This guide discusses business taxation help. Much of the small business tax information in this guide refers to the federal tax requirements. For tax and wage reporting requirements at the state level, please refer to This small business taxes services advice filing website, which links directly to existing Web sites for each state.
Before you begin, most of the tax forms and tax publications you'll need for your business are available free on the Internet. They are, however, in PDF format.
If you have have trouble reading or printing the publications, please make sure you have the newest version of the Adobe Acrobat Reader.
What form should the small business take (small business taxes services advice)? Your first decision.
One of the first decisions you must make when starting a business is determining the form of business to use. The following paragraphs briefly describe the more common options.
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 and you undertake the risks of the business for all assets owned, whether used in the business or personally owned. You include the income and expenses of the business on your own tax return. Publication 334, Tax Guide for Small Business, explains how the federal tax laws apply to sole proprietorships.
A partnership is the relationship existing between two or more persons who 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 is not a taxable entity. Each partner includes his or her share of the partnership's income or loss on his or her tax return. Publication 541, Partnerships, explains how the federal tax laws apply to partnerships.
In forming a corporation, prospective shareholders transfer 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 both the corporation and to the shareholders when the profit is distributed as dividends. However, shareholders cannot deduct any loss of the corporation. Publication 542, Corporations, explains how the federal tax laws apply to corporations.
An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation. An S corporation generally is exempt from federal income tax. Its shareholders include on their tax returns their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of non separately stated income or loss. For more information, see Instructions for Form 1120S, U.S. Income Tax Return for an S Corporation.
You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as an owner or tenant. A farm includes stock, dairy, poultry, fish, fruit, and truck farms. It also includes plantations, ranches, ranges, and orchards. Publication 225, Farmer's Tax Guide, explains how the federal tax laws apply to farming. Use this publication as a guide to figure your taxes and complete your farm tax return. (Small Business Tax Information).
You are a direct seller if you meet all of the following conditions:
You are engaged in the trade or business of:
Selling or soliciting the sale of consumer products, either:
In a home or other place that is not a permanent retail establishment, or
To any buyer on a buy-sell basis or a deposit-commission basis for resale by the buyer or any other person in a home or other place that is not a permanent retail establishment, or
Delivering or distributing newspapers or shopping news (including any services directly related to the trade or business).
Substantially all of your pay (whether paid in cash or not) for services described in (1) is directly related to sales or other output (including the performance of services) rather than to the number of hours worked.
Your services are performed under a written contract between you and the person for whom you perform the services, and the contract provides that you will not be treated as an employee for federal tax purposes.
As a direct seller, you usually sign up with a particular company to sell its product line. The company may refer to you by using one of the following titles:
Distributor and direct distributor
Manager or supervisor
Representative or sales representative
For more information, see Publication 911, Direct Sellers.
Some special tax rules apply to individuals who have their own fishing trade or business. These individuals include:
Fishing boat owners or operators who use their boats to fish for profit,
Certain fishermen who work for a share of the catch, and
Other individuals who receive gross income from fishing.
If you feel this describes your business, Publication 595, Tax Highlights for Commercial Fishermen, pertains to you. (small business taxes services advice)
Do I need any identification numbers (Business Taxation Help)?
The two most common kinds of taxpayer identification numbers are the Social Security Number (SSN) and the Employer Identification Number (EIN).
What is an Employer Identification Number (EIN)?
EINs are used to identify the tax accounts of employers, sole proprietors, corporations, partnerships, and other entities.
If you don't already have an EIN, you need to get one if you:
Have a Keogh plan,
Operate your business as a corporation or partnership, or
File any of these tax returns:
Alcohol, tobacco, and firearms.
You can get an EIN either through the mail or by telephone, but first you must fill out Form SS-4, Application for Employer Identification Number. You can get Form SS-4 at IRS or Social Security Administration (SSA) offices.
If you want to know more about EIN, see our EIN page or Publication 1635.
