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Tax Time Is Coming: What You Need to Know
Filing tax returns is an annual headache for most business owners. But knowing the right forms to file and when to file them can make the process a lot less painful. A look at the easiest ways to keep the tax man away.
Posted 2/ 11 10 at 3:56 PM | Money, Taxes & Accounting
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One of the least fun things about running a business is filing tax returns and paying Uncle Sam. Still, we all have to do it or face unpleasant consequences, such as penalties and interest. So here's a quick guide on what you should do now, in order to stay in compliance with your tax obligations. Who knows, you just might have a refund coming your way!Step 1: File your return on time
The type of return you file -- and when it's due -- depends on how your business is set up from a legal perspective and whether you operate on a calendar year (as the majority of small businesses do), which ends on December 31, or on a fiscal year, which ends on the last day of any other month. Let's assume your business runs on a calendar year. You have to file as follows:
- Sole proprietorships, independent contractors, partnerships, and most limited liability companies, or LLCs -- April 15, 2010.
- S corporations and C corporations -- March 15, 2010.
The form you file also depends on how your business is set up. Sole proprietors, independent contractors, and LLCs with one owner have the simplest filing rule. If you are in this category, complete Schedule C (www.irs.gov/pub/irs-pdf/f1040sc.pdf) (or Schedule C-EZ if you meet certain conditions for this even simpler form) and attach it to your personal return, Form 1040. There is no separate reporting required.
Partnerships and LLCs with two or more owners are not in and of themselves taxpayers but they are required to file Form 1065 (www.irs.gov/pub/irs-pdf/f1065.pdf). This operates like an information return, telling the IRS the income and expenses of the business. Along with this form, the business completes Schedule K-1 for each owner to allocate his or her share of the business' income, deductions, credits, and other tax items. Then owners report their share of these items on their personal tax returns.
S corporations file Form 1120S (www.irs.gov/pub/irs-pdf/i1120s.pdf) and also complete Schedule K-1s for each owner. Like partnerships, the business' income, deductions, credits, and other tax items are allocated to each shareholder who then reports the items on his or her personal tax return.
C corporations file Form 1120 (www.irs.gov/pub/irs-pdf/f1120.pdf). Since C corporations are separate taxpayers, they not only report their income on the return; they also pay taxes on this income.
Step 2: Ask for a filing extension, if you need one
If, for any reason, you cannot meet the tax filing deadline, be sure to request a filing extension. For instance, if you an owner in an LLC and haven't received your Schedule K-1 by the time your personal return is due, you'll want a filing extension for your personal return. If you don't obtain one, you may be subject to late filing penalties if you owe taxes. The penalty is 5 percent of the tax due on the return for each month you're late, up to maximum penalty of 25 percent, as well as a separate late payment penalty and interest.
Sole proprietors and independent contractors make the request on Form 4868 (www.irs.gov/pub/irs-pdf/f4868.pdf), while other types of businesses do so on Form 7004 (www.irs.gov/pub/irs-pdf/f7004.pdf).
- Sole proprietors and independent contractors get six extra months to file their return -- to October 15, 2010.
- Partnerships and LLCs have five months to file their returns -- September 15, 2010.
- S and C corporations have six months to file their returns -- September 15, 2010.
Step 3: Pay your taxes -- on time
You are required to pay your taxes by the original filing deadline. Obtaining a filing extension does not give you more time to pay your taxes; it only extends the time for filing a return and avoids a late filing penalty. If you don't pay what's due by April 15, there is a late payment penalty of 0.5 percent for each month the tax is not paid in full; there is no cap on this penalty, which runs every month the tax bill is paid.
If you don't have the money on hand to pay the taxes you owe, there are some options, including charging taxes to a major credit card (www.irs.gov/efile/article/0,,id=101316,00.html) or requesting an installment agreement (www.irs.gov/businesses/small/article/0,,id=108347,00.html).
While taxes may not be enjoyable, avoiding your obligations can cost you money. In addition to your federal tax return, be sure to check on filing requirements for the state or states in which you do business.
- S corporations and C corporations -- March 15, 2010.
The form you file also depends on how your business is set up. Sole proprietors, independent contractors, and LLCs with one owner have the simplest filing rule. If you are in this category, complete Schedule C (www.irs.gov/pub/irs-pdf/f1040sc.pdf) (or Schedule C-EZ if you meet certain conditions for this even simpler form) and attach it to your personal return, Form 1040. There is no separate reporting required.
Partnerships and LLCs with two or more owners are not in and of themselves taxpayers but they are required to file Form 1065 (www.irs.gov/pub/irs-pdf/f1065.pdf). This operates like an information return, telling the IRS the income and expenses of the business. Along with this form, the business completes Schedule K-1 for each owner to allocate his or her share of the business' income, deductions, credits, and other tax items. Then owners report their share of these items on their personal tax returns.
S corporations file Form 1120S (www.irs.gov/pub/irs-pdf/i1120s.pdf) and also complete Schedule K-1s for each owner. Like partnerships, the business' income, deductions, credits, and other tax items are allocated to each shareholder who then reports the items on his or her personal tax return.
C corporations file Form 1120 (www.irs.gov/pub/irs-pdf/f1120.pdf). Since C corporations are separate taxpayers, they not only report their income on the return; they also pay taxes on this income.
Step 2: Ask for a filing extension, if you need one
If, for any reason, you cannot meet the tax filing deadline, be sure to request a filing extension. For instance, if you an owner in an LLC and haven't received your Schedule K-1 by the time your personal return is due, you'll want a filing extension for your personal return. If you don't obtain one, you may be subject to late filing penalties if you owe taxes. The penalty is 5 percent of the tax due on the return for each month you're late, up to maximum penalty of 25 percent, as well as a separate late payment penalty and interest.
Sole proprietors and independent contractors make the request on Form 4868 (www.irs.gov/pub/irs-pdf/f4868.pdf), while other types of businesses do so on Form 7004 (www.irs.gov/pub/irs-pdf/f7004.pdf).
- Sole proprietors and independent contractors get six extra months to file their return -- to October 15, 2010.
- Partnerships and LLCs have five months to file their returns -- September 15, 2010.
- S and C corporations have six months to file their returns -- September 15, 2010.
Step 3: Pay your taxes -- on time
You are required to pay your taxes by the original filing deadline. Obtaining a filing extension does not give you more time to pay your taxes; it only extends the time for filing a return and avoids a late filing penalty. If you don't pay what's due by April 15, there is a late payment penalty of 0.5 percent for each month the tax is not paid in full; there is no cap on this penalty, which runs every month the tax bill is paid.
If you don't have the money on hand to pay the taxes you owe, there are some options, including charging taxes to a major credit card (www.irs.gov/efile/article/0,,id=101316,00.html) or requesting an installment agreement (www.irs.gov/businesses/small/article/0,,id=108347,00.html).
While taxes may not be enjoyable, avoiding your obligations can cost you money. In addition to your federal tax return, be sure to check on filing requirements for the state or states in which you do business.
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