What tax forms are you required to submit for your small business? When are they due to the IRS? Here's what you need to know.
Taxes are an inevitable cost of running a small business in America. For many entrepreneurs, though, the process of filing business taxes is time-consuming and stressful, as mistakes often result in strict penalties from the Internal Revenue Service. As 2020 makes its slow march to the end of the year and a new tax season begins, we've collected information on the most common business tax forms you'll need as well as other tax forms you may have to fill out.
What common tax forms do businesses need to file?
Whether you plan to send paper forms filled out by hand to the IRS, anticipate that you'll be e-filing your documents using online tax software, or expect your CPA or other tax professional to help you handle the process, it's important to have a general knowledge of the forms you'll need.
The U.S. Tax Code is notorious for its complexity. Without enough information, you may end up on the wrong side of the IRS's wrath, resulting in potential tax liens, penalties and even the forced closure of your business if you're not careful. Here are six of the most important tax documents to keep in mind.
If you have employees in your small business, the W-2 is one of the most important tax forms you will have to fill out. By law, a worker under your employ is considered an employee if you control how they do their work, when they do their work and how they're compensated for that work.
Required by the IRS if you "withheld any federal income tax, Social Security tax, or Medicare tax from wages regardless of the amount of wages," the W-2 reports an employee's annual wages and associated withheld taxes to the IRS. Along with the IRS's copies, you're responsible for providing copies of this form to your employees by Jan. 31 so they can file their personal taxes in time. [Read related article: How Should Your Employee Be Classified? 1099 vs. W-2]
Just as you need to fill out and submit a W-2 for each of your employees, you will have to submit Form 1099 for each independent contractor you paid more than $600 in a calendar year. A worker falls under the independent contractor classification if they are a temporary addition to your company and working under a contract's specific terms. These workers are generally self-employed and paid for each completed project, rather than on an hourly or salaried basis. As such, you are not responsible for their payroll taxes. [Read related article: Employer's Guide to Payroll Deductions]
The 1099 you file will summarize all the non-employee compensation you paid out in the previous year. Though it's mostly filed for self-employed individuals, you might have to file a 1099 for work you contracted out with any other entity that isn't an S- or C-level corporation.
To file this form, you will send copy A to the IRS, and then you'll send copy B to the independent contractor by Jan. 31 of the following year so they can file their own taxes.
When filing a 1099, you're also responsible for filing Form 1096. Used as a support document to IRS forms 1097, 1098, 1099, 3921, 3922, 5498 and W-2G, the 1096 is a cover sheet that specifically outlines non-employee income for the IRS. The 1099 is the most common reason to file a 1096.
One of your responsibilities as a small business owner is to make sure your employees' federal unemployment taxes are paid. By using Form 940, you can calculate your annual Federal Unemployment Tax Act (FUTA) taxes. As you must pay into this government program, which is meant to ensure laid-off employees receive assistance, this form is an annual requirement. It doesn't matter when in the year you complete this form, but you must pay your FUTA taxes every quarter.
Form 941/Schedule B
As a quarterly tax form, Form 941 reports all income, Social Security and Medicare taxes withheld from your employees' checks. This form also helps ensure that you pay your portion of their Social Security and Medicare taxes. [Read related article: Everything Employers Should Know About Payroll Withholding]
If you run a new small business, Form SS-4 is your ticket to obtaining an employer identification number (EIN) from the IRS. Every type of business requires its own nine-digit identification number, so this is an incredibly important form that only needs to be submitted at the start of your business.
How your business's organizational structure factors into your taxes
While the preceding tax forms are important to any small business, the need for the following forms depends on what type of entity your business is. Choosing the right legal structure for your business is paramount, since it governs not only how your business operates, but how it interacts with local, state, and federal law and how it pays business taxes.
"One of the most important decisions a small business owner can make is deciding how to organize his or her business, because this will impact everything from potential legal liabilities to overall tax obligations," said Mark Everson, vice chairman of alliantgroup and former IRS commissioner appointed by President George W. Bush. "There is no one size fits all ... These decisions should always be made in close consultation with a CPA, banker, legal advisor or business consultancy."
