In today’s post, I’ll be going over everything you need to know about tax filings for your small business and how to stay out of trouble with the IRS.
If you’re a new business owner or thinking about starting a business for the first time, or even if you already have a business and want to make sure you’re doing everything correctly, then this post is for you!
Similar to yourself as an individual, your small business has tax requirements that must be met in order to avoid unwanted penalties and interest from the IRS. And just so you know, these penalties are costly, easily reaching thousands of dollars.
So today I’m going to break down the forms and filings you need to have in place in order to avoid IRS penalties and keep your business compliant. Also, please keep in mind that every business is different so it’s important that you consult your CPA for specific advice regarding your situation.
Sound good? Let’s get started!
Types of Business Structures and Tax Filings For Each
First, it’s important to understand that there are different business structures and your business structure will determine the forms and taxes you’ll have to pay.
According to the IRS website, there are 5 types of business structures.
- Sole proprietorships
- S Corporations
- Limited Liability Companies (LLCs)
Let’s first start with Sole Proprietorships.
1. Sole Proprietorship
Sole proprietorship small business tax filings are actually the same as single-member LLCs. I noticed that a lot of entrepreneurs confuse the 2 so let me clear that up.
The only difference between a sole proprietorship and a single-member LLC is an LLC legally protects the owner’s assets in case of a lawsuit. The owner has limited liability.
For tax purposes, there isn’t a difference between the two and they require the same tax forms filed and taxes paid.
The form that should be filed every year by April 15th is Form Schedule C.
Form Schedule C is not actually a separate business tax return. Instead, it is a form that is attached to your personal tax return. The reason why it has the same due date as personal tax returns, April 15th.
A completed schedule C will show your sole proprietorship or single-member LLC’s income and expenses for the tax year. This could result in a profit or loss number.
As a sole proprietor or single-member LLC, you would then report the profit or loss of your business on page 1 of your personal tax return. It could either increase or decrease your taxable income and you would pay taxes based on your total taxable income and tax bracket.
In addition, there would be an approximate 15% self-employment tax due on your business profits. This amount is calculated on Schedule SE and also included with your personal filing.
A partnership is a relationship between two or more people to do business. Each person contributes money, property, labor, and/or skill, and shares in the profits and losses of the business.
A partnership can also be an LLC, in which case, it’s called a multi member LLC.
However, the tax requirements of partnership or multi member LLC are different than that of a sole proprietorship or single-member LLC. One of those differences is in the tax form that is filed.
Partnerships are required to file Form 1065 by March 15th.
Form 1065 is a separate tax return from your personal tax return. This form must be filed before your personal tax return, which is why the filing deadline is in March.
Your Form 1065 should include the preparation of schedule K-1. Schedule K-1 shows each partners’ share of the partnership’s income or losses.
For example, let’s say you form a partnership with 1 other person and are 50/50 partners.
If the partnership earned $10,000 in profits, each partner would show $5,000 in income from the business on Schedule K-1.
So as you can see, each partner will need to receive a K-1 from the partnership’s return in order to correctly report their income on their personal tax return.
This is called pass-through taxation.
Taxes are then paid on the partner’s personal tax return. And no taxes are due with the partnership return. Also, depending on if you are a general partner or limited partner would determine how much you pay in self-employment taxes.
S-Corporations can have one or more owners but the tax form remains the same- and that is Form 1120-S.
Form 1120-S is similar to Form 1065 in that it is due March 15th and should include Schedule K-1 for every shareholder in the corporation.
Each shareholder would then report their share of the S-Corp’s profit or loss on their individual tax returns and pay the applicable taxes. Also called pass-through taxation, which I mentioned earlier.
Now different from sole proprietorships, single member LLCs, and partnerships, S-Corp shareholders do not pay self-employment tax on all of the profits of the business. But only on the compensation received.
Let me explain.
S- Corp shareholders are supposed to pay themselves a reasonable salary as if they are an employee. Similar to employees, payroll taxes such as Medicare and social security should be withheld and paid on every paycheck.
So essentially, you would be paying self-employment taxes with every paycheck but only on the salary you would be paying yourself. Any profits leftover would be considered a distribution to the shareholders, not subject to SE tax.
4. Corporation or C-Corporation
In forming a corporation, shareholders exchange money, property, or both, for the corporation’s shares.
C-Corps can be one or more shareholders and is considered a taxable entity separate from its shareholders. So, C-Corps are not considered pass-through entities.
The profits of a C-corp remain in the C-Corp, unless dividends are distributed. Shareholders cannot deduct any losses of the corporation.
The form required to be filed every year is Form 1120. Not to be confused with 1120S. This form is due by April 15th.
C-corporations are required to pay corporate tax on the profits of the business. Currently, the corporate tax rate is 21%.
Shareholders only pay tax if they receive dividends from the corporation which would be calculated on their individual tax return.
Additional Tax Filings To Be Aware Of
Ok, I’m glad you’re still with me because there is some additional information you should know.
- First, if you expect your business to be profitable during or by the end of the year, you should make estimated tax payments. But essentially, the IRS wants their money, like NOW, and doesn’t want to wait on you to file your tax returns to get it.
AND if you do owe, and did not make estimated tax payments, they are going to charge you penalties and interest. And we don’t want that.
So please consider making estimated tax payments quarterly throughout the year at IRS.gov.
- Second, if March 15th or April 15th comes too quickly for you and you don’t believe you’ll be able to reasonably file your returns by then, make sure to file an extension with the IRS by these dates.
If you do, you’ll extend your due date by 6 months. So that’s either September or October 15th.
Keep in mind that filing an extension only extends your tax return filing and not any taxes due. So just send in a tax payment of what you think you’ll owe on or before your original due date.
If you make your estimated tax payments, you should be good to go.
- Third, if you do pay yourself as an employee of your business (that is with a regular paycheck, that withholds Social security and Medicare tax etc.), you would also need to file Forms 941 quarterly and Form 940 annually.
These Forms tell the IRS how you have withheld and paid in payroll taxes.
So now that you know the different types of Forms and regulation for tax filings that you have to do for your small business, you are probably considering getting the help of expert tax consultants to help you. If yes then great! LYFE Accounting has everything you need for your business’ tax filings. From tax preparation, to tax planning, even bookkeeping and accounting solutions, we got you covered. We would love to help you out!