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  • Understanding Business Taxes

    Game Plan

    In-Depth

    Tax Filing Requirements

    How your business is structured determines which taxes you must pay and how you pay them. Here’s a quick look at what to expect for each business structure:

    • Sole Proprietorship. You declare your income and expenses on Schedule C of Form 1040. It’s a good idea to consult with your tax professional to make sure you are taking every deduction available to you.
    • Partnership. A partnership pays no income tax directly. Profits are passed through to the partners on Schedule K-1 of Form 1040 and each partner pays their share of taxes on their individual income tax return.
    • C Corporation. This is a separate and self-contained legal entity. The C Corp declares income and expenses on Form 1120 and must pay estimated taxes, if profitable.
    • S Corporation. Similar to a partnership, the S Corp pays no federal income tax. Your share of profits flows through to your individual income tax return on Schedule K-1. The corporation must withhold employment taxes and pay the employer’s share of Social Security and Medicare taxes for all employees.
    • Limited Liability Company (LLC). There is no separate federal tax return for an LLC. For tax purposes, you have to decide to be treated as either an S Corp, C Corp, Partnership, or Sole Proprietor, and file and pay taxes accordingly as that entity.
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    Game Plan

    • Choosing your business structure is an important decision. You’ll want to consider ownership and control issues, along with tax considerations. For insights on sole proprietorships, partnerships, and LLCs, see this article. For the pluses and minuses of structuring as an S or C corporation, see this article.
    • To learn more about tax filing requirements for each type of business structure, visit this IRS page.
    • You may also have to pay state taxes, but every state has different rules. The Small Business Administration has links to business tax responsibilities for all fifty states on this page.
    • When you set up a business, you decide to file taxes on either a calendar year basis (January 1-December 31) or a fiscal year basis (12 consecutive months ending on the last day of any month except December). To change your tax year from fiscal to calendar or vice versa, you’ll have to get IRS approval by downloading and filing this Form 1128 PDF, and you may have to pay a fee.