Many business owners dread tax season. Keeping records, compiling receipts, and making sure you file all the right forms can seem overwhelming. Understanding a few general rules about how federal tax codes and rules apply to different kinds of businesses can make the prospect of filing a yearly tax return seem less daunting. Check out the business tax basics below to learn more about the income tax process.
Common business types and tax filing rules
The Internal Revenue Service (IRS) has a plethora of information including tax forms, schedules, and even some tax topic webinar videos on the Small Business and Self-Employed Tax Center portion of its website. You’ll find that there are different filing rules and instructions for different types of small businesses. Common business types and tax rules are as follows:
- Sole Proprietorship – This type of business is run by a single person and is unincorporated. There is no separation between individual and business income under federal tax code. Therefore, when you file an individual 1040 tax return, you’ll also be required to report your business income and expenses on Schedule C. You may also have to pay self-employment tax, which can be calculated on Schedule SE.
- Partnership – Each owner in a business partnership pays both income tax and self-employment tax on their share of profits. A partnership must complete an information return called a Form 1065. The partnership doesn’t pay income tax. Instead, the income is “passed through” to the partners and they each include the income or loss on their individual returns.
- Corporation – Tax filing for corporations are more complex, as the corporation is a separate entity from the business owner. As such, the corporation must file Form 1120. Corporations must also pay taxes on profits. Business owners who are paid a salary or receive dividends from the company will have to report it on their 1040 tax return.
- Limited Liability Company (LLC) – Tax filing rules vary for an LLC, as they can be set up as a sole proprietorship, partnership or corporation. The tax filing rules will follow whatever type is designated, as listed above.
Types of business taxes
There are five general types of business taxes. The business structure determines what taxes must be paid and how they are paid.
- Income Tax – Federal income tax is a pay-as-you-go tax. It must be paid as income is earned or received throughout the year. Employees typically have income tax withheld from their income on each pay period. If income tax isn’t withheld, estimated taxes may have to be paid. If estimated tax payments aren’t required, tax can be paid via an annual income tax return.
- Estimated Tax – As stated above, paying estimated taxes throughout the year may be required. Consult the IRS guide for more information.
- Self-Employment Tax – Individuals who work for themselves are subject to paying self-employment tax, which is a social security and Medicare tax. Self-employment tax must be paid, and Schedule SE must be filed if net earnings are $400 or more.
- Employment Taxes – Businesses with employees must pay certain employment taxes and file certain forms.
- Excise Taxes – Excise taxes must be paid on specific forms. For instance, excise taxes are reported on Form 720 for several tax categories including environmental taxes, communications taxes and more.
Business tax credits are subtracted from your tax and therefore can help reduce your tax liability. General business credits combine business credits carried forward from previous years with current year business credit totals. Use Form 3800 for the General Business Credit.
Record-keeping, expenses, and deductions
Diligent record-keeping is a critical part of doing business and preparing for tax time. The most important things to document are income and expenses. Things you want to keep include cash register tapes, invoices, bank statements, deposit slips, sales slips and canceled checks. Business expenses that are necessary to operations, such as office equipment and rent, can be tax deductible.
Tax deadlines vary
Tax filing deadlines vary per business structure. For sole proprietorships and partnerships, the annual tax filing deadline for personal and business returns is April 15. Estimated tax payments must be paid quarterly, on Jan. 15, April 15, June 15, and Sept. 15. The deadline for corporations filing deadlines for personal returns is April 15. The business return filing deadline is March 15 for Form 1120 or Form 1120S.
This article was written by Lori Melton for Small Business Pulse