Determining what types of business tax returns you need to file can be a daunting task but once you have the tools to make the determination, you’ll be well on your way. The following general questions must be considered in order to complete your assessment:
- What is the business structure of your company?
- Do you have employees?
- How much income tax do you anticipate owing?
- What types of products or services do you sell?
- How much in revenues did your company earn this fiscal year?
Determining the Business Structure of Your Company
A sole proprietorship is generally an unincorporated business that has one owner. You are probably wondering why generally is italicized. Well, a limited liability company, which is an incorporated business, can also be treated as a sole proprietorship for tax purposes under certain circumstances. We’ll cover more about the circumstances in the Limited Liability Company section. Assuming your business is, in fact, considered a sole proprietorship for tax reporting purposes, your business will generally need to file the following income tax returns:
1040, U.S. Individual Income Tax Return
Schedule C (Form 1040), Profit or Loss from Business
Schedule SE (Form 1040), Self-Employment Tax
In addition, farming income is reported on Schedule F, profit or loss from farming. Rental property income and expense is reported on either Schedule E or Schedule C. Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer. If you and your spouse each materially participate as the only members of a jointly owned and operated real estate business and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership.
With the induction of the 2018 Tax Cuts and Jobs Act, more nuances were introduced into the US tax code that are beyond the scope of this article, but KES Design Group is a phone call or email away should you need guidance.
Finally, the forms below are reported to the IRS as well, if applicable:
- Form 4562 – reports information about company assets, including any automobile expenses and depreciation and amortization deductions
- Form 8829 – reports home office expenses
Limited Liability Company (LLC)
Limited Liability Companies (LLC’s) are incorporated on a state level and can be single-member or multi-member organizations. Single member LLC’s are treated as sole proprietorships by default and would file applicable tax forms for sole proprietorships. Multi-member LLC’s are treated as partnerships by default. We’ll cover partnerships below. Additionally, an LLC can elect to be treated as an association taxable as a corporation by filing Form 8832, Entity Classification Election. You may have heard business owners or tax professionals reference corporation election as a “check the box” election because the classification is done simply by checking a box on a form. In conclusion, LLC’s can be taxed every which way, so this may explain why you may have gotten the answer “it depends” when asking how LLC’s are taxed.
A partnership exists when two or more people or organizations join in a trade or business. A partnership is responsible for filing an annual information return to report the results of operations and does not pay income tax. Partnerships are considered “pass-through” entities because they pass their income and expenses to their partners. Partnerships are required to file Schedule K-1, Form 1065. In turn, each partner will receive a Schedule K-1 from the partnership, which reports their share of profit or loss to report on their individual tax return.
A C-corporation is recognized as a separate taxpaying entity for federal income tax purposes. C-corporations are subject to double taxation; once when filing taxes on net profits or losses and again when the corporation’s shareholders are taxed on distributions or dividends they receive from the corporation. C-corporations are responsible for filing Form 1120, U.S. Corporation Income Tax Return.
S corporations are corporations that elect to become pass-through entities and pass the results of operations to their shareholders for federal tax purposes. Shareholders of S corporations are taxed at their individual income tax rates. This allows S corporations to avoid double taxation on income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S corporation status, the corporation must meet specific requirements, which are beyond the scope of this article. The corporation must submit Form 2553 Election by a Small Business Corporation in order to become an S corporation and must file Form 1120-S, U.S. Income Tax Return for an S Corporation with the IRS annually.
If your organization has employees, payroll taxes must be filed with the IRS and federal income tax must be withheld for both the employer’s and employee’s share of social security and Medicare taxes. There are two deposit schedules: monthly and semi-weekly. A determination of which deposit schedule is appropriate must be made before the beginning of each calendar year.
The forms below will be required to be filed with the IRS depending on your tax situation:
- 940, Employer’s Annual Federal Unemployment (FUTA) Tax return
- 941, Employer’s Quarterly Federal Tax Return
- 943, Employer’s Annual Federal Tax Return for Agricultural Employees (for farm employees)
- 944, Employer’s Annual Federal Tax Return