Tax requirements in the U.S. can be complex, so we’ve put together this guide to the types of forms you’ll need to file, based on the type of business you’re running. Of course, everyone’s business and tax situation is unique — use this guide as a starting point, but discuss the intricacies of your tax situation with a qualified professional.
Best Practices for Getting Your Taxes Right
Although taxes are complicated, there are several things you can do to make managing, filing, and paying your taxes a little easier.
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Get a good, qualified accountant or other tax professional who can advise you on your specific tax needs.
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Create a separate bank account for your business — for several types of business entities, that’s a requirement, for other businesses, it’s simply an excellent idea.
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If you’re going to be employing others and paying a salary, set up a payroll system so you can create the necessary forms, pay stubs, reports, and bank credits.
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Get an Employee Identification Number from the Internal Revenue Service.
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Keep accurate records in a proper bookkeeping or accounting software system and provide access to your accountant.
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Create reminders to pay estimated taxes four times a year, typically on the 15 of April, June, September, and January.
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Talk to your accountant about the best type of business entity for your needs and create a company with your Secretary of State.
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Learn about the types of forms you need to file and your requirements for collecting and reporting on data.
The worst surprise about being self-employed
You will learn about something called self-employment taxes, which are basically Social Security and Medicare taxes that are collected by the IRS.
When you are an employee, your employer pays for half of these taxes. However, when you are self-employed, you must pay 100% of these taxes yourself. Self-employment taxes are around 16% of adjusted gross income. Meaning, if your AGI is $100,000, you will owe $16,000 — before any federal income taxes are due!
That is, in this hypthetical, your tax return could show that you will owe $16,000 for Medicare and Social Security taxes yet still have to calucalte how much you own in federla income taxes.
The upshot? Thanks to the 2017 Tax Reform, at least now there is a Qualified Business Income (QBI) Deduction that allows you to offsetsome of your self-employment taxes. Read more about QBI here.
Also, another way to possibly reduce your self-employment taxes is by using something called an "S corporation" or "S corp." We will talk more about S corps below.
The Types of Business Entity You Can Create
When you’re forming a business, there are several different types of entity that you can set up, each with unique tax requirements. We’ll get into the details of tax forms later, but it’s useful to have a quick overview of the main types of businesses.
Sole Proprietorship
If you don’t form a different type of business, this is the default for how you will be treated by the IRS for tax purposes. It effectively means that you and your business are one and the same — any income earned by you or your business will be taxed as income you have earned yourself on your personal tax return.
Partnership
A partnership is formed when you go into business with someone else without forming another type of legal business entity. Any earnings will be split between the partners and taxed as income on partnership and personal tax returns. Partnership finances and earnings details are typically defined in a partnership agreement.
Limited Liability Company
A Limited Liability Company (LLC) is a formally created business entity, normally set up by filing “Articles of Organization” with the Secretary of State in your state. In most cases, LLC income is reported and taxed on your personal or partnership tax returns, unless you’ve elected to be treated as an S Corporation for tax purposes. Some states allow for Limited Libality Partnerships (LLP) which too can be taxed as an S Corp
S Corporation
You can form an S Corporation by filing official documents with your Secretary of State. S Corporations do need to file separate tax forms, as do LLCs that have chosen to be taxed as an S Corporation by filing a Form 2553.
C Corporation
C Corporations are also formed by filing official documents the Secretary of State, typically Articles of Incorporation. They must also file special tax forms as part of their reporting requirements.
Other Types of Business Entity
There are some other types of business entities including non profit 501(c)(3), and Limited Liability Partnerships (LLPs) and others. Doue to their unique nature, we haven’t covered their tax form requirements in this article.
Types of Federal Tax Payable by Businesses
The main types of federal tax that you will need to file and report to the Internal Revenue Service are listed below.
Self-Employment Tax
Again, this tax, also known as FICA / Medicare tax, is paid on any profits that a business makes. As a sole proprietor, partnership, or LLC, you will be liable for both the employee and the employer portion of self-employment tax, which together come to just under 16 percent. You will not typically need to pay self-employment tax if you pay payroll tax.
Payroll Tax
If you pay yourself or your employees through a payroll service issuing Form W2s and Form 941s nad 940s, instead of paying self-employment tax, you will pay payroll tax instead. As the employer, you will need to pay the relevant half of the payroll tax, at just over 7.5 percent. Employees will pay the other half of the payroll tax. If you are paying yourself as an employee, you will pay both portions, as for self-employment tax.
FUTA
If you pay employees through a payroll system, you will also be responsible for Federal Unemployment Tax Act (FUTA) payments. Many payroll systems deduct and pay these taxes automatically.
Federal Income Tax
Federal income tax is payable on your earnings, less your deductions, allowances, and tax credits. If you pay employees through a payroll system, then any salary paid through that will normally have federal income tax deducted. Federal income tax will also be payable on various other money, including rental income, interest payments, other business earnings, and miscellaneous income.
