Filing business taxes is a daunting task for business owners. As a business owner, you are responsible for federal, state, and local taxes, as well as various other tax filings related to the running of your business. It is important that you understand your business filing requirements so that you file your taxes accurately and on time.
Federal taxes make up the largest portion of your tax burden, and the details of how to file with the IRS vary based on the structure of your business entity.
State and local taxes vary from state to state and municipality to municipality and you should check with your local tax agencies for specific instructions.
Business taxes based on business structure
The structure of your entity determines which business tax return you need to file. Every business will need to file an annual return, but the what, how, and when of your tax obligation vary based on the legal structure of your business.
Business taxes for sole proprietorships
Sole proprietorships are generally simple to file. In a sole proprietorship the IRS considers the owner and the business to be the same and treats them like one taxable entity.
If you are the owner of a sole proprietorship, you don't need to file a separate business tax return. Instead, you report any business income or loss on your personal return using Schedule C. The IRS taxes your business income at your personal income tax rate. If you have more than one business, prepare multiple copies of Schedule C.
As a self-employed individual, you are also subject to self-employment taxes and estimated quarterly tax payments during the year.
Business taxes for partnerships
The IRS considers partnerships to be pass-through entities. This means that the business itself doesn't pay any taxes but passes income and loss along to the individual partners according to their membership interests.
Partnerships file Form 1065, which is an annual information return showing the partnership business income, deductions, gains, and losses. Partnerships also need to provide every member with a Schedule K-1, which shows each member's respective share of business income or loss. Each partner then reports their share of the partnership income or loss on their personal income tax return.
Business taxes for C corporations
The IRS considers C corporations to be separate legal and taxable entities from the owners. As such, it taxes earnings at a flat corporate tax rate. C corporations file their annual return on Form 1120.
C corporations are subject to double taxation, meaning earnings are taxed both at the corporate level, and then again when individual shareholders receive dividends and other returns which are taxed at their personal income tax rate.
Business taxes for S corporations
S corporations are corporations that have a limited number of shareholders and elect to be treated as pass-through entities for tax purposes. This allows S corporations to avoid the double taxation faced by shareholders of C corporations. In an S corporation, income and loss is passed through to individual shareholders who must report their share of profits on their personal return using their personal income tax rate.
S corporations file an annual informational return on Form 1120S.
Business taxes for limited liability corporations
In a Limited Liability Company (LLC), owners are considered legally separate from the company, yet have a choice when it comes to filing status. The tax treatment for LLCs is as follows:
- If you own 100% of an LLC, you are considered a disregarded entity and report income using Schedule C on your personal return.
- An LLC with more than one member is treated by default as a pass-through entity similar to a partnership, and files Form 1065.
- An LLC may elect to file as a C or S corporation if they feel it is beneficial from a tax standpoint. LLCs that elect this filing status file using Forms 1120 or 1120S.
Additional business taxes
There are various other tax filings that your business may be required to report. here are some common ones.
Estimated quarterly tax payments
Income tax is the tax you pay on income that your business earned. The IRS considers income tax to be pay-as-you-go on income earned throughout the year. As a small business owner, if you expect to owe more than $1,000 in taxes at year end ($500 for corporations) you must make estimated quarterly tax payments to the IRS. This means more filings and deadlines to manage, but also that the bulk of your tax burden will have been paid by the time you file your annual business return.
If you are a self-employed business owner, you must file self-employment taxes to cover Medicare and social security taxes
Business owners who have employees must file federal payroll tax. Also called employment taxes, these taxes include:
- Social security and Medicare taxes
- Federal income tax withholding
- Federal unemployment tax (FUTA)
Some businesses are subject to an excise tax, which is a tax imposed on certain goods, services, or activities.
State and local taxes
Your business may be subject to the following state taxes, each of which is governed at the local level with requirements varying between states.
- Income Tax: Similar to federal income tax, businesses owe state income tax on income the business earns.
- Property Tax: This is a local tax on commercial property or land that your business owns.
- Sales Tax: Some states require that businesses collect tax on the sale of goods and services.
When are business taxes due?
While there are different due dates based on business structure and the type of form being filed, here are the essential tax return dates to look out for:
- Form 1065 and Form K-1 for partnerships and multi-member LLCs
- Form 1120S and Form K-1 for S corporations
- Schedule C and personal return for sole proprietorships and single-member LLCs
- Form 1120 and K-1 for C corporations
In addition to these tax return deadlines, there are also quarterly deadlines for payroll taxes and estimated quarterly tax payments. The IRS offers an online calendar as well as the option to sign up for reminders, which is a handy and convenient way to stay on top of your deadlines.
It's important that you understand the different types of business taxes and which ones are relevant based on your business structure. With a through understanding of your specific requirements and accurate, up-to-date records, you should have no problem meeting your tax filing obligations with ease.