A Complete Small Business Tax Preparation Checklist for Beginners

Does tax preparation feel like yanking teeth with no anesthesia?

You’re not alone! For many small business owners, tax time and root canals have a lot in common — they’re both unavoidable and might result in intense pain. But enough about dentistry… let’s talk about setting your retail business up for tax season success.

From collecting bank statements to tax filing, you’ve got a lot to do, on top of running your store and providing excellent customer service. We want to help!

Use this article as a small business tax preparation checklist. You’ll find out which taxes you have to pay, by when, and how to make sure you’re prepared so your store can thrive.

The Small Business Tax Preparation Checklist: What You Need To Know

As a retail store owner, you likely fall under the small business threshold (the IRS generally defines a small business as having less than $25 million in average annual revenue and fewer than 250 employees).

We’ll dig deeper into the taxes you’re required to pay, but your biggest concerns are income tax, self-employment tax, sales tax, and payroll taxes.

You'll save yourself headaches, penalties, huge tax bills, and other legal and financial consequences if you do your taxes right. Tax compliance should be a top priority for any small business owner. Make sure you keep detailed records, learn what you don't know, consult experts, and file on time.

Now, let’s dive into our checklist!

Step #1: Know Which Taxes You Need To Pay

It’s your responsibility as a business owner to meet federal and state tax obligations. The various types of tax you may be required to file include:

Income Taxes: Income taxes are the state and federal taxes you pay on the profits you make. The amount you owe depends on the structure you choose for your business. Keep detailed records of all income and expenses, because that's how you'll figure out your taxable income.

Sales Taxes: Unlike income taxes, which are computed on profits, sales taxes are collected at the point of sale (POS) and then remitted. State and local sales tax rates vary significantly. For accurate collection and filing, you need to know the specific sales tax requirements for your retail location.

Self-Employment Taxes: As a sole proprietor or partner in your business, you’re required to pay both the employee and employer parts of Social Security and Medicare taxes. The self-employment tax rate is 15.3 percent on the first $142,800 of net income, divided as follows:

• Social Security: 12.4 percent
• Medicare: 2.9 percent

If you’re self-employed in your business, you must pay estimated taxes every quarter. The first payment for the 2024 tax year is due April 15, with other payments due June 17, September 16, and January 15, 2025.

Payroll Taxes: If you have employees, you're also responsible for handling payroll taxes. These include withholding a portion of your employees' income for Social Security and Medicare taxes (often referred to as FICA), federal and state income taxes, and unemployment taxes that you pay as an employer.

Here are the main taxes you need to withhold:

• Federal Income Tax: Withhold federal income tax based on each employee's Form W-4 on file. Tax rates range from 10 percent to 37 percent based on taxable income.
• Social Security and Medicare (FICA): While you withhold these taxes from employees, your business pays a share, too. The current rates are 12.4 percent for Social Security (6.2 percent from your business and 6.2 percent from your employee). And 2.9 percent (1.45 percent from the employee and the other half from your business) for Medicare. There are wage limits of $160,200 for Social Security and no limit for Medicare.
• Federal Unemployment Tax (FUTA): Withhold six percent on the first $7,000 of each employee's wages. This tax funds unemployment benefits.
• State Income Tax: If your state levies an income tax, withhold state tax based on state Form W-4 amounts. State rates vary widely.

Note: Please consult a tax advisor if you’re unsure about any of these employment taxes.

Choose Your Business Structure Wisely

There are varying opinions on the best business structure for retail businesses. Here’s an example of the pros and cons of each.

If your business is set up as a C corporation, you face double taxation — first on the money your store makes, then when you pay dividends to your shareholders. C corporations might not be the best option for small retail businesses, because you’ll need to comply with more regulations, record-keeping, and tax requirements.

It might be wise to consider a limited liability company (LLC) structure, because limited liability protects your assets. S corporations are also easy to set up if you want a simple solution.

It’s your responsibility to pay what you owe in federal and state taxes. Whether your business is set up as a sole proprietorship, partnership, C corporation, or S corporation, you may be responsible for various types of taxes.

Step #2: Find Out Which Tax Forms You Need To File

It would be great if there was a catch-all form for business taxes — but that’s not the case. You’ll need to file various forms to report profits, losses, and deductions to the IRS. Common forms include:

Form 1065: If you're in a partnership, you'll file this form to report your share of the business' income, losses, deductions, and credits. 

From 1120-S: This is the main tax return for S corporations. It's where your S corp reports income, gains, losses, deductions, and credits.

Form 940: File this annual return to report federal unemployment tax. It’s how you, as an employer, pay into the unemployment insurance system for your workers.

