When tax season comes, it’s important to understand your options for filing business taxes. IRS requirements for small business taxes can be more or less
complex, depending on the type of business entity. For example, LLC taxes are usually quite simple, while dealing with S Corp taxes can be more complicated
and requires a specialized S Corp tax return. However, filing as an S Corporation could
save you tax dollars.
Meanwhile, if your company is a C Corporation, you need to pay C Corp tax rates on any qualifying corporate profits.
Filing a business tax return is part of the annual requirements for managing your small business taxes. Just like your personal tax return, the IRS expects
your business to file a business tax return even if your business does not owe taxes.
Here are a few key points to keep in mind when filing business taxes, depending on your choice of business entity:
A Limited Liability Company (LLC) is generally treated as a “pass through” entity or
“disregarded entity” for tax
purposes, which means that your LLC does not pay taxes itself; all of the LLC’s profits or losses are “passed through” directly to the personal tax returns
of the LLC partners.
However, just because the LLC is a pass through entity does not mean that your LLC does not have to file any tax forms. Your LLC has to file Form 1065:
Partnership Return of Income, as well as a Schedule K-1 form for each member. If your LLC is a single-member LLC, you need to report the income from your
LLC on your personal tax return using Schedule C, and your business will be taxed as a sole proprietorship unless you elect to be classified differently. If
you have multiple members in your LLC, your LLC will be treated as a partnership for tax purposes. If you are a two-member LLC, and both members are a
married couple, you have the option to elect your tax classification as a single-member or multimember (partnership) LLC. But take note — this caveat only
applies to the nine
community property states: Arizona, California, Idaho,
Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska is an opt-in community property state that allows the option to choose to make your
property community property with your spouse. "Community property" essentially means that property is owned jointly by both spouses and is divided upon
death, annulment or divorce.
The LLC structure offers owners some important flexibility for tax purposes; with an LLC, you can elect to have your LLC file as an S Corporation for tax
purposes as described below
S Corp Taxes
If you set up your company to be an S Corporation, or elect to have your LLC file taxes as an S
Corporation, this can
have some tax advantages to reduce your self-employment tax liability. However, filing as an S Corporation requires you to file Form 8832: Entity
Classification Election, as well as Form 1120S: Corporation Income Tax Return or 1120-A, the “short version” of this form.
S Corporations, like LLCs, do not have to pay corporate income tax. Instead, the company’s income gets passed through to the owners and is reported on the
company owners’ personal income tax returns. The tax treatment of S Corporations is different from LLCs, in that the company owner(s) can choose to pay the
members a salary (subject to self-employment taxes) and also assign additional income to be treated as a distribution, which is not subject to
self-employment taxes. This can give the owners some flexibility in how they pay themselves from the company’s profits, as well as reduce their
Review how the S-Corporation can considerably reduce your self employment tax obligations with our S
Corporation Tax Calculator.
C Corporation Taxes
A C Corporation is required to pay corporate income tax. Unlike an LLC or S Corporation, this
type of business
structure is not a “pass through” entity. That means that your C Corporation will be required to pay taxes on the business’s income, and then the business
owners will also have to pay personal income tax upon the taxable dividends paid to the owners by the business. This situation is known as “double taxation”
because your company has to pay corporate income tax first, and then you as the business owner have to pay personal income tax.
C Corporations are required to file Form 1120: Corporation Income Tax Return, and the owners must report their income from the C Corporation (salary and any
dividends) on their personal tax returns (Form 1040). As the owner of a C Corporation, if you pay yourself a salary, you will also have to pay personal
income taxes and FICA with holdings (self-employment taxes, etc.) based on your salary.
Filing small business taxes can be complicated and often requires the assistance of professional tax advisers. Getting professional tax help can often make
the difference in avoiding costly errors or failing to comply with IRS rules. With that in mind, Incfile has teamed up with an accredited certified public
accounting firm that specializes with small business owners nationwide to help you with your tax filing needs this coming tax season.
Since tax season is right around the corner and comes swiftly when you're a busy business owner, we wanted to give you access to a CPA to get your personal
and business tax returns prepared professionally. If you have a Partnership, S Corporation or a C Corporation, you will have to file a business tax return
regardless of whether you have any activity or not in 2016. Those of you who have single-member LLCs might have a filing requirement for the business as
well, but that depends on whether you had activity in 2016 and some states required some form of filing regardless of inactivity.