Mid-year tax planning is essential for small business owners to stay compliant and avoid costly surprises like hefty fines or allegations of tax fraud at year-end. Use this checklist to ensure compliance and keep your tax strategy in check.
Did you know that 37% of small business owners[1] struggle with anxiety come tax time?
This anxiety often leads to serious issues: 32% of self-employed individuals[2] fail to report all their income to the IRS, and 36% don’t pay taxes at all!
So, what causes such widespread non-compliance with tax laws? There might be a number of reasons, but one common thread is a lack of knowledge about tax filing—many simply don’t know where to start or how to proceed.
As a small business owner, you don’t want to be part of these troubling statistics. By ignoring tax obligations, you risk incurring hefty fines or even facing accusations of tax fraud.
To stay compliant and on track for the rest of the year, this mid-year tax planning checklist is your essential guide.
1. Know your taxes
As a small business owner, understanding and fulfilling your tax obligations is not just a responsibility—it’s essential to your business’s compliance and success. Whether you’re running a sole proprietorship, partnership, S corporation, or C corporation, here are the main types of taxes you need to be aware of:
Income tax
Income taxes are based on the profits your business generates and are applicable at both the federal and state levels.
The way these taxes are handled can vary significantly depending on your business structure:
C Corporations: C corporations are subject to double taxation. This means that the corporation itself pays taxes on its earnings at a federal rate of 21%. Afterward, any dividends paid to shareholders are taxed again on the individual’s personal tax return.
Flow-through entities: For sole proprietorships, partnerships, and S corporations, known collectively as flow-through or pass-through entities, income taxes work differently. These businesses do not pay taxes at the corporate level. Instead, profits are passed directly to the owners and are reported on their personal tax returns. The tax rate you’ll pay is determined by your individual tax bracket.
State income taxes: Your business may also be liable for state income taxes, which can vary depending on where you operate and earn income. These taxes are often as complex as federal taxes, with requirements differing significantly from one state to another, and sometimes even between cities within the same state.
Estimated taxes
Estimated taxes are typically paid quarterly, and both C corporations and other forms of business entities need to plan these payments if they anticipate owing more than $500 in taxes for the year.
Who needs to pay estimated taxes?
C Corporations: If your C corporation expects to owe more than $500 in taxes, you must make estimated tax payments every quarter.
Other business structures: For sole proprietorships, partnerships, and S corporations, estimated tax payments are also required if you expect to owe more than $500 on your personal tax return.
Estimated tax deadlines for 2024
Marking these dates on your calendar helps ensure that you don’t miss any important deadlines:
| January 16, 2024 | Deadline for 2023 fourth quarter estimated taxes. |
| April 15, 2024 | Deadline for 2024 first quarter estimated taxes. |
| June 17, 2024 | Deadline for 2024 second quarter estimated taxes. |
| September 16, 2024 | Deadline for 2024 third quarter estimated taxes. |
| January 15, 2025 | Deadline for 2025 fourth quarter estimated taxes. |
It’s important to note that if any of these dates fall on a holiday or weekend, the due date is moved to the next business day. This adjustment ensures that you have every opportunity to meet your tax obligations without inconvenience.
Excise Taxes
Excise taxes are specialized taxes that apply to certain goods and services, and understanding whether these apply to your business is critical. If your business involves specific types of products or services, you might be required to pay excise taxes.
Here’s what you need to know about the types of activities that might incur these taxes:
Communication and air transportation taxes: These taxes are applicable if your business involves air transportation services or certain types of communication services.
Fuel tax: If your business deals in the selling or use of fuel, you are likely subject to federal and possibly state fuel taxes.
Retail tax: This applies to businesses that sell specific types of vehicles, such as trucks, trailers, semi-trailer chassis, and tractor bodies.
Ship passenger tax: If your business involves the transportation of passengers by water, this tax may apply to you.
Manufacturers taxes: For businesses involved in manufacturing or selling certain products, such as coal, excise taxes are also applicable.
