Form 1040 – Individuals / Families & Sole Proprietor / Single Member LLC

Form 1040 (or 1040-SR for seniors):
This is our individual/family tax return.
Report your personal income, deductions, and tax liability.

Schedule C (Form 1040):
Report income or loss from your business operation as a sole proprietor.
Include details about your business expenses and revenue.

Schedule SE (Form 1040):
Calculate self-employment tax based on your net earnings from self-employment.
Remember to file these forms annually to comply with your tax obligations as a sole proprietor!

Single Member LLC
A single member LLC is typically treated as an entity disregarded as separate from its owner for income tax purposes. This means that the LLC’s income and deductions are reported on the owner’s personal federal income tax return.

However, for employment tax and certain excise taxes, the single-member LLC is still considered a separate entity.

Form 1065 – Multi Member LLC (Partnership)

A multi-member LLC is a business structure where ownership is shared among two or more individuals. Unlike a single-member LLC, which has only one owner, a multi-member LLC functions as a partnership.

It combines the operational flexibility and tax advantages of a partnership with the liability protection of a corporation.

The management structure, profit distribution, and operating protocols are outlined in an operating agreement.

Advantages of Multi-Member LLCs:
Limited Liability: Members (owners) are generally not personally liable for business debts and liabilities. Their personal assets (such as homes, cars, and savings) are protected from business-related lawsuits or debts.

Management Flexibility: Multi-member LLCs allow flexibility in management. Members can directly manage the business or appoint managers to handle day-to-day operations.

Pass-Through Taxation: By default, multi-member LLCs enjoy pass-through taxation. Profits and losses are reported on each member’s personal tax return. This avoids double taxation (common with corporations) where profits are taxed at both the corporate and individual levels.

Profit Distribution: Multi-member LLCs are not bound by strict profit distribution rules. Members can decide how to share profits, regardless of their percentage of ownership.

Enhanced Credibility: Forming an LLC can enhance the credibility of your business, as customers, vendors, and partners often perceive LLCs as more stable and professionally managed than sole proprietorships or partnerships.

Investor Attractiveness: The LLC structure provides a clear framework for investment, making it attractive to potential investors.

Tax Treatment:
For federal income tax purposes, multi-member LLCs are treated as partnerships by default. This means that the LLC itself does not file or pay taxes. Instead, each member reports their share of profits and losses on their personal tax return using Schedule E (Form 1040).

State-specific tax laws and requirements vary:

Some states follow federal tax treatment.

Others have their own rules for LLCs, including state income tax, annual franchise taxes, and sales tax requirements.

Form 1120S – S Corporation

An S corporation is a type of business entity that elects to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes.

Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.

The primary advantage of S corporations is that they avoid double taxation on corporate income, unlike traditional C corporations12.

Qualification Requirements: To qualify for S corporation status, the corporation must meet the following criteria:

Be a domestic corporation (incorporated within the United States).

Have only allowable shareholders, which may include individuals, certain trusts, and estates.

Not be partnerships, corporations, or non-resident alien shareholders.

Have no more than 100 shareholders.

Have only one class of stock.

Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations.

Tax Treatment:
S corporations do not pay corporate income tax directly. Instead, they enjoy pass-through taxation:

Profits and losses flow through to shareholders.

Shareholders report their portion of the company’s earnings on their personal tax returns.

Taxes are assessed based on individual tax rates.

S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

To become an S corporation, the corporation must submit Form 2553, “Election by a Small Business Corporation,” signed by all shareholders.

Form 1120 – C Corporation

A C Corporation (C Corp) is a tax classification for business entities formed under state law. By default, corporations are treated as C Corps for tax purposes.

Other entities, such as Limited Liability Companies (LLCs), associations, insurance companies, businesses owned by state or local governments, and certain banks, can also choose to be taxed as C corporations.

C Corps are distinct legal entities separate from their owners, providing limited liability protection to shareholders.

Double Taxation:
One common question is about double taxation. C Corporations are generally subject to this phenomenon:

First, the corporation pays income tax on its net profit at the entity level.

Then, shareholders are taxed when those profits are distributed to them as dividends.

Essentially, the money is taxed twice – hence the term “double taxation.”

Despite this, C Corps offers other advantages, such as liability protection and flexibility in ownership and management.

Corporate-Level Income Taxes:
C Corporations pay tax at the entity level. Unlike other business types (such as sole proprietorships or partnerships).

Owners of sole proprietorships and partnerships pay tax based on their individual income tax rates, which are progressive and increase with income.

C Corps use Form 1120 to calculate income subject to the flat corporate rate. The due date for Form 1120 depends on whether the corporation follows a fiscal year or calendar year. Many C Corps choose the calendar year, with a due date of April 15th, aligning with individual tax returns.

