Dealing with tax services for small businesses can be a chore (and a costly one at that). Worried about the requirements and processes for filing taxes? This in-depth guide has the information you need to make the tax process as transparent as possible. Filing a return for your business doesn’t have to be difficult — our comprehensive approach takes the stress out of tax time!
Before You Begin: What Exactly Are You?
It may seem simple, but what kind of business are you? Depending on the answer, the tax process can take a different path.
The most common types of small businesses are:
- Sole Proprietorship: A non-incorporated business owned by a single person. The owner reports all income or losses on their own personal tax return.
- S Corporation: A form of corporation specifically aimed at small businesses where the corporation passes income, losses, tax credits, and deductions directly to shareholders. Each shareholder reports their income or loss on their own personal tax return.
- Partnership: A business where partners share the profits or losses of the partnership. Each partner reports their profits on their personal tax return.
- Limited Liability Company (LLC): A mix of both corporation and sole proprietorship, an LLC is legally separate from its owner. This allows the owner to avoid personal liability for their LLC.
Sole Proprietorship
Now, if you run a small business and have never formed an LLC or corporation, you’re considered a sole proprietor. It’s automatic, it doesn’t take any special filing or paperwork, and you personally own all of the assets of the business.
You also retain all the liability for your business — everything is on you. Unlike an LLC or S corporation, you’re personally responsible for what your business does (or the debts it incurs). For that reason alone, it’s worth considering a form of general liability insurance.
As a side note, premiums for general liability insurance are deductible.
When it comes to tax time, a sole proprietorship is simple. You report all of your income (or losses) on your personal federal tax return. You also owe self-employment tax (for Social Security and Medicare) on all of your sole proprietorship income up to an annual cap — for 2018, that’s 12.4% for Social Security and 2.9% for Medicare.
S Corporation
When people think corporations, they think multiple shareholders. While that is true, it is also possible to incorporate a business and have a single owner. These single-owner S corporations are a popular option for individuals looking for limited liability protection and tax benefits.
Remember, while corporations do provide some limited liability protection, it’s typically not exhaustive. If you’re considering starting an S corporation, check with professional tax services for small businesses before making any move.
Partnership
In a partnership, each owner will receive a tax form detailing the income or losses of their share of the business. Like an S corporation, a partnership itself does not pay taxes. Each individual partner pays income tax on their share of the income or losses of the business.
Limited Liability Company
The IRS does not consider LLCs to be taxable entities.
Single-members LLCs pay tax as either sole proprietorships or as partnerships. In other words, the owner’s personal Form 1040 includes the net income from the LLC — the LLC itself does not pay taxes.
Multiple-member LLCs pay tax as partnerships. Each partner will receive a Schedule K-1 detailing the partnership’s income or losses. The information from the K-1 completes each partner’s personal tax return.
LLCs Can Choose Their Taxation Method
Now, an LLC can elect to follow corporate taxation. There are benefits and drawbacks to choosing this approach and the choice is usually made depending on the income level of your business.
Whereas sole proprietorships, partnerships, and LLCs all “pass” their income to their owners, an LLC taxed as a regular corporation does not. In practical terms, this means that business owners will pay tax twice — once on the income of the corporation and again on the dividends of the business.
Most importantly, an S corporation provides flexibility in compensation. While an LLC passes its earnings directly to the owner (making those earnings subject to self-employment tax), an S corporation can split earnings between wages/salaries and corporate distributions.
Whether or not that tax situation is beneficial depends entirely on your personal situation.
Step One: Gather Your Records
Records are everything! You’ll want every single business record you have in front of you to file.
The exact records you need depend on your business, but some things are universal — every business will have some mixture of income and expenses.
Income
Every source of income, regardless of how small, must be verifiable. You’ll want to gather the following:
- Gross receipts or sales
- Returns and allowances
- Cost of goods sold
- Gross profit
- Other income, including federal and state gasoline or fuel tax credit or refund
- Gross income
- Interest paid from business checking or savings accounts (yes, it counts as income!)
Now, depending on your business, you may have a few blank spaces. Not every business has physical inventory, for example. Remember, you need to report all the income your business received.
Expenses
Expense reports, like income, must be verifiable. You’ll want records of the following:
- Advertising
- Car and truck expenses
- Commissions and fees
- Contract labor
- Depletion
- Office expense
- Rent or lease
- Repairs and maintenance
- Travel
- Utilities
- Wages
- Insurance, mortgages, and legal or professional services
- And plenty more!
Employee or Subcontractor Tax Information
If your business has employees, you’ll need to ensure you have the appropriate information on-hand:
- Form W-2
- Form W-3
- Payroll returns (Form 940, Form 941)
If you have issued payments of $600 or more to non-employees (subcontractors, accountants, attorneys, etc.), you’ll need a completed Form W-9 from each qualified non-employee.
