How Do Taxes Work for a Small Business?
This is part of our general Guide to Laws for Business Owners and Entrepreneurs.
All businesses must pay income taxes, which includes federal income tax, and may also include state and local income taxes. And if you sell any goods (even digital things like ebooks), you may be required to collect sales tax from your customers and send this to the government.
Let’s start with federal income tax for businesses.
As a small business, you actually must pay taxes 4-5 times per year, not just once! Your tax due dates depend on your tax treatment.
First, for federal (and some state) taxes, you must make payments each quarter (January, April, June, September) based on the estimated taxes you owe from the prior quarter.
|January 1 – March 31||April 15|
|April 1 – May 31||June 15|
|June 1 – August 31||September 15|
|September 1 – December 31||January 15 (following year)|
In addition, if you are treated as a “sole proprietor” (including a sole owner of an LLC that is not treated as an S corp) or corporation (not including S corp):
Your tax return for the prior year is due April 15.
If you are treated as a partnership, including an LLC with multiple owners, or an S corporation:
Your business tax return for the prior year is due March 15, and your personal tax return is due April 15.
Do my clients need to send me any tax forms at all?
Unless your business operates as a corporation, a client which paid you $600 or more within a calendar year for services for their business must send you a Form 1099-MISC (“1099”) by the following Jan 31 (but even if they don’t, you still must report the income on your taxes), and the client must file the 1099 with the IRS by Feb 28.
To help them fill out the 1099, your clients may ask you to fill out a W-9 form, which asks for your basic information, including social security number.
Do I need to send any tax forms for freelancers I hire?
Yes, you must send a 1099 to each freelancer who you paid $600 or more. Send the freelancer the 1099 by Jan 31, and send a copy to the IRS by Feb 28. Note: If you have “employees” (see who are employees vs independent contractors), you would generally withhold taxes from each paycheck, and send a W-2 the following year by Jan 31.
State and local income tax for businesses.
Depending on your state and city, you may have additional state and local tax requirements. Many states and/or localities require you to have a business license, which is how they collect taxes from businesses. But often there are exemptions for small business.
Do I need to charge my customers any sales tax for their purchases?
If your business sells any goods (even digital things like ebooks), you may be required to collect sales tax from your customers and send this to the government. If applicable, you would need to get a seller’s permit. This requirement varies by state and locality, so be sure to check with your state’s sales tax office.
In general, sales tax is based on where the purchaser or consumer lives, not where the business is. Many states now require online retailers to charge sales tax for all locations where the goods are shipped.1South Dakota v Wayfair However, these new requirements generally only apply to businesses that do a large amount of business. For example, if you have an e-commerce site based in New York, and you sell at least $500,000 worth of stuff to customers in California, you would have to collect and remit sales tax for California.2AB 147 (2019)
The previous rule was that you only needed to charge sales tax for purchases that are shipped to a state where you have any sort of “physical presence” such as a retail store, warehouse, office, or where the owners reside.3Quill Corp. v. North Dakota, 504 U.S. 298 (1992)