Do you own a small business, and wonder what your tax requirements are?
Owning a small business places a large burden on the owners shoulders when it comes to understanding tax compliance.
Maybe your business is one of the following entities:
- Sole Proprietorships
Each of the above entity types has their own different tax requirements, so knowing what to file is a difficult assignment for any entrepreneur.
For this post, I’m going to focus on the two most common small business entities, the LLC and the S-Corp, and hopefully simplify what the tax requirements are for each one of them for you.
The single member LLC (SMLLC) is how most small businesses start out. One good reason to use this entity is that it has legal protection that a sole proprietorship doesn’t have. It is a bit more expensive to set up, but well worth the price.
So what is required for an SMLLC each year? Let’s take a look…
- Annual Tax Return: Every entity must have an annual tax return filed, whether you are a business or individual in the United States. SMLLCs have an advantage here because the LLC can file it’s tax return on Schedule C of the 1040 personal tax return. This means that you don’t have to file a separate return for your business, so it’s cheaper for the tax preparation costs.
- Estimated Payments: The government wants you to pay your taxes as you receive income, which is why they created estimated payments. Each year, you should choose one of two formulas to make your estimated payments:
- Make quarterly tax payments based on a projection of your current year income. The estimated tax payments need to add up to 90% of the tax owed on your tax return.
- Make quarterly tax payments based on 100% of the tax owed from the prior year. I recommend #2 to my clients since there is more risk of error in calculating #1. If your business is expected to grow, I’d recommend #2 and even making a few additional payments so that your business doesn’t have a large tax bill the following year.
- Employment Taxes: Note: All income you make in an SMLLC is subject to employment taxes up through 118,500 for 2015. (See IRS website) This tax is paid as part of your 1040 tax return.
Many small businesses start out as an LLC, and then for tax savings, elect to be taxed as an S-Corp by the IRS. The advantage to doing this is that it allows the business owner to have passive income, thus avoiding payroll taxes.
So an S-corp sounds like a good deal right? Well, there are a few more things you’ll need to do each year that you’ll want to factor in. Let’s take a look at the tax requirements of an S-Corp.
- Estimated Payments: This is the same as the SMLLC above. The IRS wants to collect their taxes as you make your money, so be sure to be making these payments quarterly.
- 1120S Tax Return: In addition to filing a 1040 tax return, you’ll need to file an S-Corp tax return (1120S). So each year the small business owner needs to file two tax returns, instead of only the one with an LLC. When your accountant prepares your 1120S return, he’ll provide to you a “K-1” statement that shows the S-Corps income for the year. This statement is used on the 1040 tax return to calculate the taxes owed. An S-corp does not pay any income taxes.
- Payroll: With an S-corp, you will need to run regular payrolls and file quarterly reports with the government to show your withholdings and tax payments. I recommend my clients getting set up on Zen Payroll as an easy way to manage payroll as an SMLLC. They take care of all the tax payments and form filings for you, and they automatically pull out the funds from your bank account each payroll to make sure you are covered.
- Annual Shareholder Meeting: This one can sometimes be overlooked, but make sure that you record minutes each year of your annual shareholder meeting. In case of an audit of your S-corp status, you’ll want to have these minutes available. Here is a resource I use to see how to create the minutes and hold the meeting.
So now that we’ve simplified things down to a small checklist, get out there and get it done, and know that as you make it through the process once, it’ll get easier each subsequent time.
I hope this article has simplified some things for you regarding your small business tax requirements.
If you have additional questions that aren’t answered by this article, please feel free to reach out to us.