Form 941: Your primary quarterly payroll tax filing to report income taxes, Social Security tax, and Medicare tax withheld from employees' pay. You'll summarize the total wages paid and total federal payroll taxes due on this form.

1099-NEC: If you hire contractors in your store, and pay them $600 or more annually, use this form to report what you pay them.

1099-MISC: Any miscellaneous income over $600 paid to a contractor gets reported on this form — things like rents, royalties, prizes, or awards.

For a more detailed breakdown of the forms you need to file as a small business, check out this guide: Ultimate guide to small business tax forms, schedules, and resources.

Step #3: Keep Detailed Financial Records

Having accurate and organized financial records is crucial for small business tax preparation. Properly tracking finances can save headaches come tax time. You’ll need to document business income, deductions, credits, and other activities. If you don’t, you might miss out on deductions and even face an audit.

Here are some key financial documents you should keep for tax purposes:

• Receipts for all business expenses — keep receipts organized by category and year.
• Invoices for contractor services — maintain invoices from any contractors you pay.
• Bank and credit card statements — these validate income and expenses.
• Mileage logs — track business miles driven if deducting vehicle expenses.
• Accounting records and reports — retain general ledgers, profit/loss reports, and balance sheets.
• Purchase orders and sales receipts — document sales and inventory.
• Payroll records — keep records of payroll taxes paid and W-2s issued.
• Tax returns and filings — keep copies of all tax returns filed.

Having these documents neatly organized will make tax preparation a breeze instead of a nightmare.

Step #4: Categorize Your Expenses and Claim Deductions

One way to minimize your tax bill is to categorize and track your expenses. The IRS allows you to deduct the "ordinary and necessary" costs of operating your store. But you’ll need to provide documentation. Common categories include:

• Supplies
• Utilities
• Rent and leases
• Repairs and maintenance
• Payroll and benefits
• Contract labor
• Advertising
• Credit card fees
• Insurance
• Interest paid
• Legal and professional services
• Vehicle and mileage
• Travel
• Meals and entertainment
• Training and education
• Marketing and advertising
• Home office use
• Small equipment purchases
• Security system costs

As a retailer, there are some industry-specific deductions you can take advantage of:

• Shrinkage, or damaged, expired, and unsellable inventory — you can write off a percentage based on average shrinkage for your sector.
• Credit card processing fees — swipe fees charged by card companies are deductible.
• Business startup costs — organizational expenditures can be deducted up to $5,000 in year one and amortized after.
• Cost of goods sold (COGS) — you can deduct the cost of purchasing or creating products. 

Factor these in when logging your business expenses and claiming deductions. The lower your net income, the lower your tax bill.

Note: There are various tax credits you could be eligible for, depending on your business and hiring practices. For example, the Work Opportunity Tax Credit is given to companies that hire targeted groups.

Step #5: Know Your Dates for Paying Taxes

Don’t let tax deadlines pass you by! It’s easy to forget about them when you’ve got so much on your plate. Consider outsourcing your taxes to a payroll company, but if you can’t stay on top of the key dates — here are the dates for 2024:

• January 31, 2024: Send out Form W-2 and Form 1099-NEC to employees and contractors.
• March 15, 2024: S corp and Partnership tax returns due.
• April 15, 2024: First quarter 2024 estimated tax payment due.
• April 18, 2024: Individual tax returns due.
• June 17, 2024: Second quarter estimated tax payment due.
• September 16, 2024: Third quarter estimated tax payment due, and the extended deadline to file partnership and S corp returns.
• October 15, 2024 - Extended deadline to file individual returns.
• January 15, 2025: Fourth quarter estimated tax payment due.
  
  

For a more complete breakdown of these dates, check out this article: Small Business 2024 Tax Deadlines — What You Need to Know.

Use This Small Business Tax Preparation Checklist To Make Taxes Easy

It’s critical to file and pay your taxes on time. Late filing and payment penalties are often severe. Add all tax deadlines and estimated payment dates to your calendar and set reminders. It’s a good idea to speak to a tax professional or invest in tax planning software.

One tool at your disposal that’s helpful when preparing for tax season is a point of sale system. Some of the ways it can help include:

• Detailed sales reports for each period that give you total gross receipts for tax reporting
• Itemized transaction data, providing the details needed if you face an audit
• Automatic sales tax calculations at the point of sale
• Real-time inventory management to help manage the cost of goods sold
• Employee management, providing the necessary information for W-2 and 1099 reporting
• Receipt logs in one place to help with tax preparation

…and more!

To find out how Comcash can help manage your retail business and make tax preparation easier, schedule a demo with our retail experts today.