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Income Taxes: Introduction

All businesses must pay federal income taxes. Some businesses are taxed as separate entities for income purposes, such as corporations or limited liability companies (LLCs). Other business's incomes are not taxed separately from the incomes of their principal owners, such as a sole proprietorship.

Business income tax is a pay-as-you-go tax -- businesses usually must pay the tax as income is earned during the year. As a business, you may be required to make estimated tax payments throughout the year (i.e. every three months). If you are not required to make estimated tax payments, you may pay any tax due when you file your return at the end of the tax year.

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Income Tax and Different Business Structures

Your form of business determines which income tax return form you have to file:

  • Sole proprietorships.  A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal liabilities. You undertake the risks of the business for all assets owned, whether or not used in the business. You include the income and expenses of the business on your personal tax return.
  • Partnerships. A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's items on his or her tax return.
  • Corporations.  In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. However, shareholders cannot deduct any loss of the corporation.
  • S corporations. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss.
  • Limited liability company. A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. None of the members of an LLC are personally liable for its debts. An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner.
Which Forms Must I File?
IF you are a... THEN you may be liable for... Use Form...
Sole proprietor Income tax 1040 and Schedule C or C EZ (Schedule F or farm business)
  Self-employment tax 1040 and Schedule SE
  Estimated tax 1040 ES
  Employment taxes:  
  Social security and Medicare taxes and income tax withholding 941 (943 for farm employees)
  Federal unemployment (FUTA) tax 940 or 940 EZ
  Depositing employment taxes 8109
  Excise taxes See Excise Taxes
Partnership Annual return of income 1065
  Employment taxes: Same as sole proprietor
  Excise taxes See Excise Taxes
Partner in a partnership (individual) Income tax 1040 and Schedule E
  Self-employment tax 1040 and Schedule SE
  Estimated tax 1040 ES
Corporation or S corporation Income tax 1120 or 1120 A (corporation) 1120S (S corporation)
  Estimated tax 1120 W (corporation only) and 8109
  Employment taxes: Same as sole proprietor
  Excise taxes See Excise Taxes
S corporation shareholder Income tax 1040 and Schedule E
  Estimated tax 1040 ES


Hiring a Lawyer to Assist With Business Taxes

The U.S.Tax Code is complicated. You want to make sure you are protecting yourself and your business by filing the correct forms and taking advantage of the benefits of legal tax deductions. Speak to a business and commercial lawyer now for more information.

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Contact a qualified business attorney to help you navigate your business's taxes.

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