How to Manage Your Business Taxes Year-Round

Know which taxes apply to your business

Most businesses face income tax, self-employment tax or payroll taxes, and sales tax where applicable. Your entity type decides how and where you report.

The mix depends on your structure and activity.

• Income tax. Sole proprietors, single-member LLCs and partners report business profit on personal returns. C corporations file their own return and pay corporate tax.
• Self-employment tax. Owners who are not employees pay Social Security and Medicare tax on net earnings.
• Payroll taxes. If you have employees, you withhold and deposit taxes and pay the employer share. See how to do payroll.
• Sales and use tax. Collected from customers where your state requires it.
• Property, excise and local taxes. Depending on your assets and industry.

Our overviews of small business tax rates and business tax return forms list what to expect for each structure.

Keep clean books and separate accounts

Use a dedicated business bank account and record income and expenses every week. Clean books make filing faster and support every deduction.

Mixing personal and business spending is the most common source of tax headaches. Open a business checking account and use it for everything business-related. See how to open a business bank account.

Then keep up the routine:

1. Categorize transactions weekly in accounting software.
2. Save receipts digitally.
3. Reconcile your bank statements monthly. See bank reconciliation.
4. Run a profit and loss report each month.

If you do not have the time, consider hiring bookkeeping help. Read our bookkeeping guide for the basics.

Set aside tax money as you earn

Move a percentage of each deposit into a separate tax savings account. Your accountant can help you choose the right percentage for your income and state.

Tax money is not operating cash. Open a savings account just for taxes and transfer a set share whenever a customer pays. This habit avoids the shock of a large bill and a thin bank balance.

Illustrative example: if you net $8,000 in a month and your accountant suggests setting aside 25 percent, move $2,000 to the tax account right away. The right percentage depends on your profit, filing status, state and deductions.

For sales tax, hold the amount collected from customers separately. It belongs to the state. For payroll, deposit withheld taxes on schedule, since late deposits bring penalties.

Pay estimated taxes on schedule

If you expect to owe tax and nothing is withheld, the IRS generally expects quarterly estimated payments. Missing them can bring an underpayment penalty.

Self-employed owners and many pass-through business owners make estimated payments four times a year. Corporations have their own estimated tax rules. The due dates are set by the IRS and may shift for weekends and holidays, so check IRS.gov each year.

You can estimate based on this year's expected profit or follow the IRS safe harbor rules, which use last year's tax in certain cases. Ask your accountant which method suits your income pattern. Our guide on filing quarterly taxes gives step-by-step tips.

Many states have their own estimated tax schedule. Set reminders for both.

Track deductions and credits

Deduct ordinary and necessary business expenses and claim credits you qualify for. Keep records that show the business purpose of each item.

Common deductions include rent, supplies, software, insurance, advertising, professional fees, interest, vehicle costs and depreciation of equipment. Rules limit some items, such as meals and home office, and rules change, so confirm with your accountant. See small business tax deductions and depreciation.

Look at credits as well. Credits reduce tax directly. Our list of important small business tax credits shows what to ask about.

Interest on a business loan is generally deductible, but verify details. See are business loans tax deductible.

Build a tax calendar

List every federal, state and local deadline in one calendar with reminders ahead of each date. Missed deadlines create avoidable penalties.

Create a shared calendar with entries for:

• Payroll deposits and quarterly payroll returns
• Quarterly estimated tax payments
• Sales tax filings
• Annual information returns, such as W-2s and 1099s
• Your annual business income tax return or extension
• State and local filings and license renewals

Set reminders two weeks before each date and a second reminder a few days before. File extensions only if you need more time to file; an extension to file generally does not extend the time to pay.

Use our guide on what your accountant needs to prepare a checklist for year end.

Work with a pro and plan for a tax bill

A tax preparer or CPA can save more than their fee through planning. If a bill exceeds your cash, act before the due date.

Meet your accountant mid-year, not only at filing time. Ask about entity choice, retirement plans, equipment purchases and the timing of income and expenses. See how to hire a tax preparer.

If you owe more than you have, contact the IRS about payment options before the deadline, rather than ignoring the bill. Some owners consider a business loan to pay taxes, which only makes sense if the cost of borrowing is lower than the IRS penalties and interest. Read business loans to pay taxes and compare with working capital. ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue.