Small businesses are required to file both state and federal income tax returns.  What may get a little more confusing, is how the type of tax filing forms required will vary depending on the entity and business structure you choose for your business.   Now that the new tax reform has become law, some of the tax filing responsibilities pretty straightforward, such as a sole proprietor, while if your company is set up as a C corp, it is more complicated.   No matter your circumstance, it is always recommended that you consult with an experienced tax advisor or professional CPA before taking any final tax-filing actions.

The type and organizational structure of the business operating will have a direct impact on which taxes your business and you are responsible for paying, and the method by which must be used to remit payment for those taxes.  In the initial stages of a business’ formation, it is a “must” that the business structure of your entity needs to be set in stone.

Tax and legal considerations, combined with potential ramifications will undoubtedly have their place in the process, whereby an entity’s business structure is determined.  In turn, business and entity organizational attributes almost solely determine what forms are necessary to be completed in order for a business to be in full compliance with tax statutes. The most common forms of business structures are the following:

• Sole Proprietorships– when an individual is sole the owner of an unincorporated business by himself or herself.
• Limited Liability Companies (LLCs)– when a business structure defined and allowed by individual state statutes exists.  Every state treats LLCs differently and, in turn, many overlapping or even contradictory laws are made.  Owners of an LLC are called members and there are no parameters regarding the number of members an LLC must have.  At the same time though, these states allow, and usually advocate, “single-member” LLCs, while neglecting to restrict ownership, making it possible for individuals, corporations, other LLCs and foreign entities to be members.
• Partnerships– when the relationship existing between two or more people who collaborate in the to carrying on of a trade or a business occurs. Each individual contributes a portion of money, property, labor or skill. Profit-sharing and loss-sharing is expected and part of the arrangement.
• S Corporations– when a corporation elects to have business income, losses, deductions and credits pass-through to their respective shareholders for federal tax purposes. S corporation shareholders include the pass-through income of their respective portions of corporation income and losses on their individual tax returns, where that income is then taxed at the shareholder’s individual tax rate.  Subsequently, this means S corporations will not be subject to any double taxation. S corporations, however, are held accountable for taxes on certain built-in gains and passive income earned at the entity level.
• Corporations– when prospective shareholders exchange money and property, or a combination of both, for the capital stock in a business, a corporation is formed. From a taxation standpoint, a corporation uses the same deductions as a sole proprietorship to determine taxable income. As a corporation, special deductions are permitted and, on the federal level, a C corporation is treated as a separate taxpaying entity. As far as the conduct of a corporation goes, general business operation, recognition of net income or loss, tax remittal and shareholder profit distribution is carried out by the business.       

Income Tax

Every company, with the exception of partnerships, is required to file an annual income tax return; instead of an income tax, partnerships file an information return. For all other businesses, the content of tax material is completely dependent on a business’ structure.

The most well-known tax is the federal income tax, and the federal income tax is a pay-as-you-go tax. Payment of the income tax is required as money is received or earned during a period.  An employee normally sees income tax withheld from his or her paycheck. It is when a person or company does not submit taxes via tax withholding, or does not submit a payment that covers the amount owed in taxes, an estimated tax is usually required. IRS Publication 583 summarizes the basic federal tax information for businesses in the early stages. How to keep records and create and maintain a recordkeeping system is also reviewed. All Revisions for Publication 583 is another IRS webpage that contains more details.

Self-Employment Taxes

When employees are part of the equation, an employer has specific employment responsibilities surrounding taxes- all of which the employer must remit payment and submit forms to file correctly.  Under the employment taxes, are the following:

• Federal income tax withholding
• Medicare & Social Security taxes
• Federal unemployment (FUTA) tax

IRS document, Employment Taxes for Small Businesses elaborates on all facets of these taxes.  However, keep in mind that at any point when the self-employment tax (SE tax) is mentioned, it only refers to Medicare and Social Security taxes.  Other taxes are not included in the definition but many other self-employment taxes are pertinent and necessary for compliance with filing taxes properly.

What is Self-Employment Tax?

As mentioned, the self-employment tax only refers to Medicare and Social Security taxes, and can be compared as an equivalent to the Social Security and Medicare taxes withheld from the earnings of wage earners.

SE tax is determined by using Schedule SE (Form 1040). If there is an employer involved, Social Security and Medicare taxes of most of that company’s salary earners are calculated by the company. Deduction of the employer-equivalent portion of SE tax is allowed when figuring out your adjusted gross income but the deduction can only be applied to income tax. No deductions are allowed for wage earners for Social Security and Medicare taxes.

Who Must Pay Self-Employment Tax?

It is required that Schedule SE (Form 1040) is filed should if either of the below scenarios is applicable:

• Self-employment net earnings (excluding church employee income) were $400 or more
• Church employees had an income of $108.28 or more

Normally, net earnings generated by self-employment are subject to the SE tax.  This includes people that are self-employed in a sole proprietor role or independent contractors. IRS Schedule C: Profit or Loss from Business or C-EZ: Net Profit From Business  to figure net earnings from self-employment.

Estimated Tax

Basically, paying taxes on income, including income from the SE tax, is best made by scheduling regular payments of estimated tax during the course of the year. The IRS publication, Estimated Taxes, is an excellent source for more information.. (Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is too small, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may be subject to make estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.

If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.

Who is Required to Pay Estimated Tax

S corporation shareholders, individuals, sole proprietors and partners normally make estimated tax payments when it is expected that the IRS is owed taxes of more than $1,000, at the point a return is filed.  For corporations, this is required if that figure is $500 or more.

You may have to pay estimated tax for the current year if your tax was more than zero in the prior year. IRS Form 1040-ES: Estimated Tax for Individuals and IRS Form 1120-W: Estimated Tax for Corporations can provide further and more detailed information.

