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unning a small business requires a great array of talents: sales and marketing, people management, vendor negotiation, and of course, taxes. In fact, “small” is a misnomer: many of the issues faced by our clients, aren’t small. That’s why we at Shared Economy Tax are big believers in sharing key tax tips with maximum impact.
So while it’s not feasible to read through the 6,000 pages of the internal revenue code, we find the best way to cover your bases is to get up to speed on the key tax forms you will need or routinely see as a small business owner. Learning the basic tax forms you’ll encounter as a business operator is the first step to managing the Internal Revenue Service (IRS) and to making informed decisions about your tax bill and requirements.
This ultimate tax forms guide will cover the most common tax forms and terms used by small businesses, including those for reporting income, paying taxes, and maintaining records. Whether you're a new business owner or a seasoned operator, this guide will provide the information you need to stay on top of your small business taxes.
The Most Common Small Business Tax Forms
Small businesses have a series of filing requirements and depending on your fact pattern, your needs may differ. We’ll look at the most common forms typically required for small companies.
The W-9 form is a simple, one-page document that includes basic information such as the taxpayer’s name, business name (if applicable), address, and TIN. The form also includes a certification section, where the taxpayer certifies under penalties of perjury that the information provided is correct and accurate.
Get this from all your vendors as soon as you sign a contract. Make this part of your process. When you need to issue 1099’s, you will need the vendor’s tax information from the W9 and you don’t want to have to chase clients for it in January when it’s due.
Form 1040 + Schedule C
Form 1040 is an individual tax return form used by individual taxpayers to report their annual income from a business. Schedule C is a form used by sole proprietors, single-member LLCs, and other self-employed individuals to report their business income and expenses.
The Schedule C is a tax profit and loss statement. The net profit flows through to Form 1040 which is your usual full tax return for your personal taxes. If expenses incurred in the course of business are deducted from the total income, resulting in a net loss, that loss (up to a certain amount) lowers the business owner’s tax liability. When the business is profitable, the net income is subject to both self employment taxes (FICA and Medicare) at a rate of 15.3 percent and then, after deducting half of the self employment tax, subject to federal income tax rates at your marginal rate.
Form 1065 is a tax form used by partnerships for reporting their income, deductions, gains, losses, and credits to the Internal Revenue Service (IRS). A partnership tax return is required when two or more owners (“partners”) share the income, losses, and capital in a business. The information reported on Form 1065 is used to calculate each partner's share of taxable income, which is based on their share of the partnership's profits, which is reported on a Schedule K-1.
The key difference between a Schedule C and Form 1065 is that a 1065 is a separate return with a different deadline (March 15 for calendar year filers). The 1065 issues a Schedule K-1 which is passed onto the partners who report it on their personal income tax return. Since the profit or loss is reported on the personal income tax return, it is considered a “flow through” entity. All active partners in a partnership are subject to self employment taxes, similar to Sole Proprietors.
Form 1120 and Form 1120S
Form 1120 is a tax form used by C-Corporations to report their yearly income, expenses, gains/losses, deductions, and credits to the IRS. It's required for C-corporations and determines the corporation's taxable income and tax owed. Corporations pay taxes as separate entities and will need to make estimated payments in order to be compliant and avoid penalties and interest. When income is paid to owners (shareholders), that is considered a dividend and taxed at personal rates. That is why C-Corporations are typically not optimal for small businesses, since paying yourself is “double taxed”: first at the corporate level and then at the shareholder level.
Form 1120S is used for S-corporations and provides much of the same information and formatting as Form 1120. The difference is that an S-Corporation makes an election to operate as a flow through entity. Similar to a Partnership Form 1065, the S-Corporation issues a Schedule K-1 that gets reported on their personal income tax return. S-Corporations also have a tax benefit over Partnership in that their profits are not subject to self employment taxes.
Form 1099 Non Employee Compensation (NEC) reports independent contractor's earnings to the IRS and summarizes annual payments made to the contractor by the business. These are for any vendors you pay over $600 and the IRS can disallow contractor payments if no 1099 is on record. A copy is kept by the business, one sent to the contractor, and one sent to the IRS. Be sure to keep a Form W9 on hand for all contractors so you do not risk being unable to file a 1099.
Form W-4 is a document used by an employee to specify the number of allowances they claim for federal income tax withholding. This information helps determine the amount of federal income tax that should be withheld from the employee's paychecks. The employee fills out the form when they start a new job and can update it at any time if their tax situation changes.