Excise taxes are levied in addition to other types of taxes and can significantly affect your pricing and profitability. They are often embedded in the price of products or added at the point of sale, making it crucial for businesses to accurately calculate and collect these taxes to avoid underpayment penalties.
Employment taxes
Employment taxes are a critical component of your responsibilities as a small business owner with employees. Understanding and correctly handling these taxes is essential to ensure compliance with tax laws and to provide proper benefits to your employees.
Here’s a breakdown of the main types of employment taxes:
Social Security and Medicare tax (FICA)
Social Security tax: The current rate for Social Security is 12.4% of an employee’s income, split equally between the employer and the employee; each pays 6.2%.
Medicare tax: The rate for Medicare is 2.9%, also split equally with 1.45% paid by the employer and 1.45% paid by the employee.
As an employer, you are responsible for deducting these taxes from your employees’ paychecks and matching the same amount to contribute towards their Social Security and Medicare benefits.
Federal and state income tax withholding
You must withhold federal income tax from your employees’ earnings. The amount to withhold varies based on the individual W-4 form that each employee completes, which indicates their filing status and allowances.
Federal Unemployment Tax (FUTA)
The Federal Unemployment Tax Act (FUTA)[3] requires you to pay unemployment taxes at a rate of 6% on the first $7,000 earned by each employee annually. This tax is solely an employer tax; it is not deducted from employee wages.
State unemployment tax
In addition to FUTA, you are likely required to contribute to state unemployment taxes. The rates and wage bases for these taxes vary by state and can differ significantly from the federal unemployment tax.
Self-employment tax
Self-employment taxes are a crucial aspect for anyone operating as a sole proprietor or as an active partner in a business. These taxes fund your Social Security and Medicare benefits and are similar to the payroll tax deductions taken for employees of a business.
Self-employment tax rate
The total self-employment tax rate for 2024 is 15.3%, which encompasses:
- Social security tax: 12.4% of your earnings up to the applicable threshold.
- Medicare tax: 2.9% of your total earnings, with no upper limit.
As a self-employed individual, you are responsible for paying both the employee and employer portions of these taxes. This is because, from the perspective of the IRS, you are both the employer and the employee.
You must report income and pay self-employment taxes if your net earnings from self-employment exceed $400. This threshold is relatively low, so it encompasses most individuals who have significant self-employment income.
2. Understand the tax forms
For small business owners, knowing which tax forms to file is crucial for accurate and compliant tax reporting. The type of business structure you have determines the forms you will need to use to report your profits, losses, deductions, and credits to the IRS.
Here’s a guide to some of the most common IRS forms for small businesses:
Common IRS Forms for small business tax reporting
Form 1040 and related schedules Form 1040[4] is the standard U.S. individual income tax return, which many small business owners use to file their personal taxes. Accompanying this form, several schedules are particularly relevant:
- Schedule C[5]: For sole proprietors to report income or loss from a business.
- Schedule E[6]: Used to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs). This schedule is essential for reporting pass-through income from entities that issue Schedule K-1[7].
- Schedule SE[8]: Used to calculate self-employment tax owed on income from self-employment.
Form 1099
There are two versions of Form 1099. Make sure to understand the distinctions to avoid mistakes and use each form correctly for its intended purpose.
Read 1099-NEC vs 1099-MISC: Differences, deadlines, and how-to’s to learn more.
- Form 1099-MISC[9]: This form is used to report miscellaneous income such as rent, prizes and awards, medical and health care payments, and other various types of payments not covered by Form 1099-NEC. It’s essential for documenting a wide range of payments made during business operations that are not classified as non-employee compensation. Learn more about Form 1099 here.
- Form 1099-NEC[10]: Introduced specifically to report non-employee compensation. If you’ve paid independent contractors or freelancers more than $600 over the fiscal year, you’ll need to issue this form and file it with the IRS. This form is exclusively for reporting direct compensation for services performed by someone who is not an employee.
Form 1120[11]: The U.S. Corporate Income Tax Return, used by C corporations to report their income, gains, losses, deductions, and credits to determine their federal income tax liability.
