Key Takeaways

  • Sole proprietors report business income using Schedule C or Schedule F (for farmers), filed with their personal Form 1040.
  • Partnerships must file Form 1065 and issue Schedule K-1s to partners for individual tax filings.
  • LLCs may be taxed as sole proprietorships, partnerships, or elect corporate status, impacting which forms they use.
  • C corporations file Form 1120 and pay taxes at the entity level, potentially resulting in double taxation.
  • S corporations file Form 1120S and use Schedule K-1s for pass-through taxation to shareholders.
  • Additional tax forms such as Forms 941, 940, and 1099-NEC may apply depending on payroll and contractor payments.
  • Choosing the right tax classification and forms depends on your business structure and how income is distributed.

There are different types of business tax returns available to accommodate the different sizes and needs of businesses.

Tax Considerations by Business Type: Sole Proprietorship

In a sole proprietorship, both the owner and the business are the same. In regards to taxes, the government does not see the business in a sole proprietorship as a separate taxable entity. Any business liabilities or assets are included in the owner's personal liabilities and assets. A sole proprietor would file either of the following tax forms:

  • Schedule C
  • Schedule C-EZ, Form 1040 (individual income tax return)

Individuals can have multiple businesses under a sole proprietorship. In this case, they would just list each business and its activity on a new Schedule C form. A Schedule F would be used if the sole proprietorship is in the farming industry.

Sole proprietorships are generally simple to file. It includes any employees that are considered to be self-employed or an independent contractor. The paid tax rate is the same as the business owner's personal tax rate.

Other Sole Proprietorship Tax Responsibilities

Besides reporting business income on Schedule C or Schedule F, sole proprietors may also be required to file:

  • Schedule SE (Self-Employment Tax): This form is used to calculate Social Security and Medicare taxes.
  • Form 1040-ES (Estimated Tax): If a sole proprietor expects to owe $1,000 or more in taxes, they typically must make quarterly estimated payments using this form.
  • Form 1099-NEC: If the business pays independent contractors $600 or more in a year, it must file Form 1099-NEC with the IRS and send a copy to each contractor.

Tax Considerations by Business Type: General Partnership

A business partnership is also not considered to be a taxable entity. In a general partnership, each partner claims their own liabilities and assets and includes it with their personal tax return. All income that comes through the business is listed and then included on the individual tax return. A general partnership will utilize the following tax documents:

  • Form 1065 (return of partnership income)
  • Form 1040 (individual income tax return)

In a general partnership, each partner can expect to receive a Schedule K-1, which shares each partner's income. You will use this form when filling out your own income documents. Each partner can expect to pay taxes on their portion of the income received.

Additional Partnership Filing Obligations

General partnerships must also be aware of the following filing requirements:

  • Employment Tax Forms (e.g., Form 941 or 940): If the partnership has employees, it must report and remit payroll taxes.
  • State-Specific Returns: Many states require separate partnership filings even if the IRS does not tax the entity directly.
  • Estimated Tax Payments: Partners may need to file Form 1040-ES if their income from the partnership exceeds withholding levels.

Tax Considerations by Business Type: Limited Liability Company (LLC)

The government considers a limited liability company (LLC) a separate entity. An LLC offers liability protection to limited liability company owners. In regards to tax expectations, LLC's limited liability company owners. In regards to tax expectations, LLC's are similar to a partnership. Liabilities and assets are reported on the personal income statement and taxes are paid at the individual level. LLC owners will use the following tax return documents:

  • Form 1065 (return of partnership income)
  • Form 1040 (individual income tax return)
  • Schedule C (a Schedule C is only used if one person owns 100 percent of the LLC business)

LLC businesses can also decide if they want to be considered a C corporation or an S corporation. This can affect the required tax filing documents. Limited liability companies are not a taxable entity and are instead, taxed on the individual tax return. If an LLC has more than one member, they will treat the filing process similar to filing as a partnership.

Electing Tax Classification for an LLC

An LLC can elect to be taxed as a:

  • Disregarded Entity: A single-member LLC files as a sole proprietorship using Schedule C.
  • Partnership: Multi-member LLCs default to partnership taxation and file Form 1065.
  • S Corporation: The LLC must file Form 2553 to elect S corp status and then file Form 1120S annually.
  • C Corporation: The LLC files Form 8832 to be taxed as a C corp and then submits Form 1120 annually.

This flexibility allows LLCs to choose the most tax-efficient structure based on their income and reinvestment plans.

Tax Considerations by Business Type: C Corporation

A C corporation is a separate legal entity that is taxable. The C corporation is sometimes referred to as the regular corporation and is taxed at the corporate level. In some cases, they may also be double taxed due to dividend and salary payments. A C corporation would file the following documents:

  • Form 1120 (corporation income tax return)
  • Form 1040 (individual income tax return)

It is important to note, however, that the Form 1120 is not filed with the personal tax return. The two tax owing's could have separate tax rates.

C Corporation Estimated and Employment Taxes

In addition to Form 1120, C corporations must:

  • Pay Estimated Taxes: Use Form 1120-W to calculate and pay quarterly estimated taxes if the corporation expects to owe $500 or more.
  • File Employment Tax Forms: Corporations with employees must submit Forms 941 (quarterly payroll), 940 (annual FUTA), and W-2s.
  • Report Dividends (Form 1099-DIV): If shareholders receive dividends, the corporation must issue Form 1099-DIV to recipients and the IRS.

Tax Considerations by Business Type: S Corporation

An S corporation is also classified as a separate tax entity. An S corporation has special permission from the IRS for treatment as a partnership. They are not liable for corporate taxes and are instead taxed on a pass-through basis. The biggest advantage of this tax setup is that S corporations are not double taxed. An S corporation will file the following documents:

  • Form 1120S (income tax return for S corporation)
  • Form 1040 (individual income tax return)
  • Schedule K-1 (individual owner shares)

S corporations do not usually have as many partners, or shareholders, as C corporations do. Each of the S corporation owners reports their liabilities and assets on their personal income statements.

S Corporation Filing Deadlines and Compliance

S corporations must be aware of important compliance obligations:

  • Form 2553 (Election): Must be filed to elect S corp status, typically within 75 days of incorporation or start of the tax year.
  • Reasonable Compensation Requirement: S corps must pay shareholder-employees a reasonable salary subject to payroll taxes.
  • Filing Deadlines: Form 1120S is typically due by March 15. Extensions may be requested using Form 7004.
  • Payroll Tax Compliance: S corporations must withhold and remit employment taxes if they have employees, including the owners.

Frequently Asked Questions

  1. What is the difference between Form 1120 and 1120S?
    Form 1120 is used by C corporations, while Form 1120S is used by S corporations for pass-through taxation.
  2. Can an LLC choose how it is taxed?
    Yes, an LLC can elect to be taxed as a sole proprietorship, partnership, C corporation, or S corporation using IRS forms like 8832 or 2553.
  3. Do sole proprietors need to pay self-employment tax?
    Yes, sole proprietors must calculate and pay self-employment taxes using Schedule SE.
  4. What forms do I file if I hire employees?
    You may need to file Forms 941, 940, and issue W-2s and 1099s depending on your workforce.
  5. When are business tax returns due?
    Deadlines vary: sole proprietors file by April 15, partnerships and S corporations by March 15, and C corporations by the 15th day of the fourth month after their fiscal year ends.

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