Tax returns include all the required paperwork that accompanies the remittance of taxes to the appropriate government agencies, the largest of these being the Internal Revenue Service (IRS). The IRS issues more than 650 different forms for taxpayers to use in calculating and paying their taxes (the complete list is available through IRS publication 676, Catalog of Federal Tax Forms). Each form applies to a different situation or purpose. For example, Form 1065 details the income received by a business operating as a partnership, and Form 8826 relates to expenses claimed for business use of a home. Perhaps the most familiar type of tax form is the annual personal tax return, Form 1040, that must be completed by millions of taxpayers each year.
Considering that the laws have undergone no fewer than eight major revisions in the past two decades, as well as numerous minor changes, it is no wonder that tax return preparation can be exceedingly difficult and time consuming for small business owners. Since the average small business person can ill afford to call a tax pro with every question, time will be necessary to make one's way through the maze of tax forms and instructions. Fortunately, a great deal of information is available to help in this task. Sources include IRS publications and help lines, self-help tax preparation guides and software, trade associations, periodicals, and online services.
It is important for small business owners to maintain a personal awareness of tax-related issues in order to save money. Even if they employ a professional bookkeeper or accountant, small business owners should keep careful tabs on their own tax preparation in order to take advantage of all possible opportunities for deductions and tax savings. Whether or not a small business owner enlists the aid of an outside accountant, she should understand the basic provisions of the tax code. Just as one would not turn over the management of his money to another person, he should not blindly allow someone else to take complete charge of his taxpaying responsibilities. Knowledge of tax structures and provisions can have a powerful impact on the potential for maximizing profits. Knowing what the tax law has to offer can provide a company with an advantage over competitors who don't use tax planning efficiently.
COMMON BUSINESS TAX FORMS AND FILING DEADLINES
Small businesses that employ persons other than the owner or partners are required to withhold payroll taxes from the wages paid to employees, remit these taxes to the Internal Revenue Service (IRS), and make regularly scheduled reports to the IRS about the amount of payroll taxes owed and paid. Payroll taxes include regular income taxes, FICA (Social Security and Medicare) taxes, and FUTA (federal unemployment) taxes. In addition to withholding payroll taxes for employees, employers must remit these taxes to the IRS in a timely manner. The regular income taxes and the portion of the FICA taxes that are withheld from employees' wages each pay period must be remitted to the IRS monthly, along with a Federal Tax Deposit Coupon (Form 8109-B). If the total withheld is less than $500, however, the business is allowed to make the payments quarterly.
Employers must also file four different reports regarding payroll taxes. The first report, Form 941, is the Employer's Quarterly Federal Tax Return. This report details the number of employees the business had, the amount of wages they were paid, and the amount of taxes that were withheld for the quarter. The other three reports are filed annually. Form W-2—the Annual Statement of Taxes Withheld—must be sent to each employee before January 31 of the following year. It details how much each employee received in wages and how much was withheld for taxes over the course of the year. Copies of the W-2 forms for all employees also must be sent to the Social Security Administration. The third payroll tax report, Form W-3, must be sent to the IRS by February 28 of the following year. It provides a formal reconciliation of the quarterly tax payments made on Form 941 and the annual totals reported on Form W-2 for all employees. The final report is the Federal Unemployment Tax Return, Form 940, which outlines the total FUTA taxes owed and paid for the year.
Independent contractors to whom a business pays more than $600 during the tax year must be sent a Form 1099 by the business no later than January 31 of the following year. This form is like a W-2 form for non-employees. And like the W-2 form, it has a related summary form that must be sent to the IRS—along with copies of all 1099 forms—no later than February 28. This summary report is IRS Form 1096.
Since they do not receive an ordinary salary, the owners of sole proprietorships and partnerships are not required to withhold income taxes for themselves. Instead, they are required to estimate their total tax liability and remit it to the IRS in quarterly installments, using Form 1040 ES. It is important that the amount of tax paid in quarterly installments equal either the total amount owed during the previous year or 90 percent of their total current tax liability. Otherwise, the IRS may charge interest and impose a stiff penalty for underpayment of estimated taxes. At the end of the tax year, the income for sole proprietorships is simply reported on the personal tax return of the business owner. Partnerships must file the informational Form 1065 (Partnership Statement of Income) with the IRS, and then report the amount of income that accrued to each partner on Schedule K1.
Corporations must prepare an annual corporate tax return on either a calendar-year basis (the tax year ends December 31, and taxes must be filed by March 15) or a fiscal-year basis (the tax year ends whenever the officers determine). Most Subchapter S corporations, as well as C corporations that derive most of their income from the personal services of shareholders, are required to use the calendar-year basis for tax purposes. Most other corporations can choose whichever basis provides them with the most tax benefits. At the end of their tax year, corporations file either Form 1120, the U.S. Corporate Income Tax Return, or the shorter Form 1120A. If they expect to owe taxes, corporations are required to make quarterly estimated payments, like other businesses.
Carter, Gary W. Small Business Tax Secrets: Ultimate Tax Savings for the Self-Employed!. John Wiley & Sons, March 2003.
Dailey, Frederick W. Tax Savvy for Small Business. Ninth Edition. Nolo Press, 2005.
Ennico, Cliff. "Preparing Your IRS Forms 1099 and W-2." Entrepreneur.com. 27 January 2003.
Fink, Philip R. "Individuals and Small Business Tax Planning Guide." The Tax Adviser. September 2005.
"Top Errors Preparers Make." Journal of Accountancy. June 2000.
U.S. Department of Treasury. Internal Revenue Service. "Forms and Instruction." Available from http://www.irs.gov/formspubs/lists/0,id=97817,00.html. Retrieved on 17 May 2006.