MoneySolver Business FAQs
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Business formation, or choosing the type of legal structure, is something every business owner must carefully consider when starting a business. Your business organization can affect things like how much taxes you pay and how often, personal liability, and ability to take out loans. The state in which you have your business controls business formation.
The most common forms of business:
- Sole Proprietorships
- S Corporations
- Limited Liability Company (LLC)
Our Start packages will help you determine the right fit for you.
A partnership is an agreement between two or more business owners that are invested in the company and agree to share in profits and losses. There are different types of partnerships and levels of liability, so be sure to choose what is right for you and your partner(s).
While a partnership doesn’t pay income tax as an entity, the individual partners receive a K-1 showing their share of the income, credits, and deductions. They are each responsible for reporting his or her share of the net profit or loss on his personal 1040 return. The organization is responsible for business taxes (Form 1065) and must be registered through the state.
A C corporation is legally separate from the owners, considered as a “legal person” by law, and limits personal liability for its shareholders (with exceptions for certain conduct). When you incorporate a business, you enter the world of stocks, where shares can be bought and sold. Corporations are the best business formation if your goal is to be a publicly traded company. Corporations must pay taxes on profits, and its shareholders are also taxed individually on dividends (profit distribution).
An LLC is unincorporated but still enjoys limited liability. Like a partnership, an LLC has “pass-through” taxation and is better for companies with one owner. Depending on how the LLC is structured and the number of owners, the LLC may be recognized as a partnership or a disregarded entity (taxed similarly to a sole proprietorship).
A sole proprietorship is the most common type of business formation. It is defined as an unincorporated business of any kind that is owned by one person, with or without employees. Whereas it offers the owner the most control over business affairs, she is personally liable for financial obligations and debts. In most cases, sole proprietorships are responsible for filing quarterly estimated tax payments.
An S corporation, or “small business corporation” is similar to a C corporation, but with a different taxing structure under the IRS. S corporations have “pass-through” taxation – where profit/loss is reported at an individual level, avoiding double taxations of C corporations. Small business owners may choose to be S corporation to have similar tax benefits of a partnership without the tax preparation expense and complexity of a partnership tax return.
Also known as a Federal Tax Identification Number, an EIN is how your business is identified. Before getting an EIN, you need to have a business formation. You can apply for an EIN for free through the IRS. According to the IRS, you will need an EIN if:
- You have employees
- You operate as a corporation or partnership
- You file Employment, Excise or Alcohol, Tobacco, and Firearms tax returns
- You withhold taxes on income, other than wages, paid to a non-resident alien
- You have a Keogh plan (a tax-deferred retirement pension plan, typically for available to self-employed individuals or unincorporated businesses)
- You are involved in organizations such as:
- Trusts (with some exceptions)
- Real estate mortgage investment conduits
- Farmers’ cooperatives
- Plan administrators
Teaming up with your spouse beyond household duties can be a great way to do life. You may be treated as a qualified joint venture if:
- You own a business with your spouse
- You split the business 50/50
- You are unincorporated
- You’re not considered a formal business partnership
- You file jointly with your spouse on your taxes
All individuals and business entities must pay income tax, which can vary based on the taxpayer’s income or profits. Filing a yearly income tax return is required by law to determine taxes owed or eligibility for a refund.
If you do not pay through tax withholding (or not enough), you will be required to make regular estimated tax payments throughout the year.
Estimated taxes are regular payments throughout the year for income and self-employment taxes. If you’re a sole proprietor, partner, S corporation shareholder, member of an LLC, or self-employed worker, you will need to make estimated tax payments if required. Though these payment deadlines are quarterly, you can pay as you go. Check with your state for instructions specific to your business.
Excise tax is different from sales tax in that it is collected from the producer or seller and incorporated into the product price. Goods with excise tax include gasoline and alcohol. Typically, a business would collect these taxes from the customer to pay the IRS using Form 720, Quarterly Federal Excise Tax Return.
SE tax is a social security and Medicare tax, and your payments contribute to your coverage under the social security system.
Generally, if you are required to file a return, then you must pay estimated quarterly taxes which include self-employment tax and estimated income tax. This is because you’re not being paid on payroll and you don’t have an employer withholding these taxes from your paycheck for you.
Do you have employees? Then you’ll need to deposit payroll taxes. This includes Federal Income Tax, Social Security, and Medicare taxes. As part of your employer obligation, you must file Form W-2 for reporting employee compensation. There are requirements for filing returns and making deposits, and the funds must be held in trust until paid to the IRS.
If you fail to deposit your business’s payroll taxes, you’ll face payroll tax debt, which can include penalties and interest. The best way to avoid payroll tax debt is to file and deposit payroll taxes in a timely manner.
As a business, you may have requirements to pay sales and use tax if you sell goods. If you sell services, you typically don’t need to worry about sales and use tax, but it depends on the state rules. Some service providers (e.g. construction) may need to pay sales and use tax if an item (e.g. fabrication costs) is “sold” to the customer as part of the delivered service.
There are also complex rules concerning sales taxes for online sellers. Check with your state for specific regulations.
Work for yourself? You may be self-employed if any of the following apply to you:
- You carry on a trade or business as a sole proprietor or an independent contractor
- You are a member of a general partnership that carries on a trade or business
- You are otherwise in business for yourself (including a part-time business)
You must file an annual return if you meet the minimum income requirements for state and quarterly estimated taxes. You’ll also need to pay self-employment tax (SE tax), which is a Social Security and Medicare tax. Be wary of the self-employment tax trap.
As a self-employed worker, you don’t have an employer withholding income, Social Security and Medicare taxes for you. This means you must submit these taxes as a quarterly payment. Use your prior year’s annual tax return to fill out Form 1040-ES, Estimated Tax for Individuals and figure out if you need to file quarterly estimated taxes to the IRS and State.
To make your estimated tax payment: Use provided vouchers on Form 1040-ES to mail in your owed amounts or file online through the Electronic Federal Tax Payment System (EFTPS).
First year as self-employed? You’ll need to estimate how much you expect to earn. If you overshot your actual amount the first time, you can use Form 1040-ES to submit a new estimate moving forward.
Subtract your business expenses from your business income to find your net profit or net loss.
- If your expenses are less than your income, the difference is net profit. Report this as part of your income on page 1 of Form 1040.
- If your expenses are more than your income, the difference is a net loss, which you will report on page 1 of Form 1040. You may be able to deduct the full or a limited amount of your loss. This is for businesses who make a profit at least three of five years.
- You must file a tax return if self-employment income meets the minimum, triggering a requirement to file.
Working from home has its perks beyond a stress-free commute and lax dress code. You may be able to deduct home office expenses on your taxes if it’s the main, exclusive space for conducting your business (e.g. using your garage gym as a personal training space).
However, be careful with deductions, as too many can trigger a small business tax audit. The best way to maximize your business deductions safely? Contact experienced financial pros like ours to optimizing savings on business taxes.