Form W-2 is a tax form used by employers to report the amount of income, Social Security, and Medicare taxes withheld from an employee's pay during the calendar year. This form is submitted to both the employee and the IRS and is used by the employee to prepare their individual tax return.
Small Business Tax Terms Every Business Owner Should Know
Now let’s look at the essential tax terms that every small business owner should be familiar with to stay compliant and manage their finances effectively
Small businesses are required to make payments towards their tax bill on a quarterly basis. These payments, known as estimated taxes, help ensure that the business stays on track with its tax obligations throughout the year. The amount paid in estimated taxes is based on the business's estimated taxable income for the year. Overpayments will result in a year-end tax refund, while underpayments can result in penalties.
Self-employed individuals have the responsibility of paying both the employee and employer portions of Medicare and Social Security taxes, which are collectively referred to as self-employment taxes. These taxes are calculated based on the self-employed individual's net income from their business. Although the amount can be substantial, the employer portion is deductible, meaning it can be claimed as a business expense on the individual's tax return, reducing the overall tax burden.
Small business deductions are a crucial component of managing your tax liability. By qualifying and deducting business expenses from your taxable income, you can effectively lower your tax bill. Business expenses that are considered ordinary, necessary, and reasonable for your industry can be deducted. This includes expenses like rent, supplies, employee salaries, insurance, and more. It's important to keep accurate records and receipts of all business expenses to ensure you are taking advantage of all possible deductions.
Tax credits are a valuable tool for small business owners as they are a dollar-for-dollar credit on your tax bill. They directly reduce the amount of tax owed and can have a significant impact on your bottom line. Unlike deductions, which reduce your taxable income, tax credits are a direct credit against your tax bill. Tax credits can either be refundable, meaning that any unused portion is returned to you as a tax refund, or non-refundable, meaning that the credit only reduces your tax bill to zero and does not generate a refund.
Depreciation is a method of accounting for the decrease in value of an asset over time, usually due to wear and tear, obsolescence, or simply the passage of time. Under normal tax rules, businesses are not allowed to deduct the full cost of an asset purchase immediately. Instead, they write off the cost of an asset over time via depreciation, which represents the annual decrease in an asset's value.
For example, if a business purchases a computer for $1,000, it may write off $200 per year over 5 years as the computer becomes older and less valuable. This allows businesses to gradually recover the cost of the asset, and reduces their taxable income.
Section 179 is a tax provision that allows small businesses to deduct the full cost of certain assets, such as equipment and machinery, in the year they are purchased, instead of spreading the deduction over several years through depreciation. This tax code allows businesses to immediately deduct the expenses associated with acquiring assets, which can help to lower their taxable income in the year of purchase. To be eligible for the Section 179 deduction, the assets must be used for business purposes and meet certain requirements set by the IRS.
Bonus depreciation is a provision under Section 179 of the tax code that provides an additional tax benefit to businesses. It allows businesses to claim extra deductions on certain kinds of asset purchases, such as machinery, equipment, and other business-related property. This additional deduction helps businesses reduce their taxable income, effectively lowering their tax bill for the year. The specific rules for claiming bonus depreciation may change from year to year.
An entity is a business that exists as a separate legal entity from its owners. This means that it has its own rights, liabilities, and obligations distinct from those of its owners. In order to function and be recognized by the law, entities require a separate tax filing specifically for the business. Examples of entities include corporations, limited liability companies (LLCs), and others. This distinction is important for taxation purposes, as it determines the way in which the business will be taxed and the forms that it will need to file.
A pass-through entity is a type of business structure where the profits, losses, and tax liability are "passed through" to its owners rather than being taxed at the entity level. This type of entity is considered a separate tax entity from its owners, but the tax responsibility for the business is still passed through to the owners, who report it on their individual tax returns based on their ownership percentage. Examples of Pass-Through Entities include S Corporations and Limited Liability Companies (LLCs).
A Disregarded Entity is a type of business entity that is considered tax-invisible by tax authorities. This means that 100% of its income is allocated to its sole owner, who reports the income on their personal tax return. As a result, the business is effectively irrelevant from a tax perspective. Examples of Disregarded Entities include sole proprietorships and single-member limited liability companies (LLCs).
Running a business can be overwhelming, but our aim is to provide you with a solid foundation of small business tax forms and terms to help you ask the right questions. Although there are many more to learn, the information presented here is a great starting point and should be used to supplement year-round professional advice. If you don’t have an advisor and would like to connect with our firm, reach out to us here.
This post was written by Miguel Centeno of Shared Economy Tax, a tax firm for 1099 independent contractors and those working in the Sharing Economy to help with tax planning, compliance, preparation and savings.
Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.
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