The process for reporting small business income can be confusing and depends on whether you operate as a sole proprietorship or use a legal entity such as an LLC or corporation. Each requires a different form to report business income and expenses. However, regardless of which form you use, business income is reported in similar ways. Organization is extremely important to your small business, especially when it comes to reporting income. Consider the following tips to help you be successful when considering how to report your small business income:
1. Keep immaculate records: Keep them together in the same place so that when it comes time to report your income, you have everything ready to go. Consider using a computer program to track income and expenses throughout the year.
2. Have the right forms: Choosing the correct forms depends on how you run your business. A majority of small businesses use a sole proprietorship which enables them to report all income and expenses on Schedule C attached to their tax return. If you operate as an LLC and are the sole owner, you may use the Schedule C attachment, but a separate corporate tax return on Form 1120 has to be filed as well.
3. Fill out the forms: Fill out schedule C or Form 1120. Schedule C is simple; it is two pages and lists all expenses that can be claimed. When complete, simply subtract expenses from your business earnings to determine your net profit or loss. This number is then transferred to your personal tax form and included with any additional personal tax items. If you utilize Form 1120, taxable business income is calculated the same way, but the form requires more information that may not always apply to a small business.
4. Be aware of deadlines: Schedule C becomes part of your 1040 and no separate deadlines apply. Form 1120 has two different filing dates depending on whether you file as a C-Corp or an S-Corp.
All taxes are not the same when it comes to small businesses. Different taxes include:
– Income tax: This income is based on net profit. Profit equals income minus the business expenses. The definition of expenses is that which is necessary and ordinary to run the business.
– Self-employent tax: Self-employment is defined as being in business for yourself or carry on a trade or business as an independent contractor or sole proprietor. You may pay self-employment tax, also known as social security and Medicare taxes if you are self-employed. You must pay tax if your self-employment income is $400 or more.
– Employment taxes: If you hire employees there are several employment taxes. The employer pays some, the employee pays some and some are shared.
– Excise tax: If you manufacture or sell certain products, operate certain types of businesses, or use certain equipment you may be subject to an excise tax.
– Sales tax: 45 states require retail sellers to collect sales tax from customers.
– Local taxes: These are dependent on particular situations and locations. Local requirements can be found by contacting your state, county and city agencies.
– Tax ID Number: The two most common tax ID’s are EIN and TIN. The IRS issues EIN’s to sole proprietors, partnerships and corporations. An EIN is needed if you have employees, a qualified retirement plan, operate a business as a corporation or partnership, or file returns for employment taxes.
Business owners have a lot of pressure and reporting business income is at the top of their concerns. The tax deadline is right around the corner so it’s important to have a clear understanding of what you will need, and what the requirements are. At Camino Financial, we are dedicated to helping small businesses succeed. Contact us today for more information!