Where Do I Find All This Information?
Check your financial accounting software. QuickBooks, for example, lets you export a great deal of business information directly to your tax services for small businesses provider.
Depending on the state of your records, it’s a good idea to start assembling your income and expenses as soon as possible. The IRS recommends keeping records for at least the past three years (and preferably longer).
Step Two: Filing the Right Forms
Now that you’ve gathered all your records, it’s time to select and file the right forms.
The IRS has forms for everything. It might seem intimidating, but remember that most ordinary businesses will not need to use the vast majority of these forms. On top of that, each form comes with on-page instructions describing exactly how to use them.
Tax Forms for a Sole Proprietorship
Remember how sole proprietors have to report their business profit or loss on their personal tax return? After all, there’s no separate legal entity between you and your business — it’s all on you.
Sole proprietorships can be liable for the following:
- Income tax
- Self-employment tax
- Estimated tax
- Social Security and Medicare taxes and income tax withholding (for employees)
- Information returns
- Federal unemployment (FUTA) tax
- Excise taxes
If you’re a sole proprietor, you may need the following:
- Form 1040, U.S. Individual Income Tax Return
- Schedule C (Form 1040) Profit or Loss from Business
- Schedule 1 (Form 1040), Additional Income and Adjustments to Income
Or, depending if you qualify:
- Schedule C-EZ (Form 1040)
For sole proprietors liable for self-employment tax, you’ll also want to fill out:
- Schedule SE (Form 1040), Self-Employment Tax
Likewise, sole proprietors may need:
- Form 1040-ES, Estimated Tax for Individuals
And, if your small business has employees, you’ll need:
Again, depending on your business, you may also need:
- Form 941 (Employer’s Quarterly Federal Tax Return)
- Form 943 (Annual Federal Tax Return for Agricultural Employees)
- Form 944 (Employer’s Annual Federal Tax Return)
Wait, What?!
It may seem like an impressive amount of forms, but don’t worry.
The vast majority of small business owners need only fill out the Schedule C attachment to their personal Form 1040, U.S. Individual Income Tax Return.
Chances are your small business doesn’t have any employees, agricultural workers, or require any of the 9xx forms. That said, tax services for small businesses exist for a reason — certified professionals will handle all of this for you.
Tax Forms for an S Corporation
S corporations are pass-through entities — the corporation doesn’t pay income taxes. Instead, the business passes its income, losses, deductions, and credits to its shareholder(s).
Assuming the corporation has already submitted its Form 2553 Election by a Small Business Corporation, the corporation will need to file:
- Form 1120S, U.S. Income Tax Return for an S Corporation
- Form 1120S Schedule K-1, Shareholder’s Share of Current Year Income, Deductions, Credits, etc.
As an S corporation shareholder, it’s simple!
All you’ll need to file is a:
- Form 1040, U.S. Individual Income Tax Return with an attached Schedule E.
Schedule E allows you to report income or loss from rental real estate, royalties, partnerships, S corporations, and so on. You’ll receive a K-1 from the S corporation in order to fill out the shareholder information.
It’s Not That Bad
Remember how sole proprietors mostly need to only file a Form 1040 and Schedule C? Most S corporation small business owners need to do the same, except with a Schedule E.
Tax Forms for a Partnership
Like S corporations, partnerships are pass-through entities. Each individual partner will pay income taxes on the profits or losses of the business.
It’s important to note that while a partnership does not pay income tax, it must file an annual return. Don’t forget!
The partnership will need to file the following for an annual return of income:
- Form 1065, U.S. Return of Partnership Income
Each individual partner will need to file the following for income tax:
- Form 1040, U.S. Individual Income Tax Return
- Schedule E (Form 1040), Supplemental Income and Loss
Individual partners may need to also to file the following for self-employment tax:
- Schedule SE (Form 1040), Self-Employment Tax
And, of course, you may need to also file:
- Form 1040-ES, Estimated Tax for Individuals
What Do I Actually Need to File?
The easy answer is that “it depends,” but in general, small business partnerships will need to file a Form 1065 on behalf of the partnership. Each partner will then need to file a Form 1040 and attach a Schedule E.
Tax Forms for a Limited Liability Company
Remember, an LLC itself is not a taxable entity by the IRS. Instead, the IRS will treat the LLC as a corporation, partnership, or part of the owner’s personal Form 1040.
To get a little more technical, an LLC with at least two members pays taxes as a partnership unless it files Form 8832 and “becomes” a corporation. A sole-member LLC is legally considered to be a “disregarded entity” — taxed on the owner’s tax return — unless the owner opts to pay tax as a corporation.
