Filing Federal, State, and Local Taxes: What SMBs Need to Know

Due to the COVID-19 pandemic, the federal government has announced that personal taxes, normally due on April 15, received an automatic extension until May 17 for this year. The extra month can help individuals, small businesses, and pass-through businesses after a challenging year, but not all taxes are getting the relief. It will be important to understand what information you’ll need to gather to file correctly, and when it’s due.

Although the federal government has extended filing for 2021, states and local taxes may not have received an extension. Additionally, if your business already files quarterly tax returns and payments, the 2021 IRS extension did not apply to estimated tax payments due on April 15, 2021: these were still due on April 15. The extra time generally applies only to annual tax returns.

What you need to file taxes

Gathering the information necessary to file taxes is the first step in a return that’s timely and doesn’t trigger errors or audits. Throughout the year you should have been saving receipts, segregating earnings and payments, and keeping records of payroll and expenses. Start with the basics:

Business records 

Collect all the necessary paperwork before you file, then keep it with the return for 3 years after you’ve filed.

Detailed records are important to have and keep for 3 years following submission of your return. Collect all the necessary paperwork before you file, then keep it with the return for 3 years after you’ve filed. Your filing system doesn’t have to be elaborate — just keep the records together and accessible if you need to refer to them.

Here’s what you should have:

• Personal information
• Last year’s returns, if any
• EIN / SSN:  An Employee Identification Number (EIN) if you have one assigned by the IRS. If your small business doesn’t have an EIN, use your Social Security Number
• Earnings: payments, invoices, sales records, product/services sold
• Expenses: rent, utilities, supplies, payroll, benefits payments, mileage, other expenses

Find the right form

Depending on the type of business you run, there will be a different form to file with the IRS. They have a website that can guide you to the correct form for your business if you’re not confident of your status. For these businesses:

• Sole proprietor or LLC:  Form 1040, U.S. Individual Income Tax Return and Schedule C (Form 1040 or 1040-SR), Profit or Loss from Business
• Partnerships or LLCs with multiple partners: Form 1065, U.S. Return of Partnership Income
• C Corps or LLC that is a corporation Form 1120, U.S. Corporation Income Tax Return
• S Corporation Forms 1120S, U.S. Income Tax Return for an S Corporation and 1120S (Sch. K-1), Shareholder’s Share of Income, Deductions, Credits
• To report employee wages and earnings: Form W-2
• To report earnings for Independent Contractors: Form W-9

Fill out forms

Your next step will be to complete the form(s) for submission. Details matter! Make sure to fill out the form(s) completely and legibly. You’ll want to be sure to provide any supporting documents and receipts that are requested, keeping copies of everything for your own files. A frequent mistake is forgetting to sign the forms before sending them in. Don’t forget to date them, as well.

Pay attention to deadlines to make sure you’re filing on time. For some individuals and businesses, you can request an extension of up to 6 months to pay taxes. You’ll need to make estimated payments in the interim, but a request for an extension may be applicable. Form 7004 provides details on who is eligible for an extension and how to apply. The form must be submitted by the original deadline to be considered.

Make sure to fill out the form(s) completely and legibly. You’ll want to be sure to provide any supporting documents and receipts that are requested, keeping copies of everything for your own files.

How to file your businesses’ taxes

With the IRS

For federal taxes, most businesses and individuals can file electronically through the IRS E-file website. The site allows business to file taxes through midnight of the due date in most cases, and allows business to attach additional forms and schedules along with the return. A variety of forms are available as well as payment options at the IRS EFTPS – Electronic Federal Tax Payment System.

Through a third-party provider

If you’re not confident you’re filing all the right forms, taking all the right deductions and completing everything correctly, an accountant or CPA might be the right choice. Find a tax professional that is certified to make sure you’re hiring a competent, qualified preparer. As tax season peaks, appointments with these professionals may be difficult to schedule — make sure to contact them in advance to get your returns processed and submitted on time.

Use a software solution 

There are many software and SaaS providers that allow taxpayers to compile and submit their personal and business taxes online. Some offer assistance, others let preparers submit their returns independently. If you need assistance, these might be a good option. If you’re confident you’ve gotten your return done correctly, it’s just as easy to file directly with the IRS.

State and local taxes

In addition to federal taxes, there will be state, county, and even municipality tax forms  that will need to be filed and payments potentially made. Look to your state Department of Revenue’s website for detailed information on how to file for state taxes. They will frequently link to local and county tax revenue sites, as well. If you’re using a local third-party tax provider, they should have the appropriate forms to fill out and submit.

What happens if I’m late? 

Late filings and payments are seriously frowned upon by federal and state authorities. There may be penalties, late fees and interest added to your tax bill if you don’t file on time. These may be assessed and required in addition to the taxes you owe, so it’s important to file on time.

If you know you’re going to be late, file for an extension and submit an estimated payment of what you think you owe. You must file for the extension before the filing deadline. Filing on April 15 for a 6 month extension will give you until October 15 to file a complete return. This will give you time to:

• Do the paperwork
• Come up with the final, correct amount, and
• Submit it before the deadline

A 6 month extension should provide ample time to get the form and any full payments submitted.

Filing taxes on time and correctly is necessary for business. Compile all the information you need and make sure to set aside a block of time without interruptions or distractions so you can concentrate on getting them done right and submitted before the deadline.