Filing taxes can be stressful. But when you’re a small business, knowing the line between personal filing or business filing can seem a little blurry. This is especially true if you’re a sole proprietor.
But it doesn’t have to be confusing; there are different requirements for filing depending on how your business is organized.
Business Taxes vs. Personal Taxes
Business and personal taxes have one thing in common: they are based on taxable income. But how you pay income taxes depends on the business structure.The income is taxed on the owner’s personal taxes if you are a pass-through entity. And if you own a corporation, taxes are filed separately from personal—the corporation files as a business.
But do specific business types file differently?
Types of Businesses File Differently
There are several ways to organize a business. And whether you file personal or business taxes separately depends on how the business is registered. The business types include:- Sole proprietorship
- Self-employed or independent contractor
- Partnership
- Limited liability company (LLC)
- C corporation
- S corporation
Sole Proprietorships File Personal
An unincorporated business that has a single owner is a sole proprietorship. It is viewed as a pass-through entity. This means it passes all its income onto the business owners or investors. A sole proprietorship is also called a disregarded entity. That means for federal tax purposes, the business will be ignored or disregarded.When you’re a sole proprietor, you file a 1040 return. You also must use Schedule C. This schedule reports income or loss from a sole proprietor’s business. It is also used to deduct business expenses.
According to the IRS, you qualify as a business, and therefore use Schedule C, if your primary purpose is “engaging in an activity for income or profit”. You also must be involved in the activity with regularity and continuity.
Self-Employed or Independent Contractor File Personal
A self-employed or independent contractor must file and is taxed as a sole proprietor. This also applies to freelancers. They must use Schedule C with Form 1040 to report income. Like a sole proprietor, a self-employed individual, contractor, or freelancer can deduct their business expenses on Schedule C.Partnerships Are Pass-Through Entities
A partnership is similar to a sole proprietorship. They are both pass-through entities, but the difference is how they file their taxes.The business’s income passes through to the partners, and they report their income and pay their taxes from their personal returns.
The partnership distributes Form K-1 to every partner. This lists their portion of the earnings. Form K-1 is used to fill out Form 1040 Schedule E on their personal tax returns.
Partnerships are not disregarded entities because they file an information return. Form 1065 is the return, but it’s not used to pay income tax. Instead, it’s merely information about the partnership.
C Corporation Is Not a Pass-Through Entity
C corporations are separate tax-paying entities. The IRS requires Form 1120 from C corporations. They do not report income through personal Form 1040. Form 1120 is where a C corporation reports income and pays income tax.Shareholders, who are part of management, are considered employees and pay and report their earned income with Form 1099-DIV and W-2. This is in addition to their personal returns.
S Corporation, Also Pass-Through Entity
S corporations pay taxes through their owners. Owners are referred to as shareholders.They are similar to partners in that they file an information return. Form 1120-S reports earnings, and the shareholders, like partners, are supplied with Form K-1. They pay their part of the earnings on Form 1040 E.
But there is a difference between an S corporation and a partnership. S corporation shareholders, who are employees, must be paid a reasonable salary before receiving a distribution.
A shareholder will receive a W-2 form and a Form K-1. They will be liable for taxes on earnings from both.
LLC Regulated by States
An LLC can be confusing because it can be taxed in several ways. It is a business structure allowed and regulated by statute. It’s wise, then, to check with your state for the operational requirements. An owner (or owners) of an LLC is called a member.Depending on the LLC’s elections, there are three ways the IRS will classify it.
An LLC with one owner is called a single-member LLC and is a disregarded entity. It files in the same manner as a sole proprietor. So, they file on personal Form 1040 with Schedule C. An LLC with more than one owner is taxed as a partnership.
But there is a twist. An LLC could elect to be an S corporation or a C corporation. This is not available for every LLC, but it does change how you file.
Keeping Business and Personal Taxes Separate
As a business owner filing taxes, it’s important to know what type of business you own. Then you can file the appropriate forms. The best course of action is to contact an accountant who can guide you through the tax return maize.The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
