What are the Types of Small Business Tax Returns?
Understanding the Different Types of Small Business Tax Returns
As a small business owner, one of the most important responsibilities you have is filing the correct tax returns each year. Failing to file the proper tax forms or pay the taxes you owe can lead to penalties, interest charges, and potential legal issues with the IRS.
With so many different types of business structures and tax situations, it can be confusing to determine exactly which tax returns your small business needs to file. This comprehensive guide will explain the various small business tax returns and forms required based on your business entity type, number of owners, employees, and other factors.
By understanding the nuances of small business taxes from the start, you can ensure you remain compliant, take advantage of all eligible deductions and credits, and minimize your tax liability. Let's dive into the main types of small business tax returns to prepare you for tax season.
Sole Proprietorship Tax Returns
If you are a solo entrepreneur operating a business by yourself, you are considered a sole proprietor in the eyes of the IRS. Sole proprietorships are not treated as separate tax entities - all business income and expenses get reported on your personal tax return.
As a sole proprietor, you will need to file the following forms along with your standard IRS Form 1040 individual income tax return:
Schedule C (Form 1040) - This is where you report all income or losses from your business. You'll list your revenues, deductible expenses, cost of goods sold, and profit or loss for the tax year1.
Schedule SE (Form 1040) - Sole proprietors must pay self-employment tax, which covers Social Security and Medicare taxes. Schedule SE is used to calculate your self-employment tax liability based on your net earnings from Schedule C2.
If you had any employees during the year, you would also need to file employment tax forms like Form 940 for federal unemployment tax and Form 941 for income tax withholding and FICA taxes.
Sole proprietors may need to make quarterly estimated tax payments if they expect to owe $1,000 or more in taxes for the year. This is done using Form 1040-ES.
While sole proprietorships are relatively simple from a tax filing perspective, it's important to keep detailed records of all your business income and expenses. This will make filling out Schedule C much easier.
Partnership Tax Returns
Partnerships are "pass-through" entities, meaning the business itself doesn't pay income taxes. Instead, the partnership's income, deductions, and credits pass through to the individual partners, who report this information on their personal tax returns.
The partnership itself must file an annual information return (Form 1065) reporting the income, gains, losses, deductions, and credits from the business's operation during the year. This return doesn't actually show a tax liability - it just reports the relevant tax information.
Each partner will receive a Schedule K-1 showing their share of the partnership's income, credits, deductions etc. The partners use this information to prepare their individual Form 1040, including Schedule E to report their partnership income or losses.
In addition to Form 1065 and the Schedule K-1s, the partnership may need to file other forms like:
- Form 8825 (Rental Real Estate Income) if the partnership had rental real estate activities
- Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) for foreign partnerships
- Employment tax forms like 940, 941 if the partnership had employees
So in summary, the partnership files Form 1065 as an information return, while the individual partners report their share of partnership income on their personal 1040s using Schedule E and the K-1 information34.
Limited Liability Company (LLC) Tax Returns
How an LLC is taxed depends on whether it has a single owner or multiple owners, and whether it elects to be taxed as a corporation.
Single-Member LLCs - If the LLC has only one owner, it is automatically treated as a "disregarded entity" for tax purposes. This means the LLC is taxed similarly to a sole proprietorship, with all income and expenses reported on the owner's personal tax return (Form 1040 + Schedule C and SE).
Multi-Member LLCs - When there are two or more owners, the LLC is taxed by default as a partnership. The LLC files Form 1065 as an information return, providing each owner with a Schedule K-1. The owners then report their share of LLC income on their individual 1040s using Schedule E, just like partners in a standard partnership.
LLCs Electing Corporate Taxation - An LLC also has the option to elect to be taxed as a C-corporation or S-corporation (more on those below). This is done by filing Form 8832. If making this election, the LLC would file a corporate tax return instead of a partnership return.
So in essence, LLCs with one owner are taxed as sole proprietorships, multi-owner LLCs are taxed as partnerships by default, and LLCs can optionally elect to be taxed as a corporation56.
C-Corporation Tax Returns
C-corporations are separate taxable entities from their owners (shareholders). This means the corporation itself is subject to corporate income tax on its profits.
C-corporations file Form 1120 to report their taxable income, tax deductions and credits, and calculate their federal income tax liability for the year. Any profits distributed to shareholders in the form of dividends are taxed again at the individual shareholder level, creating a level of "double taxation."
In addition to Form 1120, C-corporations may need to file other forms like:
- Form 1099 information returns for payments to contractors/vendors
- Employment tax forms like 940, 941 if they have employees
- Excise tax forms for certain industries
- State corporate income tax returns
The shareholders of a C-corporation only pay personal income tax on any salary/wages from the corporation (reported on their individual 1040s) and any dividends received, which get reported on Schedule B of the 1040.
So in summary, C-corporations file a corporate tax return (Form 1120) annually to report their income and pay corporate taxes. The individual shareholders are then taxed personally only on any wages or dividends from the corporation7.
S-Corporation Tax Returns
S-corporations are taxed in a similar manner to partnerships in that they are considered "pass-through" entities. An S-corp itself does not pay federal income taxes. Instead, the corporation's income, credits, deductions, etc. are passed through and reported on the personal tax returns of the shareholders.
