For both business owners and consumers, tax time can be a nervous time. If you’re new to running a business, filing taxes alone can be confusing. Or, if you’ve changed anything about how you run your business in the last year, you’ll be in a similar boat.
Regardless of how confusing tax time can be for business owners, there’s a light at the end of the tunnel — the hope you’ll get a business tax refund.
How to Get a Business Tax Refund
When individuals receive tax refunds, it’s because they’ve overpaid on their taxes throughout the year. For some people, this happens accidentally as a byproduct of how they filled out their tax forms with their employers. Other people intentionally ask the government to withhold more taxes than they actually owe from their paychecks to guarantee themselves a refund come tax time.
Which camp do you fall in?
Personally, I’m not in the business of loaning the government money. So, I try to structure my tax withholdings as accurately as possible. This way, I’m less likely to owe money at the end of the year. That said, I’m also less likely to receive any money back in the form of a refund.
For your business, overpaying on your taxes in the hopes of receiving a refund may seem appealing, but it could also create other issues for you. You’ll have less cash on hand each month, and you’ll create some potential accounting nightmares for yourself in the process.
Did your business get a tax refund this year? Did you file expecting to receive a refund, but you didn’t in the end? If you got a tax refund for your business, what should you do with it?
Types of Business Taxes
Before we talk about what to do with your refund, let’s examine why you may have gotten one in the first place. There are three types of taxes small businesses pay which could make you eligible for a refund.
- Income taxes
- Payroll taxes
- Sales taxes
Income Taxes
The only type of business entity that can receive an income tax refund is a C corporation.
C corporations’ profits are taxed separately from their owners’. (That’s why so many business owners elect to structure their businesses as C corporations. It limits owners’ and potential shareholders’ liability, because they remain separate entities from the business.)
If a C corporation ever overpays on its income taxes, it could receive a refund. This refund would be reflected on the owners, partners, or shareholders’ personal returns based on their total income.
Payroll Taxes
Both employees and employers pay payroll taxes. Employee payroll taxes come out of their paychecks, effectively lowering their net pay. Businesses, on the other hand, pay payroll taxes in addition to payroll.
While payroll taxes may seem outrageous or unfair, they go toward important local, state and federal government programs like Social Security, Medicare and unemployment.
If your business ever overpays on payroll taxes, you’ll likely be eligible for a refund.
Sales Taxes
If your business operates in a state with sales tax, you’ve likely filed a sales tax return. Sales tax varies from state to state by the way, and only 45 of 50 states currently have it at all. (We’re lookin’ at you, Alaska, New Hampshire, Delaware, Oregon and Montana.)
Sales tax is relatively easy to calculate if you sell via one channel, in one state. But if you sell across multiple channels (like online, and in person) across more than one state, they can become tough to calculate.
Pro tip: Even if you don’t collect sales tax, you still need to file a sales tax return. Failing to do so could earn you anything from a hefty fine to revocation of your sales tax license. Ouch!
The frequency at which you file a sales tax return could also vary by state. You could be paying monthly, quarterly or annually.
If you end up overpaying on sales tax, you may be eligible for a refund.
A professional caveat: Even the savviest business owners benefit from hiring an accountant or bookkeeper to help you file business taxes. Automation tools and tax software can help, but nothing substitutes the advice of an in-person professional.
What to Do with Your Business Tax Refund
That said, if you did receive (or expect to receive) a refund this year, woohoo! Take a second to celebrate and breathe a sigh of relief.
After you celebrate, take a step back. How should you use your business tax refund?
You’ll want to spend your business tax refund wisely. Try not to blow it on non-business expenses or let it dwindle away in a checking account. Consider investing it back into your business.
Here are a few ideas of how to spend your business tax refund to benefit your business and your employees.
1. Invest in healthy employees.
Healthcare is a hot button issue for consumers and business owners alike. That’s because no matter which side you’re on, the costs are only rising. Even employers with the best intentions are finding it harder and harder to pay for their team’s healthcare costs.
If you’re wondering what to do with an unexpected tax refund, consider investing it in your employees’ health. There are multiple types of healthcare plans out there, and they’re definitely not one size fits all.
Popular small business healthcare options:
- Health reimbursement arrangements (HRAs) – Businesses with fewer than 50 employees can set aside a monthly allowance, tax free, that will reimburse employees for eligible health spending. In 2018, businesses could offer up to $420.83 for single employees, and $854.16 for enrolled families.
- Group insurance plans – These are the most common insurance policies for businesses, which provide fuller coverage to employees and potentially their families. Businesses pay premiums to offer these policies, and they may pass on a portion (no more than 50%) of these premiums to employees. These are now required under The Affordable Care Act for businesses with more than 50 employees. Average cost per employee is a little more than $6,000.
- Self-funded health insurance – To avoid paying regular premiums, some businesses choose to offer self-funded plans, where they pay for eligible employee claims as they arise. Typically, businesses work with a third-party administrator to set up a fund in anticipation of these expenses.
If your refund and budget allow it, get creative and consider investing in new or additional healthcare options for your employees.
Healthy employees make happier, more productive employees. They tend to stay longer, too.
2. Give your biz a branding refresh.
When’s the last time you refreshed your branded materials? Most small businesses take great care when they start out in building a brand, designing a logo, installing signage, and developing on-brand physical marketing materials like flyers and business cards.
But chances are you haven’t had the time or resources to check back in with those materials and update them as often as you should. An unexpected tax refund could give you the opportunity to take another look.
Does part of your storefront’s sign no longer light up? Are your business cards feeling outdated? Should you add some of your latest products and services to your printed materials?
Now’s the time to do it.
3. Show your building or fleet some love.
Chances are there’s at least one large expense you’ve been putting off paying for. A tax refund could be your perfect opportunity to take care of it without impacting your business’ budget.
Have a storefront? This could be anything from a leaky faucet in the bathroom, a finicky AC unit, or even a wall that could use a fresh coat of paint.
Don’t have a storefront? Perhaps your fleet of company trucks could use some love. Or, now may be the time to splurge on that new piece of equipment you didn’t necessarily need but that could make you a heck of a lot more efficient.
