New Business, New Taxes
Whether you are stating a new business or buying an existing business, you need to know what your federal and state tax obligations are for that business and yourself as the owner. I'm going to focus on the federal tax obligations in this post.
First, you need to decide what type of entity your business is going to operate as. Maybe you are and independent, contract-based roofer, and you want to operate as a sole proprietor. As a sole proprietor, you will report your income and expenses on an IRS Form Schedule C, which then gets added to your form 1040. In this case, you may not need an Employer Identification Number (EIN) or any additional forms or schedules separate from your individual return. However, you do still have more tax obligations!
Individuals who earn self-employment income are required to make estimated tax payments (ETPs) at least quarterly. The goal is to not owe when you file your tax return. However, the general rule is that if your tax liability is $1,000 or greater for the year, you are required to have paid in at least 90% of that prior to the return filing deadline. You can pay the remainder with your return and still have it considered paid on time. Generally, you can estimate your taxes by looking at your total tax owed the prior year and splitting that amount into four quarterly payments due April 15th, June 15th, September 15th, and January 15th. If it is your first year in business, it can be hard to estimate, and I usually recommend paying 25-30% of your income to the IRS. If you overpay, you can get a refund, and it's better than incurring penalties.
Now let's move on to more complicated business structures. If you have a partnership, corporation or S-corporation, your business is a separate entity from yourself and has its own filing requirements. Partnerships and S-corporations file what are referred to as informational returns. The entities themselves do not pay tax on the business income, as it flows through to the owners who will be taxed. Partnerships file Form 1065, which is normally due March 15th for businesses operating on a calendar year basis, or by the 15th of the third month following the end of the tax year. S-Corporations file Form 1120-S, which is also due on March 15th for businesses operating on a calendar year basis, or by the 15th of the third month following the end of the business' tax year. A partnership or S-corporation must also issue a K-1 to each of its shareholders or partners when it files this return. The partner or shareholder then uses this information to complete their personal income tax returns.
Income from a partnership or S-corporation is not self-employment income and therefor not subject to the self-employment tax. However, partners and shareholders still need to make estimated tax payments if they are not having taxes withheld from their income from the business. Some business owners choose to make themselves employees and receive income that is taxed. Those that do not need to use the same strategy as sole proprietors and make estimated tax payments on a quarterly basis.
Finally, if your business is a corporation, it is taxed at the corporate level. A corporation files a Form 1120 and is taxed on the profits of the business. The owners (shareholders) of the corporation as also taxed on any dividends distributed to them from those profits. This is often referred to as "double taxation." Form 1120 returns are due by April 15th for businesses operating on a calendar year basis, or the 15th of the fourth month following the end of their tax year. The corporation will also issue an IRS 1099-DIV to any owners/shareholders who received dividends.
Because both the corporation and its shareholders will be taxed, both need to make estimated tax payments. The general rule is that if a corporation will owe $500 or more in tax, it should make quarterly estimated tax payments. And the shareholders need to follow the same estimated tax principles as sole proprietorships on any dividends.
Okay, I know I've put a lot of information out there for you to consider, but there's more. If your business has employees, you have even more requirements. First, you have to determine if you have independent contractors or employees. That's a whole separate topic, but one you should look at very closely, as it can be costly if you get it wrong. Check out this great article about it for Illinois businesses.
If you pay an independent contractor more than $600, you have to report that to the IRS on Form 1096 and issue a Form 1099-NEC to that contractor. If you have employees, you are required to withhold taxes from them each pay period, and you are required to deposit those with the IRS throughout the year, along with the employer portions of the Social Security and Medicare taxes. Your deposit schedule will depend on the size of your payroll, although I always recommend my small business clients just deposit them when they run the payroll or, even better, use a payroll service. You will also need to file quarterly Form 941 returns reporting the wages your business has paid and the taxes withheld. (Some businesses may file a different employment tax return, but this one is the most common.) And you need to file a Form 940 each year to report your Federal Unemployment Tax (FUTA).
Are you tired yet? The rules around taxes can be very overwhelming. It is always a good idea to have a knowledgeable tax attorney or accountant advise you, especially as you're beginning a new business or taking over a business.