
Enter: tax prep software.
What is tax software?
Tax software is a type of computer program that guides users through the process of preparing and filing their annual returns, helping them comply with tax laws while identifying any relevant deductions and credits. It’s the closest thing you can get to hiring a tax advisor without actually splurging on a tax advisor.
Once sold primarily as physical CD-ROMs, the majority of tax software now exists in the form of digital, downloadable programs and mobile apps for on-the-go filing.
Can I file my business taxes with my personal taxes?
For some background, the U.S. Small Business Association’s Office of Advocacy says it “generally defines a small business as an independent business having fewer than 500 employees.” Whether you’re able to combine your business and personal taxes depends on how that business is structured: as sole proprietorship, as a partnership, or as a corporation.
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A sole proprietor is “someone who owns an unincorporated business by himself or herself,” according to the IRS, and they report their business income and expenses on a Schedule C and their self-employment tax on a Schedule SE (provided they’ve made at least $400 from their business). Both go with Form 1040, the standard individual tax filing form. TL;DR: You can file everything together.
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A partnership is defined as “the relationship between two or more people to do trade or business.” This kind of company is considered a “pass-through entity,” meaning its income and losses are “passed through” to its owners, and they’re not legally separate from it. In other words, the business itself doesn’t pay any taxes. It will still file Form 1065 to declare its financial info, though, as well as provide each owner with a Schedule K-1 form. The owners are responsible for reporting any income and losses from their share of their company on their personal tax return and can keep the K-1 for their records. TL;DR: You have to file stuff separately.
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A corporation is an entity that “conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders,” again per the IRS. A standard corporation (classified as a C corporation, or C-corp) is legally separate from its shareholders unlike sole proprietorships and partnerships. This is great because you get some personal liability protection, but not-so-great because you get taxed twice: The company itself pays corporate income taxes on its profits (filed using Form 1120), and each of the shareholders cough up personal income taxes on any dividends paid out. If you’re not a fan of that structure and you have less than 100 shareholders, you can file Form 2553 within 75 days of the start of the tax year to turn the business into an S-corp — that converts it to the same “pass-through” status as a partnership and spares it from federal corporate taxes. (The company then files Form 1120-S to report its financials, and each shareholder reports their income and losses with their individual return.) TL;DR: You have to file stuff separately.
FYI: These are all extremely basic, “explain like I’m five“-style descriptions of different business structures that don’t include every single tax form you’ll need for each situation; they’re mostly just to give you an idea of what you’re in for. Double-check with the IRS for more intel.
Ah, but what if you set up your small business as a limited liability company (LLC)? That legal status gets you the “pass-through” taxation of a sole proprietorship/partnership but the personal liability protection of a corporation (where you’re not responsible for any of the company’s debts). Single-member LLCs are typically treated as sole proprietorships for tax purposes, while multi-member or co-owned LLCS are taxed like partnerships. However, an LLC can also elect to be taxed like a corporation by filling out some paperwork. This usually happens when a company wants to woo investors, offer stock options, and/or access additional tax benefits.
Does my hobby count as a small business?
Whether you tuft colorful rugs or concoct candles in the shape of Shrek’s ass, there’s a good chance the IRS might consider your hobby a business. It mostly depends on why you do it.
If you’re doing something for funsies with no intention of making it your livelihood, it can remain just a hobby. You can still make some money off it, FYI, and if you report that on your 1040, it won’t be subject to the 15.3% self-employment tax so long as it’s under $400.
You wade into “business” territory — specifically small proprietorship territory — if it seems like you’re actively trying to make money off your hobby, which can include advertising and bookkeeping. (If it’s your entire livelihood, it’s definitely a business.) If this is the case, you’ll have file Schedules C and SE. On the plus side, you may be able to claim home office write-offs as a business owner. Hobbyists can’t.
What can small business owners write off on their taxes?
While we’re on the subject, small business owners can write off a ton of work-related expenses including rent, office supplies, office furniture, mileage, business meals, marketing, startup costs, moving expenses, utilities, education, child care, legal fees, and depreciation — anything that’s “both ordinary and necessary” to running your business, per the IRS. (Translation: Within reason.) QuickBooks, which is owned by TurboTax’s parent company Intuit, has the complete list for 2022 on its website.
Is it worth getting an accountant to do your taxes?
As you’ve probably gleaned from reading the previous paragraphs, filing taxes as a small business owner can be an extremely involved process. Sole proprietors who don’t have any employees and make less than $73,000 a year can probably make a free filing program work so long as it offers full support for Schedule C. (We like FreeTaxUSA.) But more paid premium software from companies like TurboTax and H&R Block are a much better bet for your standard small business return: They come with better features, simpler walkthroughs, accuracy guarantees, and on-demand support options if you run into issues. Budget for at least $105 for a federal return if you’re a sole proprietor, $125 for a federal return if you’re a corporation, partnership, or multi-member LLC, and $50 for a state return either way.
If you have especially complex taxes — say, you employ a bunch of independent contractors or fell behind on your bookkeeping — you might as well just pull the trigger on hiring a certified tax pro instead of relying on a computer program. It’s a way better value from a financial and administrative standpoint. This is also worth considering if you’re unfamiliar with some new tax laws, or this is your first year doing taxes as a small business owner; having one-on-one expert help right out of the gate might make you feel more confident filing solo later on.
For reference, the typical U.S. firm charges an average of $323 for an itemized Form 1040, $220 for a non-itemized Form 1040, $192 for Schedule C, $41 for Schedule SE, $733 for Form 1065, $913 for Form 1120, and $903 for Form 1120S, according to a National Society of Accountants survey. Most will also bill you for preparing employees’ W-2s ($69.75 on average) and having disorganized or incomplete files ($165.82 on average).
What’s the best tax software for small business owners?
Settle on the DIY route? Here’s a deeper dive into the small business-oriented software options we recommend for the 2023 tax season. (Note: All of the following were live in mid-2022.)