Form 1120-S[12]: Used by S corporations to report their income, gains, losses, deductions, and credits. Unlike C corporations, S corporations pass these financial details directly to their shareholders through Schedule K-1. Shareholders then report their share of the corporation’s income and losses on their personal tax returns, typically using Schedule E of Form 1040.
Form 1065[13]: This form is an information return used by partnerships to report their financial results for the year. It does not itself calculate tax liability, but rather provides each partner with a Schedule K-1, detailing their share of the partnership’s income, deductions, and credits. Partners use this information to fill out Schedule E on their personal Form 1040 to report their share of pass-through income from the partnership.
Form 720[14]: Required for businesses that deal with excise-taxable goods or services. It’s used to report and pay the federal excise taxes you’ve collected.
Form 940[15]: Employers use this form to report their annual Federal Unemployment Tax Act (FUTA) tax.
Form 941[16]: This form is used by employers to report quarterly federal payroll taxes, including withheld income tax, Social Security, and Medicare taxes.
Form 944[17]: Designed for smaller employers to file and report annual federal tax returns instead of quarterly.
Form 2553[18]: Used by small businesses to elect to be treated as an S corporation for tax purposes.
Form 4562[19]: Used to report depreciation and amortization.
Form 7004[20]: An application for an automatic extension of time to file certain business income tax, information, and other returns.
Form SS-4[21]: Application for Employer Identification Number (EIN), used by entities to apply for a tax ID number.
Form 8829[22]: Used by individuals to calculate allowable expenses for business use of your home.
Form 8832[23]: Allows eligible entities to choose how they are classified for federal tax purposes.
Form W-2[24]: Employers issue this form to report an employee’s annual wages and the amount of taxes withheld from their paycheck.
Form W-3[25]: A summary page of all W-2 forms issued by the employer, sent to the Social Security Administration.
Form W-4[26]: Used by employees to indicate their tax situations to employers, which helps determine the correct amount of tax to withhold from their wages.
Form W-9: Request for Taxpayer Identification Number and Certification, used to provide correct taxpayer identification number to entities that must file information returns to the IRS.
Choosing the correct tax forms is more than a compliance issue; it’s about ensuring accurate tax calculations and taking advantage of all eligible deductions and credits. Incorrect or incomplete forms can lead to audits, penalties, and interest charges. Given the complexities involved, especially with pass-through entities and corporations, consulting with a professional can be beneficial to navigate the specifics related to your business structure.
3. Create a tax filing calendar
As a small business owner, keeping up with tax deadlines is crucial, not just for compliance, but also for maintaining healthy cash flow. It’s important to remember that the IRS does not look kindly on late submissions or payments.
To manage this effectively, consider setting up a tax calendar specifically for your business.
Here are the key tax deadlines for small businesses in 2024:
| January 31, 2024 | Deadline to distribute W-2s to employees and 1099s to independent contractors. Also, this is the last day to file these documents with the IRS. |
| February 28, 2024 | Deadline for businesses to file their information returns with forms 1099 or 1096. |
| March 15, 2024 | Partnerships, S corporations, and multi-member LLCs need to file their annual tax returns. |
| April 18, 2024 | Deadline for single-member LLCs, sole proprietors, and C corporations (on a standard calendar fiscal year) to file annual tax returns. |
| April 15, 2024 | Due date for the first quarter estimated tax payment. |
| June 17, 2024 | Second quarter estimated tax payment due. |
| September 16, 2024 | Third quarter estimated tax payment due, and also the deadline for partnerships, S corporations, and multi-member LLCs that received an extension to file their returns. |
| October 15, 2024 | Extended deadline for single-member LLCs, sole proprietors, and C corporations to file their returns. |
| January 15, 2025 | Fourth quarter estimated tax payment due. |
Should any of these dates fall on a weekend or holiday, the due date is moved to the next business day. This calendar can help you avoid penalties and keep your business running smoothly.
4. Be mindful of the paperwork
Filing taxes for your small business involves organizing a variety of forms and documents.
Here’s a comprehensive list of what you’ll need to gather to ensure a smooth filing process:
General tax preparation documents
Federal Tax ID Number (EIN): Essential for identifying your business on returns.
