How Business Tax Refunds Work
The secret to getting a business tax refund is to pay the Internal Revenue Service (IRS) more during the year than your total tax bill. You must be able to estimate the amount of tax you might owe during the year and pay that amount plus more. Your business income is just a part of total taxable income for most business owners, so they must factor in all income sources. This means adding estimated business income and self-employment tax (for Social Security and Medicare benefits) to other income to get a total of all income and taxes due.
Pass-Through Businesses
Most small businesses pay their business income tax through their personal tax return. Sole proprietors and one-owner LLCs complete a Schedule C - Profit and Loss for Business as part of the owner’s Form 1040. Partners in partnerships, owners of multiple-member LLCs, and S corporation owners also have their share of business income included on their personal tax returns. The partnership or LLC files an information tax return, and the owners are given a Schedule K-1 form showing their share of the income.
Corporations
You might pay tax on your income in one of two ways if you’re the owner of a corporation. Corporate owners are shareholders who receive dividends paid out by the corporation. Dividends are taxed to shareholders when they’re received. If you work for the corporation as an employee, you are taxed on your annual earnings in the same way as other employees. The corporation itself also pays income taxes.
Ways To Increase Your Chances of a Business Tax Refund
You can incease your chances of getting a business tax refund by taking advantage of some tax-cutting strategies.
Take a Deduction for Startup Costs
If you started a business during the year, you may be able to take some additional tax deductions for your startup expenses. The IRS considers start-up costs as capital expenses, which means they must be spread out over several years. But you can deduct some expenses in the first year: up to $5,000 of startup costs and up to $5,000 of organization expenses (paying an attorney to create your business documents, for example).
Make Estimated Tax Payments
Because business owners don’t have income taxes withheld during the year, they must pay their income tax bill periodically during the year through estimated taxes. The due dates for estimated quarterly tax payments are usually April 15, June 15, Sept. 15, and Jan. 15 of the following year. Calculate your estimated business net income for the year and add self-employment taxes on this income to get a total of your expected business tax liability for the year. Then make quarterly estimated payments through the IRS Payments service. It’s not a good idea to skip paying estimated taxes and wait until tax time to pay. The IRS can charge you fines and penalties for underpayment.
Adjust Withholding from Employment
If you own a small business and you (or your spouse) have income from work as an employee, you may be able to adjust the withholding on this wage income to have more taxes taken out during the year. Use Form W-4, Step 4(a) to increase your enter the additional amount withheld.
Take Advantage of the Qualified Business Income Deduction
Another way to increase your deductions as a small business owner is to take advantage of the Qualified Business Income (QBI) deduction. Business owners (not corporations) can get an additional 20% deduction on their business net income each year. This deduction is in addition to your normal business tax deductions, and it’s calculated and included in your personal tax return. There are limitations and qualifications, of course, so check with your tax professional about this.
Don’t Forget Self-Employment Taxes
You must pay self-employment taxes on your business income, in addition to income tax, if you own a pass-through business. The self-employment tax is for Social Security and Medicare, and it’s paid at 15.3% of your share of the business net income, or the entire business net income if you’re a solo business owner. You must consider paying enough during the year through estimated taxes or withholding on other income to cover both your estimated income tax liability and your self-employment tax if you want a tax refund.
The Key To Getting a Small Business Tax Refund: Planning
Some people use tax refunds as a means of forced saving. They overestimate the amount of tax they must pay, in order to get a hefty refund in April. But the drawback to this is that they don’t have the use of that money during the year. The IRS is using it for up to 12 months, and taxpayers won’t get any interest for what could be thought of as a type of loan. It’s a balancing act—you want to pay enough in estimated taxes and withholding on income from employment to avoid fines and penalties without paying so much that you have a huge tax refund of money you didn’t get to use during the year. Work with a licensed tax professional who can sit down with you every few months and look at your business and personal income for the year to plan the amounts of your quarterly estimated payments and other tax-saving strategies. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