To summarize, the default tax structure for a single-member LLC is for the LLC to pay tax as a sole proprietorship. The default tax structure for a multiple-member LLC is for the LLC to pay tax as a partnership.
LLC Taxed as a Corporation
The process of opting to pay taxes as a corporation requires an election made via Form 8832, Entity Classification Election.
Step Three: Filling Out the Right Form
Now that you’ve gathered your records and found the right forms, let’s explore how to properly fill them out. Certified tax services for small businesses professionals will take care of all of this for you, but it’s also possible to do it alone.
Filling Out Form 1040, U.S. Individual Income Tax Return
The IRS redesigned Form 1040 in 2018 — it’s shorter, easier to fill out, and fairly self-explanatory.
Form 1040, Page 1
The standard Form 1040 is a two-page design. The first page consists of identifying information (name, Social Security number, address, and so on).
Simply fill in the information as accurately as possible. If you’re married, be sure to choose the correct filing status — filing as single instead of married makes for a headache down the road! Likewise, be sure to only claim dependents that qualify for that status. Qualified dependents must meet a series of standards set forth by the IRS.
Form 1040, Page 2
The second page of the Form 1040 consists of a simple, 23-line layout where you input your income, withheld tax, and other information.
Remember to list all your income sources! You need to account for salary and wages, unemployment, Social Security benefits, qualified dividends, and even alimony.
You cannot complete some of the Form 1040 lines without information from your Schedule C, Schedule 1, and so on. Once completed, attach the relevant forms to your Form 1040.
Filling Out Schedule C
Schedule C, Profit or Loss From Business (Sole Proprietorship) is an attachment to your personal Form 1040. This document is a simple two-page form that lists your business income, expenses, and cost of goods sold (if applicable).
Schedule C: Lines A-J
The top portion of your Schedule C consists of identifying information for your business. Input your business’s name, address, accounting method, and so on.
For small businesses that paid over $600 to non-employees (subcontractors, attorneys, accountants, etc.), be sure to check “Yes” on Line I and file Form 1099.
Schedule C Part I: Income
Part I of Schedule C is a straightforward list of your business’s income. Input the following:
- Gross receipts or sales
- Returns and allowances
- Cost of goods sold (if applicable)
- Gross profit
- Other income
- Gross income
Remember, Schedule C is for the listed business type. If you have multiple small businesses (even using different trade names), you can generally still file a single Schedule C. However, all your businesses must fall under the same IRS Activity Code. If the businesses have different Activity Codes, you’ll need to file separate Schedule C forms for each operation.
Schedule C Part II: Expenses
Part II of Schedule C requires you to list all your business-related expenses.
You’ll need to provide tax information for business expenses on everything ranging from advertising costs to insurance to wages.
Filling out Part II of Schedule C correctly depends largely on your specific business. Sole proprietorships, for example, will generally not need to worry about employee wages or benefit programs. Take your time filling out Part II and remember to cross-check your expenses with the IRS business-related expenses publication mentioned above.
Schedule C Part III: Cost of Goods Sold
If your small business creates physical products or inventory, you’ll need to provide information regarding your inventory, cost of labor, cost of materials, and cost of goods sold.
Schedule C Part IV: Information on Your Vehicle
You’ll only fill out Part IV on Schedule C if you’re claiming car or truck expenses and are not required to file Form 4562.
If you do choose to claim car or truck expenses, you’ll need to know when your vehicle began service for business purposes, the mileage for business and commuting, and whether you have documentation for this deduction.
Transferring Schedule C Information to Your Form 1040
Once you’ve completed your Schedule C, transfer the information to your Form 1040 and you’re done. The process may seem complicated, but remember — sole proprietors place all their business income on their personal tax return. It’s that easy!
Filling Out Form 1120S
S corporations use Form 1120s to file an income tax return. The corporation cannot use this form unless it has filed or is in the process of filing Form 2553.
Form 1120S Lines A-I
Lines A-I consists of simple business identifying information. You’ll need to know the date the business incorporated, total assets, date of the S election, and a few other bits of information.
Form 1120S Part I: Income
Like Part I of Form 1040 Schedule C, you’ll need to provide the following information:
- Gross receipts or sales
- Returns and allowances
- Cost of goods sold (if applicable)
- Gross profit
- Net gain (loss)
- Other income (loss)
- Total income (loss)
Form 1120S Part II: Deductions
S corporation deductions cover everything from the compensation of officers to salaries to advertising.