Social Security Number (SSN): Needed if the business is a sole proprietorship.
Previous Tax Returns: Keep the last three years of both state and federal returns accessible.
Business income tax documents
Accounting records: Including journals and ledgers that detail financial transactions.
Financial statements: Balance sheets and income statements that summarize your financial activities.
Supporting transaction documents: Such as bank deposit slips, account statements, paid and received invoices, checkbooks, and credit card statements.
Vehicle use documentation: Mileage logs and expenses if vehicles are used for business purposes.
Documents for business-related expenses
Receipts for supplies: For general office supplies.
Operational costs: Documents related to rent, utilities, and subscription services.
Travel and entertainment: Keep track of business-related travel and entertainment expenses.
Marketing and advertising: Receipts for any promotional activities.
Professional fees: Invoices from consultants, accountants, lawyers, etc.
Insurance policies: Documentation for all business-related insurance policies.
Equipment and asset depreciation: Include depreciation schedules.
Employment tax documents
W-9: For employee tax withholding.
I-9: Employment eligibility verification.
W-2: Wage and tax statement for each employee.
1099 Forms: For subcontractors and nonemployee compensation.
Documents for home office deductions
Home office size: Square footage of your office and total square footage of your home.
Home office costs: Mortgage interest or rent, utilities, and insurance.
This checklist covers the essential documents needed for various aspects of your business tax filing. Organizing these records ahead of time can greatly simplify your tax preparation and help avoid any potential issues with the IRS.
5. Keep a check of tax deductions and credits
Understanding and utilizing tax deductions and credits can significantly lower your small business tax bill. By deducting certain expenses and investments from your taxable income, you reduce the amount of tax you owe. Being aware of the tax breaks and credits applicable to your business is crucial for effective tax planning.
Small business tax deductions
Here are some key tax deductions that can benefit your small business:
- General business expenses, including operational costs necessary for running your business.
- Costs associated with promoting your business, including marketing materials and digital advertising.
- Fees paid for legal advice and services.
- Deductions for business-related vehicle use, calculated using the IRS mileage rate.
- Premiums paid for business insurance.
- Cost of renting office space or equipment.
- Interest paid on business loans or credit lines.
- Expenses for business communications.
- Deduction for the loss in value of business equipment or property over time.
- Wages, bonuses, and benefit costs for employees.
- Costs for professional development and training for you and your employees.
- Expenses for business meetings or client entertainment (subject to IRS limits).
- Fees paid for business licenses and regulatory permits.
Tax credits for small businesses
Tax credits directly reduce your tax liability and can be a major boon for small businesses. Some of the common credits include:
- Small employer health insurance premiums credit for businesses with fewer than 25 employees that provide health insurance.
- Investment credit for investments in specific assets like energy property, reforestation, or building rehabilitation.
- Disabled access credit for making your business accessible to persons with disabilities.
- Work opportunity credit for hiring individuals from certain target groups, such as veterans or ex-felons.
- Alternative motor vehicle credit for businesses using electric or hybrid vehicles.
- Paid family and medical leave credit for providing paid family and medical leave to employees.
For more detailed information on which tax credits may apply to your business, the IRS’s Business Tax Credits page[28] can provide valuable guidance.
6. Know your options in case you miss a deadline
If you find that your tax situation is complex or if you’re unable to gather all necessary documents by the standard deadline, you might consider requesting a filing extension. This can provide additional time to ensure your tax return is accurate and complete.
How to request an extension?
Use Form 7004[29].
This form is specifically designed for businesses to request an automatic six-month extension to file their income tax returns. It’s important to submit this form by the original due date of your return to avoid penalties.
Important considerations
Extension to file, not to pay: It’s crucial to understand that an extension to file your taxes does not equate to an extension to pay any taxes owed. You are still required to estimate and pay any taxes you owe by the original deadline to avoid interest and penalties.
Keep up with estimated tax payments: If you make quarterly estimated tax payments, continue to do so throughout the extension period. Falling behind on these payments can lead to fines and complicate your financial situation.
