Cue the happy music…it’s the most wonderful tiiiime of the year…do do do. No, not really. It’s tax season! If you have the pleasure of knowing a tax accountant, you probably won’t see them much between now and April 15th.

That’s right ladies and gents, it’s time to do your taxes! As an entrepreneur, you now have the responsibility to not only report your own personal income and expenses (and possibly your family’s), but also the income and expenses of your business.

First and foremost, you and your business are likely responsible for two types of taxes:

1. Sales taxes paid to your state
2. Income taxes paid to the federal government, and possibly also your state

When you first go into business, one of the first things you should do is get a state sales tax permit. This process will depend on your state, but it is usually a relatively painless and luckily, free, process. In Texas, it costs no money and you can easily apply online.

This is the gist of sales taxes – every time you sell an item, even if it’s an online sale, to another person in your state, you are responsible for charging them your state (and possibly city/county) sales tax percentage rate. The customer pays that extra tax money over to you, and you hold onto it until it’s time to pass it on to your state government tax agency. You’ll be responsible for paying your sales taxes on either a monthly, quarterly, or annual basis. They aren’t really an expense to you, more so just a “pass through” in and out amount.

Income taxes are a different beast. These are the taxes you’re charged on all the money you make each year, whether it be your personal wages, investment dividends, or small business income.

Now we could talk about business income taxes for days on end (sounds thrilling right?), but today we’ll just leave it to a brief overview to get the wheels turning. First, I’m going to assume that your business is considered a “sole proprietorship”. This means your business is not a corporation, a partnership, an LLC, or any other separate legal entity. If you’ve never filed separate paperwork to incorporate your business (excluding your sales tax permit and your DBA license), chances are you are a sole proprietorship.

Your business’ legal status matters because it determines on which form you are reporting your income and expenses. For a sole proprietorship, you will report your business stuff on a special form called Schedule C, which is attached to your regular personal 1040 return. Some of the data from your Schedule C will actually end up flowing onto page 1 of your 1040.

Here is the IRS webpage for both the Schedule C AND the all important Schedule C instructions.

Above is what part of page 1 of the 2011 Schedule C looked like. On the two pages of the Schedule C, you’ll have space to enter your business info, all your sales, and all the expenses and deductions related to your business. At the bottom of page 1, you will get the final number for your business’ taxable net profit or net loss, and this number then travels over to page 1 of your personal 1040. If you have net profit, that money will increase your taxes owed this year. If you have a net loss, it’s possible this money can decrease the amount of taxes you will owe.

So you can see, it’s really important to track all your expenses and deductions over the year. In reality, you of course want your busy to be profitable and have a net profit, but for tax purposes, the lower your net profit, the smaller the amount of taxes you will owe. That’s why having a good handle on your expenses helps.

Go ahead and take some time to get familiar with both the Schedule C and the Schedule C instructions; these instructions are particularly helpful since they go through each item on both pages of the Schedule C line by line with definitions. Even if you use a program like Turbo Tax to do your taxes, these instructions can offer some extra guidance.

I’d love to hear from you! Are you doing the taxes for your small business this year or consulting a tax professional?

• What is a Schedule C IRS form? (turbotax.intuit.com)
• Tax Tips for Bloggers (friendseat.com)
• Do You Need an Accountant to Do Your Taxes? (bargaineering.com)