What about paying others?
In the operation of a business, you will probably make certain payments you must report on information returns. You must give the recipient of these payments (the payee) a statement showing the total amount paid during the year. The forms used to report these payments must include the payee's identification number, as well as your identification number. If the payee is an employee, use the SSN. If you must report payments to an organization, such as a corporation or partnership, use its EIN.
When do I start my tax year?
You must figure taxable income on the basis of a tax year. A "tax year" is an annual accounting period for keeping records and reporting income and expenses. The tax years you can use are:
A calendar year.
A fiscal year.
If you adopt a calendar year, you must maintain your books and records and report your income and expenses from January 1 through December 31 of each year.
Generally, anyone can adopt the calendar year. However, if any of the following apply, you are required to adopt the calendar year.
You do not keep adequate records.
You have no annual accounting period.
Your present tax year does not qualify as a fiscal year.
A fiscal year is 12 consecutive months ending on the last day of any month except December. A tax year is a fiscal year that varies from 52 to 53 weeks.
If you adopt a fiscal year, you must maintain your books and records and report your income and expenses using the same tax year.
If you operate a business as a sole proprietor, the tax year for your business must be the same as your individual tax year. For any other form of business special rules apply. Publication 538, Accounting Periods and Methods, describes these rules.
What accounting methods do I use?
Each tax payer must use a consistent accounting method, which is a set of rules for determining how and when to report income and expenses. The most commonly used accounting methods are the cash method and the accrual method. Under the cash method you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under the accrual method you generally report income in the tax year you earn it, regardless of when payment is received, and deduct expenses in the tax year you incur them, regardless of when payment was made.
For other methods, see Publication 538, Accounting Periods and Methods.
What kind of business taxes must I pay?
There are four general kinds of business taxes:
Employment taxes, and
All businesses except partnerships must file an annual Income tax return. Partnerships file an information return. Which form you use depends on how your business is organized.
Self-employment tax is the Social Security and Medicare tax for individuals who work for themselves. Your payments of self-employment tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and medical insurance (Medicare) benefits.
You must pay self-employment tax if
Your net earnings from self-employment (excluding income described in (2) below are $400 or more, or
You performed services for a church as an employee and received $108.28 or more.
You are self-employed (and subject to self-employment tax) if you carry on a trade or business as a sole proprietor, an independent contractor, a member of a partnership, or are otherwise in business for yourself. You do not have to carry on regular full-time business activities to be self-employed. Part-time work, including work you do on the side in addition to your regular job, may also be self-employment.
Wages and salaries received for services performed as an employee and covered by social security or railroad retirement, however, are not self-employment income. Nor are tips received for similar services as an employee. See Publication 533, Self-Employment Tax, for more information.
Employment taxes are:
Federal income tax withholding,
Social Security and Medicare taxes, and
Federal unemployment (FUTA) tax.
Generally, employees are defined either under common law or under special statutes for special purposes. Anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. See Publication 15-A, Employer's Supplemental Tax Guide, for more information on how to determine whether an individual providing services is an independent contractor or an employee.
If you want the IRS to determine whether a worker is an employee, file Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
You may have to pay excise taxes if you:
Manufacture or sell certain products,
Operate certain kinds of businesses, or
Use various kinds of equipment, facilities, or products.
For more information on excise taxes, see Publication 510, Excise Taxes.
Which taxes apply to my business (Small Business Tax Information)?
If You Are a:
You May Be Liable for:
Annual return of income
Partner in a partnership (individual)
Corporation or S corporation
S corporation shareholder
How do I deposit my taxes?
You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. Mail or deliver deposits with completed deposit coupons to an authorized financial institution or a Federal Reserve bank for your area unless you make the deposits electronically.
Form 8109, Federal Tax Deposit Coupon, is used for depositing taxes. On each coupon, you must show the deposit amount, the type of tax, the period for which you are making a deposit, and your telephone number. Use a separate coupon for each tax, period, and deposit.
