On the surface, determining whether a business is small, medium or large seems like a simple enough process. However, it’s actually quite complicated, particularly when you throw others into the mix – freelancers, independent contractors, subcontractors, consultants, entrepreneurs and the like. Determining whether you are actually a small business is a vital consideration when it comes to business taxes and bookkeeping, as well as for many other things. How do you figure it out, though?
The Small Business Administration’s Answer
The Small Business Administration, or SBA, is the governing body handling small business-related issues in the United States. The SBA offers help finding financing, provides assistance to business owners, helps you find advice and guidance, and more. They also work to connect small business contractors with the government in many instances. As such, they’re uniquely positioned to help you determine whether or not your firm is too large to fall under the “small business” heading.
First and foremost, the SBA states that a small business is “organized for profit, has a place of business in the US, operates primarily within the US or makes a significant contribution to the US economy, is independently owned and operated, and is not dominant in its field on a national basis.” However, that is just part of the equation. The SBA also determines business size by profits (average annual receipts) and by the number of employees working for the company.
Rather interestingly, manufacturing firms are “small businesses” with as many as 1,500 employees. Mining concerns are small businesses if they have under 500 employees. A grocery store (even a chain) is a small business if it doesn’t bring in more than $35.5 million in average annual receipts. For those a little confused by all this, the SBA offers a handy size chart as a downloadable PDF.
Others Who Fall under the Small Business Heading
In addition to the designations made by the Small Business Administration, there are others who technically fall under the small business heading. For instance, if you work as a freelancer, then you will need to file business taxes like any other small business owner. If you are a contractor, and that is your primary source of income, then you will need to file taxes as a business owner. If you are a consultant and that is your primary source of income, then you’ll need to file taxes like any other business owner.
In short, if you earn your primary income in any way other than as an hourly or salaried employee of another company or individual, then you the IRS views you as a business owner, at least when it comes to tax matters.
In a nutshell, then, a “small business” can include any of the following:
- A sole proprietorship (you own and operate the business yourself and report the business earnings through your personal taxes in most instances)
- A partnership with one or more other people, generally requiring a Form 1065 and a Schedule K-1 and Form 1040
- An LLC, which is actually taxed as a sole proprietorship or as a partnership, as limited liability company is not a recognized taxing form by the IRS
What Should You Know about Business Taxes and Bookkeeping?
While you might not think of yourself as an entrepreneur or a business owner, the IRS most likely does. That means you need to put some thought into how you file taxes for your business. Even if you only work out of your home office and make less than $50,000 per year, it’s important to think carefully here.
One of the most important considerations is your business designation/classification when you file with the IRS. Some of this will hinge on how you formed the business, too. You obviously can’t file as a C Corp if you don’t have any articles of incorporation. The IRS will likely view you as a sole proprietorship in that instance.
Each business classification carries unique benefits and drawbacks when it comes to income tax. For instance, a C Corp doesn’t pass its profits through to shareholders. Instead, you just write Uncle Sam a corporate check for the taxes owed and go about your merry way. However, S Corps do pass their earnings (and losses) on to shareholders, so you must claim those on your individual income taxes, not corporate taxes.
Do You Really Need to Work with a Tax Expert?
You might think your business is too small to benefit from working with a professional tax preparer. However, unless your business is miniscule AND has no cost of goods sold, and cannot benefit from asset depreciation, you probably do need one. Even something as relatively simple to complete as a Schedule C can actually be quite a headache, and there’s a significant chance you’ll make a costly mistake.
That’s all it takes to end up in hot water with the IRS. Then you might be facing fines and penalties, or overpaying on your corporate taxes simply because you didn’t know any better. In a worst-case scenario, you could be flagged for an IRS audit, which is not where you want to be when you have a growing business to run.
In the end, unless you work for another person or company, Uncle Sam will treat you as a small business owner. That can be very confusing, particularly for those who don’t run traditional businesses, such as freelancers. With the gig economy on the rise, more and more working professionals are in for a rude surprise come tax time. The best defense is to work with a tax preparer to help ensure that you have a viable strategy to reduce your tax liability and ensure that you’re meeting your financial obligations to the government at all times.