Key Takeaways
- Filing taxes for a business you own may require you to report your business income on your individual income tax return.
- If you own multiple businesses, you may need to file separate returns for each, depending on their legal business structure.
- Sole proprietorships, partnerships, and S corporations typically pass their income through to the owner’s income tax returns.
- C corporations prepare corporate tax returns that report their profits and losses and pay any tax due at the corporate level.
How to file business taxes
When you file a federal income tax return for your small business, the way that you do it depends on how you’ve structured the business. If you run it as a Sole proprietorship or single-member limited liability company (LLC), you’ll typically report all of your income and expenses on Schedule C or Schedule F if it’s for farming. If you run your business as a pass-through entity like a partnership (meaning your partnership has multiple owners) or S corporation, or as a C corporation that pays its own taxes, you’ll need to use different tax forms to report your business income and expenses.
Pass-through entities use a tax form called Schedule K-1 to report a partner’s or shareholder’s share of the profits, losses, and other income of a partnership or S corporation. These are called “pass-through entities” because they “pass” these financial items through to the owners using Schedule K-1. They don’t generally pay taxes themselves. Each partner or shareholder typically needs to receive a Schedule K-1 from the business to report their share of these items and then to include with their tax return. This is reported on Schedule E for an individual’s tax return filed on Form 1040. An S corporation prepares Form 1120S, while a partnership prepares Form 1065 as their annual tax return.
C corporations aren't pass-through entities because they pay taxes at the corporate level and typically don't affect the owner’s tax return unless the corporation pays out dividends or interest to the owner.
Regardless of the tax return form your business uses, you generally calculate your taxable business income in similar ways.
How do you file taxes if you own multiple businesses?
Whether you own one or multiple businesses, the steps for calculating your business income are usually the same. When you own one business, you only need to perform these steps once. When you own multiple businesses, you need to do this for each business, typically resulting in separate business tax returns. That means if you own three businesses taxed as S corporations at the federal level, you’ll need to file three separate tax returns for them (Form 1120-S), create three sets of Schedule K-1s, and then report the K-1 information on your personal tax return.
TurboTax Tip:
Keeping separate bank accounts, credit cards and accounting records for each business can help you stay organized during tax time. Having these accounts listed under each business’ name makes it easier to keep track of your business performance.
How business taxes work
There are various forms of business structures. These are mostly organized at the state level, meaning each state may use different regulations, and some business structures are largely ignored at the federal level.
The IRS recognizes two main categories of business structures for business tax purposes — pass-through entities and C corporations. The primary difference is that pass-through entities pass along all of their income to their owners to be taxed as the owners' income, while C corporations pay taxes at the corporate level.
Pass-through entity structures include Sole proprietorships, partnerships, and S corporations. In addition to these business types, there are Limited Liability Companies or LLCs, which are one of the most popular business structures. Despite their popularity, the IRS mostly ignores LLCs for tax purposes. The formation of business structures is controlled at the state level and the IRS has chosen not to create a separate tax structure for LLC taxes.
Instead, LLCs have choices on how they are to be taxed. These include being taxed as a Sole proprietorship (one owner), partnership (multiple owners), S corporation (one or more owners) or C corporation (one or more owners).
How businesses pay income taxes
Sole proprietors
If your business is organized as a Sole proprietorship for taxes, you report all business income or losses on your individual income tax return. The business income or loss that you earn isn't taxed separately from your other income. This income “passes-through” to your personal income tax return because the business profits don’t get taxed as a separate entity.
Most often, you report your business income and expenses on Schedule C of Form 1040. If you have multiple unrelated businesses organized as Sole proprietorships, you generally should prepare separate Schedule C forms for each to report your business income or losses. Separate Schedule C forms are typically filed for each spouse that has their own business as well.
The results of the various businesses are combined on your Form 1040 and added to your other income in determining your taxable income. In addition to paying income tax on your Sole proprietorship business, you will also need to pay self-employment taxes including Social Security and Medicare taxes. These taxes are calculated using Schedule SE with your Form 1040 tax return. If you have multiple Sole proprietorship businesses, you typically combine the results of these into a single amount that you then use with your Schedule SE. As with the Schedule C, if spouses have separate Sole-proprietorship businesses, each spouse will prepare their own Schedule SE since self-employment taxes are calculated separately for each worker.
Partnerships
Typically, partnerships aren't responsible for paying the tax on business earnings, but they're responsible for preparing annual partnership tax returns, usually using IRS Form 1065. The IRS requires partnerships to file this return for informational purposes, not for paying income taxes. All income, deductions, and credits applicable to the partnership are reported by each owner on their own tax returns.
To pass through this income, deductions and credits, the partnership reports each partner’s share of these amounts on a Schedule K-1 at the end of the partnership’s tax year. For example, imagine you and three business partners create a partnership to run a business and own it in equal amounts (or 25% each). During your tax year, it earns $100,000 with $60,000 of deductible business expenses. When reporting this income on your individual returns, you’ll need to prepare a Schedule K-1 for each member, reporting $10,000 of income. Then, all of the partners report these amounts on their own income tax returns. This is reported on Schedule E for partners that are individuals. In this case, the partnership will increase your personal taxable income by $10,000. This information is reported on your tax return, though this doesn’t always add to your taxable income due to deductions on the Schedule K-1 like the Section 199A qualified business income deduction.
