Business Structure and Taxes: 5 Things You Need to Know
The type of business you own -- sole proprietorship, partnership, LLC, S corporation or C corporation -- has a big impact on how you file your taxes. How to find the right filing dates, tax forms and more.
Text Size:A A A
From different tax forms and deadlines to how much you pay to Social Security and Medicare, it can all get a little confusing come tax time. What's the best way to sort it all out? Here are five things you need to know.
Different structures require different tax forms.
- Sole proprietor. File a Schedule C for the business, along with your personal Form 1040. Form 1040 (including Schedule C) is due April 15 each year.
- Partnership. The partnership files Form 1065, which includes a Schedule K-1 stating the share of partnership income and deductions for each partner. Form 1065 is due each April 15. Schedule K-1 should be sent to each owner by this date.
- LLC. With one owner, you follow the rules for a sole proprietorship. If there are two or more owners, follow the rules for a partnership. Note: LLCs can opt to be taxed as corporations, but this is not usually done, and further discussion of LLCs assumes that no corporate election has been made.
- S corporation. File Form 1120S, whether you have one or more owners. The return is due March 15. At that time, you must also provide each owner with a Schedule K-1 showing the share of corporate income and deductions for each owner.
- C corporation. File Form 1120, whether you have one or more owners. The return is due March 15. There are no Schedule K-1 requirements for a C corporation.
If your business can't meet the filing deadline, you can obtain an extension of time to file. The period of the extension and the form used to make the extension request depend on your entity type. If you are a:
- Sole proprietor and one-owner LLC, you can obtain a six-month filing extension to Oct. 15. Use Form 4868 to request this extension.
- Partnership and multi-owner LLC, you can obtain a five-month filing extension to Sept. 15. Use Form 7004 to make your request; enter the code for your entity type.
- S corporation and C corporations, you can obtain a six-month filing extension to Sept. 15. Use Form 7004 to make your request; enter the code for your entity type.
How you report income and expenses also differs.
C corporations are separate taxpayers, as explained in the instructions to Form 1120. They are taxed on their profits and can deduct losses, subject to certain limits. Owners of C corporations only pay tax on their personal returns on salary, dividends and other taxable amounts distributed to them.
Certain structures provide more favorable tax treatment.
- A partner deducts these expenses as an above-the-line deduction (no itemizing of personal deductions is required).
- A shareholder in either an S or C corporation is an employee, so unreimbursed expenses can only be deducted as miscellaneous itemized deductions. Only amounts exceeding 2 percent of the owner's adjusted gross income can be deducted. If the owner is subject to the alternative minimum tax (AMT), all benefit from the write-off is lost, because miscellaneous deductions are not allowed for the AMT.
Social Security and Medicare taxes can vary.
In contrast, self-employed individuals -- sole proprietors, partners and LLC members -- are subject to self-employment tax on their net earnings from self-employment, namely all profits, whether or not distributed to owners. Self-employment tax is made up of both the employee and employer share of FICA. Thus, self-employed individuals can pay substantial Social Security and Medicare taxes even if they leave funds in the business.
Note: There are some tax experts who argue that LLC members should not be taxed on all their net profits, but the IRS has not yet issued guidance on the matter. Also, Congress has been discussing a change in the treatment of S corporation owners to make them taxed like partners for Social Security and Medicare tax purposes, although nothing has been decided yet.