The Basics of Small Business Tax Compliance

No one enjoys taxes. However, as a small business owner in the US, tax compliance is one of the most important responsibilities you have. If you don’t remain compliant, you could be liable for a hefty fine or even prosecution. Trust us, you will enjoy that less than the taxes themselves.

Unfortunately, the tax laws and regulations can be super complex and confusing, but it is essential to understand the basics of small business tax compliance to avoid the penalties and fines imposed by the IRS and state and local tax authorities.

Here’s an overview of what you should know.

Types of Business Entities

The first step in small business tax compliance is to understand the different types of business entities in the US and their individual tax implications. 

Let’s quickly go through them:

  • Sole proprietorship: This is the simplest and most common form of business entity. It is a business that is owned and operated by one person who is personally liable for all debts and obligations of the business. 
    • For tax purposes, the income and expenses of the business are reported on the owner’s personal income tax return.
  • Partnership: This is a business that is owned and operated by two or more people. Partnerships are also pass-through entities.
    • Income and expenses of the business are reported on all partners’ personal income tax returns.
    • Each partner is personally liable for the debts and obligations of the partnership.
  • S corporations: These provide the limited liability protection of a corporation while allowing for pass-through taxation. S corporations can have up to 100 shareholders.
    • The income and expenses of the business are reported on the shareholders’ personal income tax returns. 
    • S corporations have more complex tax requirements and are additionally subject to certain restrictions.
  • C corporations: These are legal entities separate from their owners and shareholders. They offer limited liability protection, but they are subject to double taxation. 
    • The corporation pays taxes on its income.
    • Shareholders also pay taxes on any dividends they receive from the corporation.

There are several different types of federal taxes that may apply to small businesses, including:

  • Income tax: Tax on income earned by a business. 
    • For sole proprietorships, partnerships, and S corporations, the income and expenses of the business are reported on the owner’s personal income tax return.
    • C corporations are subject to their own corporate income tax. The tax rate for businesses varies depending on income level.
  • Employment tax: This includes taxes on items such as Social Security, Medicare taxes, federal income tax withholding, and more. 
    • Small businesses with employees must withhold these taxes from employees’ paychecks and pay the employer’s portion of Social Security and Medicare taxes directly. 
    • Employers are required to file quarterly payroll tax returns
  • Excise tax: This is a tax on certain goods and services, such as fuel, tobacco, and alcohol. 
    • Small businesses that sell these goods or services may be required to pay excise tax depending on the type of goods it handles

You cannot comply with your federal tax obligations unless you have first obtained an Employer Identification Number (EIN) from the IRS. 

The EIN essentially acts as an identifier for tax purposes and enables you – the business owner – to open a business bank account. 

You are also obligated to file your tax returns with the IRS. This includes an annual income tax return plus quarterly payroll tax returns if you have any employees.

State and Local Tax Obligations

In addition to federal taxes, your business is also subject to state and local taxes such as:

  • Sales tax: Certain goods and services, such as clothing, electronics, and restaurant meals, are subject to sales tax. 
    • Small businesses that sell these goods or services may be required to collect and remit sales tax to the state and local tax authorities.
  • Use tax: This is a tax on goods and services that are purchased outside of your state and brought into the state where your business is located for use.
  • Property tax: This tax is applied to any real estate or personal property owned by the business

To get started with this, you must register with the appropriate state and local tax authorities in your state and obtain any necessary permits or licenses.

It is also essential that you: 

  • Collect and remit sales tax on taxable sales
  • File sales and use tax returns
  • Pay property tax on any business-owned real estate or personal property

Tax Deductions and Credits

One of the benefits of small business ownership is the ability to take advantage of available tax deductions and credits:

  • Deductions reduce the amount of income that is subject to tax and include:
    • Business expenses, such as rent, utilities, and office supplies
    • Employee wages and benefits
    • Depreciation of assets
    • Health insurance premiums for self-employed individuals
  • Tax credits provide a dollar-for-dollar reduction in tax liability and include:
    • The Small Business Health Care Tax Credit
    • The Work Opportunity Tax Credit
    • The Research and Development Tax Credit

It can be tough to understand or find out which tax deductions and credits you can take advantage of. Therefore, we recommend getting an accountant on board to ensure you’re getting everything you’re entitled to.

To help you with this, it is essential that you keep detailed and accurate records of your income and expenses.


Tax compliance doesn’t have to be a headache.  

At EvolveCFO we understand the pains that taxes cause small businesses. That’s why we’re here to help you with affordable virtual accounting services. Whether you want an accountant on a regular basis or you just need some help during tax season, we’ve got price plans to suit your needs.

Why not get in touch to understand more and let EvolveCFO make taxes less taxing?