Five to six weeks after you receive your employer identification number (EIN), as discussed earlier, the IRS will send you the coupon book. If you have a deposit due and there is not enough time to obtain a coupon book, blank coupons (Form 8109-B) are available at most IRS offices. You cannot use photocopies of the coupons to make your deposits.
If you have not received your EIN and must make a deposit, mail your payment with an explanation to the IRS Center where you file your return. Make your check or money order payable to the Internal Revenue Service. On the payment, write your name (exactly as shown on Form SS-4), address, kind of tax, period covered, and date you applied for an EIN. Do not use Form 8109-B in this situation.
Electronic deposit of taxes.
Generally, taxpayers whose total deposits of Social Security and Medicare taxes and withheld income tax during previous years exceeded certain amounts are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS).
Taxpayers not required to make deposits by EFTPS may enroll in the system, which will allow tax deposits without coupons, paper checks, or visits to an authorized depositary. For more information, see Publication 15, Circular E, Employer's Tax Guide, below.
To participate in EFTPS you must first enroll. For more information or an enrollment form, you may call EFTPS Customer Service at:
1-800-945-8400 or 1-800-555-4477;
1-800-945-8900 or 1-800-733-4829 (TDD Hearing Impaired) and
1-800-945-8600 or 1-800-244-4829 (Espanol).
What are information returns?
If you make or receive payments in your business, you may have to report them to the IRS on information returns. The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. You must give a copy of each information return you are required to file to the recipient or payer. In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. For more details on information returns and when you have to file them, see the Instructions for Forms 1099, 1098, 5498, and W-2G.
What small business expenses are deductible?
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. For guidance in determining allowable deductions, see Publication 535, Business Expenses.
To deduct expenses related to the business use of part of your home, you must meet specific requirements. Even then, your deduction may be limited. To qualify to claim expenses for the business use of your home, you must meet the following tests.
Your use must be:
Exclusive (however, see Exceptions to Exclusive Use in Pub 587 below),
For your trade or business, AND
The business part of your home must be one of the following:
Your principal place of business for your trade or business, or
A place of business where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or
A separate structure (not attached to your home) that you use in connection with your trade or business.
Can I deduct travel, entertainment, gifts and local transportation?
You may be able to deduct business-related expenses you have for:
Travel away from home,
Your expenses for travel away from home and for local transportation may include car expenses. Publication 463, Travel, Entertainment, Gift, and Car Expenses, explains what expenses are deductible, how to report them on your return, what records you need to prove your expenses, and how to treat any expense reimbursements you may receive.
Publication 463 deals with expenses of employees and sole proprietors. Other businesses (such as partnerships, corporations, and trusts) and employers who reimburse their employees for business expenses should refer to their tax form instructions and chapter 16 of Publication 535, Business Expenses, for information on deducting travel, entertainment, gift, and transportation expenses.
What kinds of records should I keep?
Except in a few cases, the law does not require any special kind of records. You may choose any record keeping system suited to your business that clearly shows your income. Your record keeping system should include a summary of your business transactions. This summary is ordinarily made in your books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook is the main source for entries in the business books. (Small Business Taxes Services Advice Filing)
Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents such as invoices and receipts. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place.
The following are some of the types of records you should keep.
Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts.
Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases.
Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense.
Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to figure the annual depreciation and the gain or loss when you sell the assets.
Is there a tax service that can help?
The IRS publishes the Guide to Free Tax Services, Publication 910, (see below) which identifies the many IRS tax materials and services available to you, and how, when, and where you can get them. Most of the materials and programs are free and available year-round through the IRS. Internet, telephone, and fax access of tax materials, filing options, tax publications, tax education and assistance programs, and tax tips are covered in this guide. The guide also lists telephone numbers for recorded tax information, automated refund information, and IRS mailing addresses.
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