S corporation
S corporations have similar characteristics as partnerships or multi-member LLCs, but a few distinctions with respect to business ownership and how the business classifies earnings paid to owners. Like partnerships, they pass-through income to members, avoiding double taxation on both corporate and shareholder income. They also can distinguish how they can pass back earnings to members by electing a portion to represent wages, with the remainder flowing back as a distribution of capital. Shareholders who work for the company typically have at least some of their share of income treated as wages subject to income and payroll taxes. The remaining portion of income is treated as pass-through income and typically only falls subject to federal income tax and any applicable state and local income taxes. The wages reported typically appear on a Form W-2.
If you are interested in taking the S-corp tax election from the IRS, a federal election you make, you’ll need to meet S-corp qualifying criteria. First, an S-corp must have fewer than 100 owners, and it must be a domestic company organized under the laws of one of the 50 states. The S-corp can have no ownership stakes held by nonresident aliens, nor other business entities. Exceptions apply for nonprofits classified under sections 401 (a) or 501(c)(3) of the tax code. For more on qualifying as an S-corp, see the instructions to Form 2553.
C corporation
A C corporation is a separate legal entity from its owners and pays corporate income tax reflecting its income that it offsets with losses, deductions, and credits. Because of the corporate income taxes, C corporations are potentially subject to double taxation. This means that the business is responsible for paying income tax on its earnings, and then the shareholders are responsible for paying a second tax when they receive dividends from the corporation.
A C corporation can choose to keep its profits instead of distributing them to shareholders. This avoids the double taxation situation, allowing the corporation to reinvest these earnings back into the business.
A C corporation uses Tax Form 1120 as its income tax return. This informs the IRS of the C corporation’s income, gains, losses, deductions, credits, and overall income tax liability.
LLCs
Owners of LLCs are called members, and LLCs can have a single member or an unlimited number of individuals, corporations, other LLCs, and foreign entities as members. These LLCs are referred to as single-member LLCs and multi-member LLCs, respectively.
As mentioned above, LLCs are unique in that the IRS doesn’t recognize them with a separated tax structure. Instead, LLCs need to adopt the tax structure of one of the IRS-recognized business forms - Sole proprietorship, partnership, S corporation, or C corporation.
By default, single-member LLCs are ignored for federal taxes and are referred to as a “disregarded entity.” The federal tax system “disregards” the single-member LLC and by default considers it a Sole proprietorship for federal taxes, although it can make an election for different tax treatment.
Multi-member LLCs involve businesses and individuals working together that aren't organized as any other entity (typically C or S corporations) and therefore are treated by default as partnerships for federal taxes although these LLCs can also make an election for different tax treatment.
Generally, owning an LLC can have greater flexibility in choosing how the IRS will tax your earnings. For example, a single-member LLC can choose to be taxed as a Sole proprietorship or as an S or C corporation. A multi-member LLC, is taxed as a partnership by default but it typically can make an election to be taxed as an S or C corporation.
Businesses typically use Form 8832 to be taxed as a C corporation. If you prefer to be taxed as an S corporation, you file Form 2553. Making these elections is usually quite straightforward. Reversing these elections typically has greater restrictions.
Do businesses pay payroll taxes?
If you have a business that has employees, you're responsible for paying various payroll taxes, including half of each employee’s Social Security and Medicare taxes and withholding taxes from your employees wages. You calculate the amount of payroll taxes due based on taxable wages paid to your employees. The amounts that a business pays and the amount that is withheld from employee paychecks is sent to the IRS on a semi-monthly, monthly, or quarterly schedule. The frequency that you have to send this money in is typically based on the amount of payroll taxes the business generates each payroll cycle.
You can use Publication 15 (Circular E), Employer’s Tax Guide, Publication 15-A, Employer’s Supplemental Tax Guide, and Publication 15-T, Federal Income Tax Withholding Methods to determine the amount of withholding and the directions on depositing the withheld amounts and other employment taxes. Additionally, you will typically use Form 941, Employer’s Quarterly federal Tax Return to report your payment of employment taxes. If you have employment tax liabilities of $1,000, or less, you can use the annual version of Form 941, Form 944. You can submit payments through the Electronic Federal Tax Payment System.
How do you report this information on your personal tax return?
If you own multiple businesses, you'll first gather the necessary information to calculate the taxable income or loss produced by each business during the tax year. From there, how that information is reported depends on the business structure of each business.
Sole proprietorships (including single-member LLCs) usually report a businesses’ taxable income on Schedule C and Schedule SE. This includes freelancers, gig workers, and independent contractors as well.
Partnerships, including multi-member LLCs that are taxed as partnerships, prepare and file Form 1065 with the IRS, documenting your businesses’ income or loss. At the same time, you'll prepare Schedule K-1’s to pass through this income to the respective members in the partnership. These partners/members can then report this information on their tax returns.
Businesses electing to be taxed as an S corporation will prepare Form 1120-S, declaring their income for the year. Like a partnership, you'll prepare a Schedule K-1 to declare each shareholder’s share of income, deductions, credits, and more. The shareholders can then report this information on their tax returns.
Finally, C corporation income is reported on Form 1120. Since C corporations aren’t pass-through entities, no income needs to be reported on your personal income tax return unless the C corporation paid you dividends during the tax year. Any dividend payments are typically shown on Form 1099-DIV.
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