No business is entirely immune from taxes. Even those operating at a loss still need to justify their revenue and expenses to the IRS to prove they actually don’t owe any taxes. How your business needs to report earnings to the IRS varies depending on how it’s structured.
For example, corporations need to use IRS Form 1120. A sole proprietor needs to file a Schedule C Form 1040 as a profit or loss statement. This is also the same for an LLC since technically the limited liability company doesn’t pay income tax, but the owners would need to report all their business income.
Two Form 1040s – If you’re a sole proprietor or the owner of an LLC, you may need to file two 1040s, one for your individual income tax and a Schedule C profit and loss form.
Form 1040 Schedule C-EZ – Small businesses, like gig workers, freelancers and some contractors, may be able to file the Schedule C-EZ. It’s given the “EZ” specification because it’s… easier to file. Not every business qualifies for the easier option, so make sure you visit the IRS’s Schedule C-EZ page to learn more. Basically, you can use the easy version if:
Many gig workers and freelancers fall into this category. If you do something like writing, programing or designing and all you use is your computer, you might meet all those qualifications.
Form 1040-ES – Regardless of how big your business is, if you’re self-employed, you need to pay estimated quarterly taxes. This is essentially government-mandated DIY withholding. You can do this online through the government’s EFTPS dashboard. There are several other options, including a direct pay for individuals and credit card payment options for businesses or individuals.
Failing to make your quarterly payments can result in penalties, even if you pay all your taxes before the tax deadline.
Form 1040-SE – This is essentially just a tool to help you figure out what you owe for Social Security and Medicare, or the “Self-Employment Tax.” Since you don’t have an employer who is paying half of your SS and Medicare, you’ll need to pay all of it yourself. It’s generally going to be 15.3 percent of your income (12.4 percent for SS and 2.9 percent for Medicare).
Schedule K-1 – Each partner needs to complete the Schedule K-1. The information from the Schedule K-1 is then used to complete the joint Form 1065. Its main purpose is to determine each partner’s stake in the business and its profits or losses.
Form 1065 – This is just an “informational form.” The IRS wants to know what your business made or lost so it can confirm what you end up paying in your personal 1040 is accurate and fair.
Form 1040 Schedule E – In addition to your Form 1040, you might also be required to file a Form 1040 Schedule E, which is only required if you have supplemental income or losses from your partnership business.
Form 1120-S – This is the S Corp version of the 1040 Schedule C. It’s the IRS’s tool for tracking not only your businesses revenue, expenses, losses and profits but also any credits or deductions to which your corporation may be entitled.
Form 1120-S Schedule K-1 – Just like the partnership K-1, every shareholder will be required to fill out this form. It serves the same purposes and usually doesn’t need to be filed with the IRS. It’s mainly a tool to help shareholders figure out their personal profit or loss from the business when they fill out their personal income tax forms.
Preparing your business’s income taxes is a time-consuming job, especially if you haven’t stayed on top of your company’s finances for the past year. It’s easy to make a mistake or miss out on deductions or credits that could significantly reduce your business’s tax burden.
Working with a business accountant not only saves you a lot of time and frustration when April rolls around – it also helps ensure you won’t make a mistake or end up paying the IRS more than you should.
Schedule a free consultation with the business tax preparation and accounting professionals at H&H Accounting Services by calling (480) 561-5805.