Form 1120S Part III: Tax and Payments
S corporations use this section to calculate their taxes and payments if they were previously C corporations. In practical terms, you’ll already know if you meet this criterion. The vast majority of incorporated small businesses are not converted C-to-S corporations!
Schedule K-1 (Form 1065) and Schedule K-1 (Form 1120S)
Schedule K-1 (Form 1065) and Schedule K-1 (Form 11120s) are broadly similar. The former reports a partner’s income, deductions, credits, etc. from a partnership, whereas the latter reports a shareholder’s information.
Both forms are nearly identical, but the Form 1065 K-1 includes information on the partner’s share of profit, loss, capital, and liabilities.
Schedule K-1 Part I: General Information
Part I of a Schedule K-1 provides basic information about the corporation or partnership. This information includes the name, address, and employer identification number of the business.
Schedule K-1 Part II: Information About the Partner or Shareholder
Part II of a Schedule K-1 (Form 1065) consists of information about the partner or shareholder.
Lines A-I provide basic identifying information (name, address, and so on).
Lines J-M provide information on the partner’s share of profit, loss, and capital (both beginning and ending). Line K provides information on the partner’s share of liabilities. Line L breaks down the partner’s capital account analysis, including withdrawals and distributions, capital contributions, and the ending capital account amount.
Part II of a Schedule K-1 (Form 1120s) features Line F, which is the shareholder’s percentage of stock ownership for the tax year.
Schedule K-1 Part III: Share of Income, Deductions, Credits, and Other Items
For both the 1120s K-1 and the 1065 K-1, Part III will break down the tax information for the corporation or partnership. The information differs slightly on each version of the K-1, but follow the on-page instructions.
The K-1 will tell you exactly where to transfer the information from the K-1 to your 1040.
Form 8829, Expenses for Business Use of Your Home
Self-employed small business owners are able to use Form 8829 to deduct some of the cost of a home office.
Form 8829 Part I: Part of Your Home Used for Business
Part I of Form 8829 covers the area used of your home used for business, the total area of your home, and information regarding daycare for children.
Form 8829 Part II: Figure Your Allowable Deduction
If you file Form 8829, you’ll need to also attach your Schedule C. Take the amount from Schedule C line 29 and use it on your Form 8829. You’ll need to spend some time following the on-page instructions, but the tax benefits are well worth it.
Part II of Form 8829 covers deductible mortgage interest, real estate taxes, insurance, rent, repairs, utilities, home depreciation, and plenty more.
Form 8829 Part III: Depreciation of Your Home
Part III allows you to calculate the tax information on the depreciation of your home. You’ll need your home’s adjusted basis or fair market value, the value of land, and some other information.
Form 8829 Part IV: Carryover of Unallowed Expenses
The last section of the form calculates the carryover of operating expenses and excess casualty losses and depreciation.
Step Four: Expenses and Deductions
Deducting expenses is both an art and a science — a good accountant can work some serious magic when it comes to lowering the tax bill. If there’s one place where certified tax services for small businesses earn their keep, it’s here. Expenses and deductions done correctly can save a shocking amount of money.
Broadly speaking, a business expense must be “ordinary and necessary.” The IRS argues that an ordinary expense is one that is “common and accepted,” while a necessary expense is one that is “helpful and appropriate” for your business.
As you can see, there’s a fair amount of wiggle room here! There’s enough information on deductible expenses to fill an entire library, so we’ll hit some of the highlights below.
Advertising
You’re legally allowed to deduct the cost of advertising, within reason — ad agency costs, signs, and so on.
Home Office Deductions
Many small business owners are self-employed and work from home. If you fall into this category, you’re allowed to deduct expenses related to your home office. Use Form 8829 (discussed above) in conjunction with Schedule C (Form 1040) to calculate this correctly.
Property Depreciation
The IRS allows you to deduct a portion of your business assets cost each year by using Form 4562, Depreciation and Amortization.
Step Five: Submission
Once all your forms are in order, you can go ahead and file your return with the IRS. For most small businesses, you’re able to file online.
E-File
The IRS allows you to file your personal tax return and attached Schedule C, K-1, etc., here. S corporation shareholders, sole proprietors, and partnerships can file information returns (such as the 1099-MISC) electronically here.
Paper File
It’s possible to file a paper return with the IRS. You’ll want to check here for the correct mailing address for your state.
Using Professional Tax Services for Small Businesses
Certified tax preparers send your returns directly to the IRS. If you’re looking for a professional to help you prepare your return, make sure they have an IRS-issued preparer tax identification number (PTIN).
Tax Services for Small Businesses
The tax process seems daunting. There are forms, attachments, and schedules galore. It is a stressful experience, especially without help. Using professional tax services for your small business needs can make tax time a breeze.
