Small Business Income Taxes

What forms do I need to file income taxes for my sole proprietorship?

If you're a sole proprietor and you're not incorporated, you'll generally file a Schedule C. It's part of your personal income tax return. It's a separate form. There may be additional forms that go with it, like Form 4562 for depreciation or supporting statements which detail out your tax deductions. But that Schedule C will carry forward your net business income to page one of your tax return. That net business income may be subject, not only to income tax, but to self employment tax, which is an additional tax that people pay when they are not employees.

What forms do I need to file income taxes for my partnership?

If you're a partnership you'll be filing form 1065 for income tax. It's due on April 15th just like an individual return.There's a very important income tax form to remember to file in a partnership return and that's Form K-1. Form K-1 reports the partner's share of the income for the year and that income can be put under individual or their corporate returns as both individuals and corporations can be partners, and it's taxed at that level. So around April 15th every year, if you're a general partner you're likely to get calls from the other partners asking where their K-1 income tax forms are.

What forms do I need to file income taxes for my S corporation?

If you're an S corporation, you'll be filling in form 112S. It looks a little bit different than the 112 which is C corp filed. You'll also be dealing with a form K-1. Form K-1 allocates some of the S corp income to the S corp shareholders. So, right around the due date of the shareholders return which is probably April 15th, they'll be asking for their K-1's and what they really want to know is how much income they should report on their returns. If you are a shareholder in an S corporation, a member in an LLC, or partner in a partnership, you'll be reporting your past year income from those entities on page 2 of form E. That's where it goes under individual tax return. Ultimately, it flows through to page 1 of the return.

What forms do I need to file income taxes for my C corporation?

If you're a C corporation or a conventional-style corporation, you'll file Form 112. Form 112 calculates both the taxable income and the tax due, because a C corporation is a tax-paying entity, and you're likely to be filing a state equivalent. Here in California, we call it a form 1. Unlike S corporations, there are no K-1s because the tax is at the entity level and most corporation returns are due on March 15.

What is "self-employment" tax?

If you're a self-proprietor or you're a general partner in a partnership or you're a managing member of an LLC, you may be responsible for self-employment tax on your earnings. Where employees pay Social Security and Medicare through withholdings on their salary, self-employed people pay the same, but it's called self-employment tax. In 2007, the rates are 6.2% for Social Security, 1.45% for Medicare. A self-employed person pays that twice because an employer generally matches an employee's withholdings. So the self-employed person ends up paying both ends of it. Escorp shareholders do not have to pay this tax on their income, and non-managing members of LLCs do not have to pay the tax either.

What is "zeroing-out" a corporation?

Certain corporations, and personal service corporations come to mind, lend themselves to what we call "zeroing-out" the corporation. "Zeroing-out" the corporation means having neither any loss nor income, so the bottom line works out to as close as possible to zero. The incentive for doing that is if the owner of the personal service corporation is in a rate that's lower than the highest rate, it would certainly behoove him or her to pay tax at that rate, rather than to leave the income in the corporation and pay tax at a higher rate, and this is accomplished by the owner taking a salary or dividend from the corporation.

How can a small business lower its tax bill?

Small businesses should be sure not to overlook write-offs for purchases of equipment when trying to lower their tax bills. Section 179 of the Internal Revenue Code allows you to expense, rather than depreciate, things that you buy. If you're in the entertainment business, for example, this includes lighting or camera equipment. Whereas you may have to write-off that equipment over a period of five to seven years under normal depreciation rules, you can actually elect to expense 100% of the cost in the year that you purchased the equipment. That's a valuable deduction. The limits for expense are quite high: in excess of $100,000 a year.

What are the various tax rates for corporations?

Corporate tax rates are interesting because they go up and then they go back down again. The first 15,000 is taxed at 15%. The next 25, is taxed at 25%. The next 25,000 is taxed at 34%. The next 235,000 is taxed at 39%. Then the rates start to drop and eventually level off at a flat 35%. But a business owner that's making a fair amount of income may actually be in a higher tax bracket than the tax brackets afforded to the first $100,000 worth of income in the corporation. As you can see there is a difference between individual and corporate rates, potentially on the first 50,000 or 75,000. Personal service corps, of course, pay tax at the shareholders highest rates but other types of corporations pay tax at graduated rates so it might make sense to see an advisor and see what tax strategies are most advantageous.