If you face difficulties in meeting your tax obligations on time, it’s advisable to proactively contact the IRS to discuss available options, such as setting up a payment plan. The IRS is often willing to work with taxpayers, especially if they communicate their challenges early. Always ensure that while you take extra time to file, your payments are made promptly to maintain compliance and avoid unnecessary penalties.
The bottom line
Tax planning plays a crucial role in keeping your business on track and saving money. But to effectively plan for taxes, you need a solid foundation which is provided by accurate bookkeeping. Proper bookkeeping ensures your financial records are well-organized and ready for tax season, helping you avoid costly mistakes.
However, with so much on your plate, managing both bookkeeping and taxes can feel overwhelming. That’s where CoCountant steps in. Our bookkeeping services keep your records up-to-date, while our tax filing and advisory services guide you through the complexities of tax laws, ensuring you stay compliant while maximizing your savings.
Whether it’s federal, state, or local taxes, or income, sales, or use taxes, we manage it all.
FAQs
What is the mid-year tax review?
A mid-year tax review is an evaluation of your financial and tax situation halfway through the year. This review helps you assess your current tax liabilities, identify any changes in income or expenses, and adjust your tax strategies accordingly. It’s an opportunity to ensure that you’re on track with your tax planning and make necessary adjustments to avoid surprises when filing your taxes.
How do I plan my business taxes?
Planning your business taxes involves several steps:
- Review your income, expenses, and any significant financial events that might impact your tax obligations.
- Calculate your expected taxes based on your current earnings and business activities.
- Identify any available tax deductions or credits that can reduce your tax burden.
- If applicable, ensure you’re making timely estimated tax payments to avoid penalties.
- Get advice on optimizing your tax strategy, especially if there are changes in tax laws or your business structure.
What does tax planning start with?
Tax planning starts with a thorough review of your financial situation. This includes analyzing your income, expenses, assets, and any changes in your financial circumstances. The goal is to identify potential tax liabilities and opportunities to reduce your tax burden. From there, you can develop a strategy to manage your taxes throughout the year.
What does a mid-year review look like?
A mid-year review typically involves:
- Checking your income, expenses, and cash flow to see if they align with your goals.
- Ensuring that your tax withholdings or estimated payments are on track.
- Making changes to your tax plan based on the first half of the year’s performance, such as increasing retirement contributions or adjusting quarterly payments.
- Revisiting and possibly revising your financial and tax goals for the remainder of the year.
Why is mid-year tax planning important?
Mid-year tax planning is crucial because it allows you to evaluate your current financial situation and make necessary adjustments before the year-end rush. By assessing your income, expenses, and tax obligations now, you can implement strategies that optimize your tax situation, potentially reducing what you owe or ensuring you receive an appropriate refund.
What should I do if I received a large tax refund or owed a lot of taxes last year?
If you received a large tax refund or owed a significant amount of taxes last year, mid-year is a good time to adjust your withholdings or estimated tax payments. This can help you avoid a big refund or a large tax bill next year by ensuring your tax payments are more aligned with your actual tax liability.
When is the best time to start tax planning for the next year?
While tax planning is often done in the fall, starting your planning mid-year is highly beneficial. By beginning the process now, you have more time to implement tax strategies, such as Roth conversions or managing capital gains, rather than scrambling to make changes in the final weeks of the year.
Why is summer a good time for tax planning?
Summer is a great time for tax planning because it’s typically a less hectic period compared to the end of the year. You have a clearer picture of your income and financial situation for the year, and there’s still ample time to make informed decisions that will positively impact your tax return.
What are some key tax strategies to consider mid-year?
Mid-year is an excellent time to consider strategies like Roth conversions, addressing capital gains, adjusting withholdings, and maximizing deductions. These steps can help you optimize your tax situation and avoid last-minute stress during tax season.
Why should I consider meeting with a tax professional during the summer?
Meeting with a tax professional during the summer allows you to get ahead of your tax planning, giving you more time to implement strategies and avoid the rush of year-end tax preparation. It’s an opportunity to make wise financial decisions with the guidance of an expert, ensuring you’re on track for the upcoming tax season.
