Can I Do My Own Business Taxes for My Small Business?

As a small business owner, you are legally permitted to prepare and file your own business taxes. The process does not require a certified professional, but it demands organization, a clear understanding of your tax obligations, and attention to detail. Managing your own tax filing hinges on maintaining comprehensive records and navigating the requirements that correspond to your business’s structure.

Required Financial Documentation

Before any tax calculations can begin, gathering the correct financial documents is the first step.

• Profit and Loss (P&L) Statement: Also known as an income statement, this document summarizes your revenues and expenses over a specific period. The resulting net profit or loss figure is a foundational part of your tax return.
• Balance Sheet: This statement offers a snapshot of your business’s financial health, detailing your company’s assets, liabilities, and equity. For incorporated businesses, a balance sheet is often a required component of the tax return.
• Income Records: Comprehensive records of all income sources are necessary. These include copies of issued invoices, records of bank deposits, and any Forms 1099-MISC or 1099-K received from other businesses or payment networks.
• Categorized Expense Records: You must maintain organized proof for all business-related expenditures, supported by receipts and bank or credit card statements. Proper categorization for costs like office supplies, advertising, and utilities directly impacts your deductions.
• Asset Purchase Records: For investments in vehicles, machinery, or computer equipment, detailed records are needed. These should include the purchase date and total cost of each asset to properly calculate depreciation.
• Payroll Records: If you have employees, you must maintain summaries of all wages paid and documentation of the payroll taxes you have withheld and remitted. These taxes are reported on Form 941 or Form 944.

Tax Requirements Based on Business Entity

Your business’s legal structure determines your federal tax obligations and the specific forms you must file. The requirements vary significantly between different entity types, so identifying your classification is the first step in understanding your responsibilities.

For those operating as a sole proprietorship or a single-member limited liability company (LLC), the tax process is integrated with your personal finances. Business income and expenses are reported on Schedule C (Form 1040), Profit or Loss from Business, which is filed as part of your personal Form 1040 tax return. The net profit calculated on Schedule C is then subject to both regular income tax and self-employment taxes, which cover your Social Security and Medicare contributions.

Partnerships and multi-member LLCs must file Form 1065, U.S. Return of Partnership Income. This form is an informational return, meaning the partnership itself does not pay income tax. Instead, the profits or losses are “passed through” to the individual partners. The partnership provides each partner with a Schedule K-1, which details their specific share of the income, deductions, and credits that they then report on their personal tax returns.

An S corporation also functions as a pass-through entity and must file Form 1120-S, U.S. Income Tax Return for an S Corporation. Similar to a partnership, the S corporation does not pay federal income tax, as profits and losses are passed through to shareholders via a Schedule K-1. A distinction for S corporations is the treatment of owner compensation. Owners who work in the business must be paid a “reasonable salary” as employees, with payroll taxes withheld. Any remaining profits can be distributed to shareholders as dividends, which are not subject to self-employment taxes.

A C corporation is treated as a separate taxpayer from its owners. It is required to file Form 1120, U.S. Corporation Income Tax Return, and pay taxes on its profits at the corporate level. If the corporation then distributes its after-tax profits to shareholders as dividends, those shareholders must report the dividend income on their personal tax returns. This creates a situation referred to as “double taxation,” where earnings are taxed at both the corporate and individual levels.

Determining Your Business’s Taxable Income

The calculation of your business’s taxable income begins with your total revenue and subtracts allowable costs. The first step is to determine your gross income, which includes all revenue generated from the sale of products or services before any expenses are taken out.

If your business sells physical goods, the next step is to subtract the Cost of Goods Sold (COGS). COGS includes the direct costs attributable to the production or purchase of the goods you sell, such as raw materials and direct labor. The result of subtracting COGS from your gross income is your gross profit.

From your gross profit, you will then total all of your deductible business expenses. For an expense to be deductible, it must be both “ordinary,” meaning it is common and accepted in your trade or business, and “necessary,” meaning it is helpful and appropriate for your business. Common examples of deductible expenses include the home office deduction, vehicle mileage, office supplies, and business insurance premiums.

A deduction for large asset purchases is handled through depreciation. Instead of deducting the full cost of an asset in the year of purchase, depreciation allows you to spread that cost over the asset’s useful life. Methods like Section 179 expensing or bonus depreciation can allow for a larger upfront deduction in the first year. After totaling all business expenses and depreciation, you subtract this total from your gross profit to find your net profit, which is your taxable income.

Because you are not an employee having taxes withheld from a paycheck, the IRS requires most business owners to pay their income and self-employment taxes throughout the year. These estimated tax payments are based on your projected annual income and are necessary to avoid an underpayment penalty when you file your annual return.

The Process of Filing Your Business Tax Return

Once your taxable income is calculated, the final stage is filing your tax return. You must first choose a filing method, with the primary options being dedicated tax software, IRS Free File if your income qualifies, or manually completing and mailing paper forms.

If you e-file, tax software will guide you to enter your financial figures into the digital forms and includes an error-checking feature to identify mistakes before submission. To finalize the e-filing, you will need to provide bank account information for a refund direct deposit or a direct debit of taxes owed.

Tax payments can be made through an electronic funds withdrawal via your tax software or by using the IRS Direct Pay system online. You can also mail a paper check or money order with a Form 1040-V payment voucher.

After you have submitted your return electronically, you should receive a confirmation from the IRS, usually within 24 to 48 hours, indicating whether your return has been accepted or rejected. A rejection notice will include an error code explaining the reason, which must be corrected before you can resubmit. Save a complete copy of your filed tax return and all supporting documentation for your records, as the IRS has three years to initiate an audit.