Take the necessary time to figure out which structure works best for your business. The following IRS forms will matter based on which one you choose. By handling your tax responsibilities correctly, you can avoid unwanted attention from the IRS and operate your business unimpeded.
LLC or partnership
If you want to ensure that your personal assets are not at risk in case your small business doesn't work out, a limited liability company or a limited liability partnership is likely best for you to form. If you want to operate under such a business structure, you need to get familiar with Form 1065, which you will use to report your business's income or loss to the IRS. [Read related article: How to Pay LLC Taxes]
Self-employed or sole proprietorship
If you're a sole proprietorship and thus self-employed in the eyes of the IRS, you need to know how to calculate your self-employment tax. To calculate how much you'll owe to cover your Social Security and Medicare taxes, you'll need to use Schedule SE. According to the IRS, the current Social Security tax and Medicare tax rate is 15.3%, with 12.4% going to the former and 2.9% going to the latter. [Read related article: The Sole Proprietorship Tax Guide]
S-corp or C-corp
As the owner of a corporation, whether it's an S-corp or a C-corp, you already have complex taxes to worry about. With shareholders who play a part in how you're taxed as a C-corp and the desire to avoid double taxation as an S-corp, you'll have to pay special attention to what you need to file. Particularly, you'll want to familiarize yourself with Form 1120, which lets you report your company's income and losses to the IRS.
Tax dates to remember
Unlike personal taxes, which are due just once a year, business taxes have multiple deadlines. You should mark these dates on your calendar every year.
- Jan. 31: All W-2 forms should be mailed to your employees, your contractors should have all their 1099s, and copies of each should be submitted to the IRS by this date.
- Feb. 28: All 1096 and 1099 forms should be mailed to the IRS by this date.
- March 15: If filing corporate tax forms, including Form 1120 and 1065, you will have to submit them to the IRS by this date.
- April 15 (Tax Day): This is when personal tax returns are due. If you own a sole proprietorship, this date is equally important to your business.
- April 30, July 31, Oct. 31 and Jan. 31: These four dates are the deadlines for each quarter. They are especially important if you are paying your FUTA tax and must file Form 941.
How to file your taxes
Just as there are many forms to file, there are multiple ways to file your business taxes. There are plenty of online solutions you can use to e-file your documents to the IRS, though you can still fill out and mail paper forms. If you decide to manually fill out your tax forms, you'll need to download and print out your forms, obtain them in person at certain locations, or order the forms directly from the IRS.
Along with your tax documents, you should always keep various deductions and tax credits in mind. Speaking from extensive experience dealing with the federal tax code, Everson says there are plenty of options to consider, such as the research and development tax credit.
"The R&D credit applies to companies of all sizes, not just big business, and across a wide range of industries, including manufacturing, agriculture, technology and others," he said. "The credit is often overlooked because taxpayers think they don't qualify. In reality, the R&D credit is a generous provision which extends well beyond laboratory work or discoveries that lead to patents."
Everson said that any business that does things like "develop or design new products or processes, enhance existing products or processes, or develop and improve existing prototypes or software" fit the bill for such a credit. With the pandemic forcing companies to pivot, this type of credit could be within arm's reach for many small business owners. They can even go back several years to amend past returns and receive the credit.
Speaking of the ongoing coronavirus pandemic, Everson said small businesses should be aware of anything they can get from relief legislation and establish whether they are entitled to additional packages in the future.
"In particular, I encourage small business owners to understand and differentiate between provisions which grant either deferral or forgiveness of tax obligations, at both the federal and state level," he said. "A tax obligation deferred must ultimately be paid and considered in a business's financial planning. Remember, when navigating these issues, which can be complex, the starting point should be a conversation with your CPA and legal advisors. Working closely with people who know your business, how it is organized, and its specific financial situation will allow you to make informed decisions about what national, state, or local tax benefits you may be eligible for, now and moving forward."