State and Other Taxes:
In addition to federal income tax, C Corps may also face state-level income and excise taxes.

Some states impose additional taxes, such as payroll taxes, sales tax, and other regulatory requirements.

It’s essential for C Corps to comply with both federal and state tax obligations. 

Form 1040 ES – Quarterly Estimated Tax Payments

Quarterly estimated tax payments are a way for individuals and businesses to pay their taxes throughout the year rather than waiting until the annual tax filing deadline. Here is what you must know about and understand to avoid steep penalties and interest.

Who Must Pay Estimated Tax:
Individuals, including sole proprietors, partners, and S corporation shareholders, generally need to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.

Corporations generally must make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.

Due Dates for Estimated Tax Payments:
The four quarterly tax payments are not evenly spaced. They are due as follows:

First quarter: Due on Tax Day, usually April 15 (for income earned from January 1 to March 31).

Second quarter: Due on June 15 (for income earned from April 1 to May 31).

Third quarter: Due on September 15 (for income earned from June 1 to August 31).

Fourth quarter: Due on January 15 of the following year (for income earned from September 1 to December 31)

How to Calculate Estimated Tax:
Individuals and certain entities use Form 1040-ES to figure out their estimated tax.

Nonresident aliens use Form 1040-ES (NR).

To calculate estimated tax, you’ll need to estimate your adjusted gross income, taxable income, taxes, deductions, and credits for the year.

Avoiding Penalties:
Making quarterly estimated tax payments helps avoid surprises when filing your return.

You can also avoid interest or penalties for paying too little tax during the year.

Generally, paying at least 90% of your tax during the year will prevent penalties.

Remember that staying on top of estimated tax payments ensures smooth tax compliance and helps you avoid penalties.

What Is Self-Employment Tax:
Self-employment tax is a combination of Social Security tax and Medicare tax that self-employed individuals must pay.

Unlike employees who have these taxes withheld from their paychecks, self-employed individuals are responsible for paying them directly.

The self-employment tax rate is 15.3% in total:

12.4% goes toward Social Security.

2.9% is allocated to Medicare.

Employers and employees typically share these taxes, with each paying 7.65%. However, self-employed individuals cover both parts themselves.

Form 1099 NEC – Reporting Non Employee (Contractor) Payments

Form 1099-NEC (Nonemployee Compensation) is an information return used by businesses to report payments made to non-employees.

These non-employees include independent contractors, freelancers, or other self-employed individuals who provide services to the business but are not considered regular employees.

When to Use Form 1099-NEC:
If your business has made payments of $600 or more to non-employees during the year, you are generally required to issue a Form 1099-NEC.

Common examples of non-employee compensation include fees paid for professional services, contract work, or freelance work.

Purpose:
The primary purpose of Form 1099-NEC is to provide information to the IRS about payments made to non-employees.

By reporting these payments, the IRS can track and verify the income reported by these individuals.

Remember that businesses must file Form 1099-NEC annually to comply with tax regulations.

Schedule K1 – Reporting Partnership & Shareholder Income

Schedule K-1 is used by the following entities:
Partnerships: When a business operates as a partnership, each partner receives a K-1 form to report their share of the partnership’s financial activity.

S Corporations: Shareholders of S corporations receive K-1 forms to report their portion of the corporation’s income, deductions, and other items.

Trusts and Estates: Beneficiaries of trusts and estates receive K-1 forms to report their share of income, deductions, and credits.

These entities are considered pass-through entities, meaning they don’t directly pay corporate tax on their income. Instead, they shift the tax liability (along with most of their income) to their stakeholders.

Contents of Schedule K-1:
The K-1 form reports each participant’s:

Share of the business entity’s gains, losses, deductions, credits, and other distributions (whether or not they’re actually distributed).

Basis or ownership stake in the enterprise.

The information on Schedule K-1 is essential for calculating each participant’s tax liability.

Filing and Reporting:
Partnerships file Form 1065, the partnership tax return, which includes the activity reported on each partner’s K-1.

S corporations report activity on Form 1120-S.

Trusts and estates report K-1 activity on Form 1041.

Recipients of K-1 forms add the income reported on them to their other sources of income and include it on their individual tax returns (usually Form 1040).

Comparison to Form 1099:
Schedule K-1 is like Form 1099, which reports dividends, interest, and other annual returns from investments.

Investments such as master limited partnerships (MLPs), real estate limited partnerships (RELPS), and certain exchange-traded funds (ETFs) routinely issue K-1s.

Remember that Schedule K-1 plays a crucial role in ensuring accurate tax reporting for participants in these entities.