Self-Employed or Small Business: Tax Considerations and Differences

Anyone self-employed or who owns a small business can tell you that all kinds of perks come with working for yourself. The opportunities are endless, from the flexibility to create your own hours to the satisfaction of being your own boss and taking full responsibility for your success or failure.

However, some vital differences exist between self-employment and owning a small business, too. Many involve taxes. 

Self-Employed or Small Business: Key Differences

Both self-employment and small business ownership can come with benefits – and both come with taxes. Today, we’ll cover some crucial tax differences you must know before you embark on either journey. 

At PayStubs, we understand just how important it is to business owners that they’re able to create pay stubs that accurately calculate taxes—making tax season a lot less stressful. In addition to articles like this one, we also offer the payroll solution you need to get it done!

Let’s start with a brief overview of some of the most notable differences and characteristics of being self-employed or a small business owner.

Self-employment

As someone self-employed, you don't have any employees and typically work from home or a remote location. You will be responsible for filing your own taxes. You can choose to participate in certain government programs such as Social Security or Medicare.

Here's how the IRS defines self-employed:

• "You carry on a trade or business as a sole proprietor or an independent contractor
• You are a member of a partnership that carries on a trade or business
• You are otherwise in business for yourself (including a part-time business or a gig worker)."

The main advantage here is you are the only person responsible for your success or failure. You can pursue projects that interest you and be creative in your business.

Small businesses

On the other hand, as a small business owner, you may have employees who need to rent office space or purchase equipment. In addition, most are responsible for paying their estimated taxes every quarter, just as self-employed individuals do.

Many small business owners classify their business as a sole proprietorship if it is unincorporated.

However, the IRS explains, "if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation."

Now, let's look at the specifics of filing taxes for self-employed people before we move on to tax filing for small businesses.

Filing Self-Employed Taxes

Here are some of the key elements you'll need to understand when filing taxes as a self-employed individual.

When to file as self-employed

This year, the tax filing deadline in the USA is April 18, 2023.

As a self-employed person, you'll usually need to pay your estimated taxes quarterly but file once a year.

Along with being subject to income tax, you're also subject to self-employment tax. This refers to a unique combination of Social Security and Medicare Tax. Much like the taxes wage earners pay, this tax is calculated as a percentage of your total income.

What forms do I need?

When filing taxes as a self-employed individual, you'll typically need to fill out the Schedule C and Schedule SE forms. Schedule C forms allow you to calculate your profit or loss, while Schedule SE forms help you determine the self-employment tax you owe.

Self-employed advantages

One of the significant advantages of filing taxes for self-employment is that certain deductions and credits may be available to those who qualify. These deductions, such as home office expenses, can lower the overall amount of money you're responsible for paying come tax season.

Filing Small Business Owner Taxes

Now let's focus on small businesses and some of their tax considerations.

Before we get into these tips, it’s important to remind you there are many tools and strategies available to help business owners like you come tax time. For example, our payroll solution makes it virtually effortless to create compliant pay stubs with just a few clicks, making your calculations as accurate as possible. 

When to file as a small business

Like self-employed individuals, small business owners are subject to paying estimated quarterly taxes and must file annually. This year, that filing deadline lands on April 18, 2023.

What forms do I need?

Small businesses typically need to fill out Schedule C for profit or loss and additional forms such as Form 1120 for corporations or 1040-ES Estimated Tax Vouchers for limited liability companies (LLCs). Additionally, you may also need other supplemental forms depending on the type of business you have.

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For example, excise taxes come into play if you manufacture or sell particular products, operate a specific kind of business, utilize various types of equipment, facilities, or products, and get paid for certain services.

With Form 720, several excise taxes can be reported, including numerous tax categories.

They include the following:

• Environmental
• Communications and air transportation
• Fuel
• Tax on the first retail sale of heavy trucks, trailers, and tractors
• The sale or use of a variety of different articles

Employee taxes

As a small business with employees, you must also pay employee taxes. These include Social Security and Medicare taxes, Federal income tax withholding, and the Federal unemployment (FUTA) tax.

Small business advantages

Small business owners can benefit when filing taxes. 

First, even if your business is a pass-through entity, such as an LLC or S corporation, be aware that you may still qualify for certain deductions and credits to help lower your tax burden. 

For example, the IRS offers incentives like capital investment deductions, research and development credits, and other depreciation allowances that can significantly reduce taxable income. They also offer simplified accounting methods like cash basis accounting for small businesses to make it easier to calculate their income.

Suppose you have accurate payroll records like the ones PayStubs’ payroll solution offers. In that case, you and your accountant will have an easier time filing your taxes. You'll have all the information needed to complete the relevant forms and maximize your deductions.

Self-Employed or Small Business: What's Right for You?

At the end of the day, the decision to pursue self-employment or launch a small business will come down to what best fits your personal goals.

Keep this in mind: All small business owners are self-employed, but not all self-employed people are business owners.

Let's say you're after more flexibility and creative freedom and fewer people to answer to or provide for. In this case, self-employment may be the right path for you. 

On the other hand, starting a small business makes more sense if you prefer working with teams and need more resources. The ability to bring in outside investment and scale up your operations is a huge plus.

Payroll for Small Businesses

Another way to ensure tax season goes as smoothly as possible is to know your payroll is on point (which is something PayStubs helps you accomplish!)

After all, payroll can be one of the most complicated aspects of running a business. But it’s also one you can’t afford to get wrong.

Using payroll software is an easy and efficient way to ensure you stay on top of (and in compliance with) your taxes and keep up with any changes in deductions or other tax considerations. It also simplifies the process, so when it comes time to file taxes, you’re well-prepared, and there are no surprises.

Many small businesses need to consider how they’ll pay their contractors, employees, and other team members. Accurately calculating tax withholdings for all of these people can be tricky—and this is another way having a reliable payroll solution proves helpful.

If you’re paying people in different locations with different taxes, having the right payroll solution can help you track those taxes and comply with local laws.

Conclusion

Investing in a quality payroll system is an essential step for small businesses that want to be confident they're staying on top of their finances year-round and are prepared when tax season rolls around.

If you go the small business route, we encourage you to use PayStubs to take the guesswork—and work-work—out of small business payroll.

By automatically and accurately creating pay stubs, tax documents, and payment records for workers of all kinds, you can be confident your payroll is being handled correctly and with the least hassle possible.