Who is Exempt from Having to Pay Estimated Tax?

Tax filers can avoid paying estimated tax by requesting an employer to withhold more tax from your earnings. In such a case, a new Form W-4: Employee’s Withholding Allowance Certificate is filed with your employer. On Form W-4 there is a specific place where any additional amount an employee wants withheld can be recorded.   

Also, if the following three conditions are all met, estimated tax payment is not required.

• No tax liability for the previous year
• Status as citizen or documented resident for the year in question
• A directly p tax year covered a 12-month period

You had no tax liability for the prior year if your total tax was zero or you didn’t have to file an income tax return. For additional information estimated tax determination, refer to Publication 505 (2017): Tax Withholding and Estimated Tax.

When To Pay Estimated Taxes

As far as estimated taxes are concerned, the year is divided into four quarters (payment periods.)  Payment by phone, online or mail is accepted. IRS Form 1040-ES: How to Pay Estimated Tax provides more details on the payment process and so does Publication 505: Tax Withholding and Estimated Tax.

Using the Electronic Federal Tax Payment System (EFTPS) tool is the simplest way for individuals and companies to remit payment for federal taxes. If a taxfiler, be it an individual or business, uses EFTPS for basically every and all federal tax payments,  it is far more easy to pay estimated taxes weekly, bi-weekly, monthly and so on, providing enough payment has been made by the completion of every quarter. EFTPS also provides real-time access to payment history.

How To Figure Estimated Tax

IRS Form 1040-ES: How to Pay Estimated Tax applies to individuals, sole proprietors, partners and S corporation shareholders to determine estimated tax.  In order to obtain an accurate estimated tax, it is essential that expected adjusted gross income, taxable income, taxes, deductions, and credits for the year are readily available. Referencing your prior year’s data can also be very helpful and useful.

Penalty for Underpayment of Estimated Tax

When enough payment for taxes owed during a year, whether payment is made via withholding or the remittance of estimated tax payments, it is possible that a penalty payment is enforced if taxes have not been paid in full, or if there was an “underpayment.” A majority of tax filers avoid this penalty because, normally, the underpayment is less than $1,000, after subtracting withholdings and credits, or if a business paid at least 90% of the taxes owed for the current year; this also holds true if a percentage of 100% of the tax displayed on the return for the previous year, depending on which number is smaller. Special caveats and rules for fisherman and farmers.  For more information, access the IRS website and follow the prompts for and fishermen, refer to Publication 505 (2017): Tax Withholding and Estimated Tax.

Should income be received and earned in an uneven fashion during a year, there is a possibility of being be able to avoid or lessen any penalty by annualizing your income and making unequal payments. Form 2210: Underpayment of Estimated Tax by Individuals, Estates, and Trusts, and, at times, Form 2220: Underpayment of Estimated Tax by Corporations, to determine if you must remit payment as a penalty for underpaying your estimated tax. Please refer to IRS Form 1040A Instructions, or IRS Form 1120 Instructions, for details concerning the reporting of estimated tax penalties on tax returns.

Keep in mind that associated penalties may also be waived if either of the following circumstances holds true:

• Retirement after reaching age 62, or being deemed disabled sometimes during the tax year, or even the preceding tax year, in which estimated payments were supposed to be made, or even in the preceding tax year, assuming the underpayment could be attributed to reasonable cause instead of willful neglect.
• Lack of estimated payments was due to a disaster, casualty or any other justifiable unusual circumstance where it would be inequitable to impose the penalty.

Excise Tax

Companies are assessed an excise tax and complete additional forms should they participate in any of the activities:

• Operating as a specific business types
• Manufacturing of or selling of specific products
• Receiving payment for specific services
• Using different sorts of products, equipment or facilities

If qualifying for an excise type based on any of the aforementioned activities, the following types of forms may be required.  Please note that these forms are the most widely used and necessary forms are not limited to the forms identified below:

Form 720: Quarterly Federal Excise Tax Return – federal excise taxes are identified on Form 720, which is comprised of many broad tax categories, such as:

• Fuel
• Air transportation
• Environmental
• Communications
• Retail sales of:
  • Tractors
  • Trailers
  • Heavy trucks
• Manufacturing of:
  • Sale of a variety of articles
  • Use of a variety of articles

Form 2290: Heavy Highway Vehicle Use Tax Return – If two conditions exist simultaneously, (1) a vehicle uses public highways and (2) the same vehicle’s taxable gross weight is 55,000 pounds or higher, an excise tax is assessed.  Examples of such vehicles include, but are not limited to: buses, specified trucks and truck tractors and certain detail must be accounted for on Form 2290. For.further information on IRS instructions for completing Form 2290 are outlined by the IRS here.

Form 730: Monthly Tax Return for Wagers –  Businesses involved in the handling of wagers, the conducting of a wagering pool or the conducting of a lottery need to complete this form to determine the amount of their federal excise tax.  

Form 11-C: Designated the Occupational Tax and Registration Return for Wagering– This form is used to register participation in any wagering activity and to determine the dollar amount of federal occupational tax on wagering.

Excise taxes take on numerous roles and abide by any number of general excise tax programs. Motor fuel is a very large component of tax excise programs. Excise taxes are normally built into in the price of a product. Excise taxes can also be put on activities; taxes such as those on wagering or on truck highway usage, are good examples.  Elaboration on additional instructions and information is provided by the IRS here.

Conclusion

When it comes to taxes, a successful business does not cut corners and is very well-versed on the taxes associated with its company.  Thomas Huckabee, CPA of San Diego, California understands the critical nature of getting taxes completed in an accurate and timely fashion. Operating as a full-service accounting firm with expertise in tracking, reporting and providing on the taxes a firm needs to be familiar with, the offices of Thomas Huckabee, CPA offer invaluable services.