Understanding Small Business Taxes

Businessman reviewing tax docs

A small business must file taxes just like any other business or individual. Additionally, if a self-employed individual has gross earnings in excess of $400, he or she must file a business return in the form of completing Schedule C of Form 1040.

If You Need to File a Business Tax Return

Self-employed individuals may be unsure whether they need to file a personal or a business tax return. In general, self-employed individuals do not need to file a business tax return. The Internal Revenue Service (IRS) defines a "self-employed individual" as someone who:

  • Operates a business as a sole proprietor or independent contractor
  • Is in business for themselves

In these instances, and individual would only need to file a personal tax return and include business earnings and deductions on that return.

What Forms to File

The form that a small business must file depends on its structure (for example, a limited liability company, corporation, or partnership). The IRS provides explanations of what form is needed, copies of the forms, and instructions about how to complete the forms online. Examples of forms required and their due dates are:

  • Members of partnerships needing to report income use IRS Form 1065. This 5-page form requires the taxpayer to identify the amount of income earned from both domestic and foreign partnerships. It is due on the 15th day of the 4th month of the partnership's established calendar year.
  • C or S Corporations needing to file for income tax must complete and submit IRS Form 1120. Income that must be reported on this form includes that from rents, royalties, dividends, and interest. It is due the 15th day of the 3rd month of the corporation's calendar year.

When to File a Business Tax Return

The deadline for filing a business tax return depends on the type of business, such as a partnership or S Corporation, that is filing a tax return, how the business manages its calendar year, and the form being filed.

The IRS has laid out 2014 due dates for business tax returns in Publication 509. These due dates are often the 15th day of the third or fourth month of the business' calendar year.

In addition to filing a main business tax return, business owners must abide by deadlines for other types of forms, such as W-2 wage and tax statements for money paid to employees. In 2014, the deadline to mail W-2s to employees is January 31st.

Additionally, small business owners who withhold employment taxes from employee paychecks must file quarterly reports. In 2014, these reports are due April 30, July 31, October 31, and January 31.

Specific Business Tax Liabilities

Small business owners have a few additional tax liabilities. Some of these liabilities are:

  • Employment taxes refer to Social Security, Medicare, unemployment tax, and federal income tax withheld by employers from employee wages. Accountings of tax withholdings must be reported to the IRS. Each type of tax is reported using a different form.
  • S-corporations, sole proprietorships and partners must make estimated tax payments if they expect to owe more than $1,000 in taxes at the end of the year. Additionally, corporations must make estimated tax payments if it expects to owe more than $500 in taxes at the end of the year. Failure to make estimated tax payments could result in the IRS assessing penalties against the business.

Deductions Unique to Businesses

Business owners may take advantage of several deductions. A non-exhaustive list of these deductions includes:

  • Home office deduction: Individuals who use a portion of their home exclusively for business purposes can deduct the costs associated with operating that portion of their home. These expenses may include the portion of mortgage payments, utility payments, insurance, and depreciation that can be allocated to that portion of the home.
  • Business use of your car: If you use your personal car for business purposes, you may deduct a per-mile cost for each mile you drove for business purposes. For the 2013 tax year, the per-mile cost was approximately $.56.
  • Rent expenses: You can deduct the cost of any rent payments you make to use the space in which your business operates.
  • Insurance: Insurance payments are considered a business expense and are, therefore, deductible.

When to Hire a Professional

When it comes to filing business tax returns, owners may choose to file on their own or hire a professional. It may make sense to hire a professional when:

  • You are unfamiliar with or uncertain which forms you need to file.
  • You have not submitted the forms previously or not complied with quarterly reporting requirements.
  • You would like to ensure that you save as much money as possible in the form of deductions.

In these circumstances, a tax professional can help you file the correct forms and meet all tax obligations, reducing the likelihood of your being audited.

Filing Your Business Taxes

What form you must file and when you must file it depends on the type of business you operate. If you are uncertain how or when to file a business tax return, consider hiring a professional.

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Understanding Small Business Taxes