To be taxed as an S-corp, the corporation must first elect S-corp status by filing Form 2553. It must also meet IRS requirements around number of shareholders, types of shareholders, and other criteria.
Each year, the S-corp files Form 1120S, which is an information return like partnership Form 1065. It reports the corporation's income, credits, deductions etc. but does not actually show a tax liability.
The S-corp will issue Schedule K-1s to each shareholder, reporting their pro-rata share of the corporate income and other tax items. The shareholders then report this K-1 information, along with their salary/wages from the S-corp, on their individual Form 1040 tax returns.
In addition, S-corps with employees need to file employment tax forms like 940 and 941. State income tax returns may also be required depending on the state.
So while S-corps file a corporate tax return (1120S), the corporation itself does not pay income taxes. The tax liability is passed through to the shareholders, who report their share of S-corp income on their individual tax returns89.
Keeping Up with Small Business Tax Changes
Tax laws and regulations frequently change, which can impact the forms and filing requirements for small businesses. The Tax Cuts and Jobs Act (TCJA) of 2017 was one of the most significant overhauls to tax legislation in decades, bringing changes that affected businesses of all sizes.
Some of the key provisions impacting small businesses from the TCJA included:
- Increased deduction for qualified business income from pass-through entities like partnerships and S-corps (up to 20% deduction)
- Doubling of the bonus depreciation deduction for purchases of business assets
- Increased limits for expensing depreciable assets under Section 179
- Elimination of the corporate alternative minimum tax (AMT)
- New limits on deductions for business interest expenses
More recently, the Inflation Reduction Act of 2022 extended and modified some of the TCJA provisions related to business tax credits. The employee retention credit was terminated early, while the research & development tax credit was enhanced10.
Tax rules are constantly evolving, so it's critical for small business owners to stay up-to-date each year and be aware of any changes that could impact their tax situation. Working with a qualified tax professional is highly recommended to ensure you remain compliant and take advantage of any new deductions or credits your business qualifies for.
When to File Small Business Tax Returns
The due dates for filing small business tax returns vary based on the type of business entity:
Sole Proprietorships - April 15th is the due date for Schedule C and the owner's personal tax return. This can be extended to October 15th.
Partnerships - Form 1065 is due on March 15th for calendar year partnerships. This can be extended to September 15th.
C-Corporations - Form 1120 is due on April 15th for calendar year corporations. This can be extended to October 15th.
S-Corporations - Form 1120S is due on March 15th for calendar year corporations. This can be extended to September 15th.
If your business has employees, employment tax returns like Form 941 (for withholding taxes) are due quarterly.
It's important to be aware of not just the annual filing deadlines, but also the requirements for making quarterly estimated tax payments if you expect to owe $1,000 or more in taxes for the year. Estimated taxes are generally due on April 15th, June 15th,
September 15th, and January 15th of the following year.
Failing to file tax returns or make estimated payments on time can lead to penalties and interest charges from the IRS. It's wise to put all the tax due dates on your calendar and set reminders to avoid missing any deadlines.
Tips for Simplifying Small Business Tax Filing
While taxes are a complicated necessity for all small businesses, there are some strategies you can employ to simplify the process:
Maintain Detailed Records - Good recordkeeping is crucial for tax time. Make sure to track all your business income and expenses meticulously throughout the year. Using accounting software can make this much easier.
Separate Business & Personal Expenses - Having a dedicated business bank account and credit card is highly recommended to avoid commingling personal and business expenses. This will make your bookkeeping much cleaner.
Work with a Tax Professional - Unless your tax situation is very simple, it's wise to work with a qualified tax preparer or certified public accountant (CPA). They can ensure you take advantage of all deductions and credits you qualify for while avoiding costly mistakes.
Use Tax Software - Programs like TurboTax and tax modules in accounting software can help you prepare and file your small business tax returns more efficiently.
Make Quarterly Estimated Payments - Paying taxes incrementally through estimated payments can help avoid a large bill at tax time.
Deduct Eligible Business Expenses - Make sure you track and deduct all the business expenses you are entitled to, from home office costs to vehicle expenses, employee benefits, and more.
Take Advantage of Tax Credits - There are numerous tax credits available for small businesses, such as the research & development credit, work opportunity credit, small business health care credit, and more. Maximize all the credits you qualify for.
By staying organized, working with professionals, utilizing technology, and taking advantage of all deductions and credits, you can simplify tax time and minimize your small business's tax liability each year.
The key is to start tax planning early and maintain good records throughout the year. With the proper preparation, filing your annual small business tax returns doesn't have to be a daunting process.
References:
1 IRS: About Schedule C (Form 1040), Profit or Loss From Business https://www.irs.gov/forms-pubs/about-schedule-c-form-1040
2 IRS: Self-Employment Tax (Social Security and Medicare Taxes) https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes
3 IRS: Partnership Return of Income https://www.irs.gov/forms-pubs/about-form-1065
4 IRS: Partner's Instructions for Schedule K-1 (Form 1065) https://www.irs.gov/instructions/i1065sk1
5 IRS: Limited Liability Company (LLC) https://turbotax.intuit.com/tax-tips/small-business-taxes/how-to-file-federal-income-taxes-for-small-businesses/L8ghn14sF
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.
