Tax Filing Requirements of Small Businesses

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Small Business Tax Obligations

The tax reporting obligations of any small business is dependent on which entity type the owner has chosen for the business. A sole proprietorship is the most simple, and its activities are reported on the federal and state income tax returns of the owner. The business and the owner are essentially the same entity, and the profit or loss is combined with the other components of the personal return. Income tax reporting requirements differ for the various entity types, but all entity types share similar requirements for payroll tax reporting.

Two or more owners who have drafted a written partnership agreement are required to file a yearly informational return, Form 1065, with the Internal Revenue Service. The partnership return summarizes how profit or loss was distributed to each partner. Each general partner then includes the share of profit or loss on his or her personal tax return.

Some business activities are more prone to potential lawsuits than others, and the owners choose to protect their personal assets by owning the business as a distinct, separate entity. Electing S corporation tax status eliminates income taxation at the corporate level and allows profit or loss to pass through to the personal return of each shareholder. The S corporation files an annual return, Form 1120S, to report how the corporation profit or loss flowed through to the individual shareholders.

The limited liability company has become an increasingly useful form of business entity in recent years, due to its simpler formation process and limited liability feature. An LLC with just one member does not have its own income tax reporting requirement. The results are reported on the personal Form 1040 of the member. An LLC with two or more members files an annual Form 1065 partnership return, reporting the distribution to each member. The members then report their respective shares on their personal tax returns.

Reporting requirements for employee payroll taxes is not dependent on the entity type. Federal reporting of withholding is generally required each quarter on Form 941, but small businesses with total annual withholding of less than $1000 can request permission to file just one yearly Form 944. New businesses can also apply for yearly filing at the same time that they apply for an employer identification number. States that levy an income tax also require withholding and each state has its own withholding forms and reporting schedule.

Employers are required to pay federal and state unemployment tax, usually on the first $7000 of earnings paid to each employee for the year. Federal Form 940 is filed annually, and deposits are made quarterly if above a certain threshold. There is an interrelationship between federal and state unemployment tax rates, determined by the current unemployment level in each state.

Some local governments impose income taxes and require tax returns to report withholding. California levies a separate fee on any Limited Liability Company actively doing business within the state. Small businesses must consider any city or county requirements in addition to the federal and state.

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