Types of State and Local Taxes Payable by Businesses
Your state may also impose taxes on earnings and other areas.
State Income Tax
Depending on where you live, you may need to pay state income tax on your earnings. As for federal income tax, most states provide deductions, allowances, and tax credits, meaning you will only pay a percentage of money earned over certain limits. If you pay employees through a payroll system, it’s likely that state tax is deducted and paid as part of the salary process.
Sales and Use Tax
If you sell certain goods and services, you may be liable to pay sales and use tax to the state, region, county, or local municipality.
SUTA
If you pay employees through a payroll system, you will also be responsible for State Unemployment Tax Act (SUTA) payments. Many payroll systems deduct and pay these taxes automatically.
Other Taxes
There are several other types of tax you may need to pay to the federal or state government or other agencies, depending on various factors:
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Franchise taxes are sometimes levied by the state government on particular types of business entities.
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Property taxes are likely to be payable on your business premises.
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Capital gains taxes are paid on profits made from the sale of an asset, typically investments. .
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If you sell certain specialist products like alcohol, tobacco, fuel, and other goods, you may need to pay special excise and other taxes.
Types of Federal Tax Forms to File by Business Entity
Depending on the type of business entity that you are, you will need to report your financial information and file tax forms with the IRS as shown below. Note that all of these forms are applicable under normal circumstances. Always speak with a tax professional to understand your specific filing requirements.
Sole Proprietorship
The following forms are used to capture and report on self-employment / payroll and federal income tax for sole proprietorships.
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Personal earnings and income are captured and reported on a 1040 federal income tax return.
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Business earnings and income are captured and reported on a 1040 Schedule C.
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Business self-employment tax is captured and reported on a 1040 Schedule SE.
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Salaried payroll is captured and reported on a Form W2 / W3 and a Form 941 or 944.
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Salaried FUTA is captured and reported on a Form 940.
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Estimated taxes are filed and paid on Form 1040-ES.
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Specialized taxes will be captured and reported on speciality forms.
Partnerships
The following forms are used to capture and report on self-employment / payroll and federal income tax for partnerships.
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Partnerships must file a Form 1065 Return of Partnership Income that details income, gains, losses, deductions, credits, etc. You may also need to prepare and file certain schedules with the 1065.
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Personal earnings and income for each partner are captured and reported on a 1040 federal income tax return.
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Business self-employment tax is captured and reported on a 1040 Schedule SE.
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Salaried payroll is captured and reported on a Form W2 / W3 and a Form 941 or 944.
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Salaried FUTA is captured and reported on a Form 940.
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Estimated taxes are filed and paid on Form 1040-ES.
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Specialized taxes will be captured and reported on speciality forms.
Limited Liability Company
An LLC is typically taxed the same as a sole proprietorship, partnership, or S Corporation and must generally file the same forms. An LLC is simply a legal designation, and does not impact how the business is treated by the IRS for tax purposes.
S Corporation
The following forms are used to capture and report on payroll and federal income tax for S Corporations.
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S Corporations must file a Form 1120S U.S. Income Tax Return for an S Corporation that details the finances of an S Corporation. You may also need to prepare and file certain schedules with the 1120S.
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Personal earnings and income are captured and reported on a 1040 federal income tax return.
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Salaried payroll is captured and reported on a Form W2 / W3 and a Form 941 or 944.
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Salaried FUTA is captured and reported on a Form 940.
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Estimated taxes are filed and paid on Form 1040-ES.
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Specialized taxes will be captured and reported on speciality forms.
C Corporation
The following forms are used to capture and report on payroll and federal income tax for C Corporations.
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C Corporations must file a Form 1120 U.S. Corporation Income Tax Return that details the finances of a C Corporation. You may also need to prepare and file certain schedules with the 1120.
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You may also need to file other tax forms for a C Corporation as they are complex entities. Check with your accountant.
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Personal earnings and income are captured and reported on a 1040 federal income tax return.
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Salaried payroll is captured and reported on a Form W2 / W3 and a Form 941 or 944.
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Salaried FUTA is captured and reported on a Form 940.
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Estimated taxes are filed and paid on Form 1040-ES.
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Specialized taxes will be captured and reported on speciality forms.
State Tax Requirements and Forms
State tax requirements vary from state to state, in terms of how you capture information and report it to state authorities. Specific forms and timescales will vary between states, so please consult the website of your state’s Department of Revenue. Speak to your accountant about your specific state reporting and tax requirements.
Estimated Taxes
Both federal and state governments will require you to estimate how much tax you will owe through the year and to make estimated tax payments, typically four times a year. The types of estimated taxes you will need to pay are:
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Self-employment tax.
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Federal income tax.
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State income tax.
You may also need to make estimated payments for some speciality or sales and use taxes. Check with the relevant authorities.
As you can see, there’s plenty to think about when you’re setting up a new business, but a little more effort now will make things much easier at tax time! Remember, if you ever need help with your taxes, we have experts you can rely on.
