Not many business people do their own taxes. Nor is it recommended, since tax laws change very year (just look at 2017). Besides, finding the right “tax guy” can save money in the long run. However, for small business tax requirements, it depends on which style of business entity you form. Here are the three common types:

Basic Small Business Tax Requirements: Sole proprietorship (SP)

SP is the most common business registration. It’s usually filed with the state you choose to pay taxes. Not necessarily the state you do business in.  Since you can have multiple business licenses. One thing to remember is a sole proprietor merges personal assets and liabilities with business assets and liabilities. This basically means if someone sues your business, they have access to your personal wealth as well. It also means you’re taxed at your individual income tax rate. Tax Forms include:

• Schedule C: The basic profit/loss statement for the sole proprietor. This information is taken from your bookkeeping records. In accounting this is called your income statement.
• Standard 1040. The schedule C profit or loss is added to the standard 1040 tax filing form. This amount will be combined with any other earned income (second jobs, gifts, side work etc). This accumulated total is added, minus your deductions, and serves as the basis of your total yearly income. This final amount will then be taxed at the individual tax rate (both state and federal).
• Schedule SE: This form calculates the self-employment tax (Social Security and Medicare) you owe as well. This amount is taken from your net business income. Generally, it’s about 15% of the business income.  Yet, any secondary income may already have this deducted from a W2. If you get one.

Other state and/or federal regulated taxes may include:

• Withholding / Estimated tax: Depending on our business income, we’re supposed to pre-pay (withhold) a certain amount of taxes beforehand. This means, we look at past earnings, and write a check to the government in advance. It’s like a down payment for the taxes we expect to owe at the end of each year. The government expects to get paid. The IRS doesn’t take lightly when we can’t pay our taxes when their due. Depending on state/federal law, these withholding taxes may need to be monthly, quarterly or bi-yearly.
• Unemployment Insurance (tax): If you have employees, the Federal Unemployment Tax Act requires you to pay into the state unemployment funds. These funds are designed to pay benefits to workers if they get laid off, or the company goes out of business. Here’s a look from QuickBooks website about unemployment tax costs. “Unemployment taxes are calculated on “base wages.” These are set by your state. Then, each state decides on a “multiplier” as a “percent” of tax applied to those base wages. For example, in Illinois, the first $12,960 of each employee’s income is the base wage, and new businesses are taxed at a rate of 3.75%. So the unemployment insurance tax for a single employee at a new business in Illinois is $12,960 x .0375 = $486.00 per year.”
• Disability Insurance: There are only 5 states that require mandatory Disability Insurance – California, Hawaii, New Jersey, New York and Rhode Island. But these make up almost ¼ of the U.S. Population.  Disability Insurance has two aspects – short-term and long-term, and it covers a portion of a worker’s salary if they become disabled or unable to work. The costs run between a quarter to half percent of employees’ salaries or wages.
• Sales tax: Is often added to both products and services (depending on the state or county). Some states will even tax their sales tax. For example, Hawaii has an excise tax system. This means you add the sales tax to every invoice from every transaction. Then this total makes up your gross profits, which is then taxed again at the same excise tax rate.
• County tax: This usually includes vehicle registration tax, public service fees and property tax. Of course, these rates too vary regionally.

Basic Small Business Tax Requirements: Partnerships

A partnership, like the sole proprietor, is a business entity registered by each state. The company can be set up any number of ways. With the legal structure determined by the partnership agreement contract. These agreements can help spread the liability risk and work-load among the partners. However, this may also increase the odds of one side making a grievous error. Thus, the high failure rate of many partnerships. Most of the same taxes apply to either partnerships or sole proprietor, but the way they are filed differs slightly.

• The partnership entity doesn’t file with the IRS. Instead it files a Form 1065, showing the total amount of income, expenses, deductions and then the net income of the partnership entity. This income is then divided up between the partners (determined by the partnership agreement) and recorded on the 1065 form.
• A Schedule K-1 is distributed to each partner. This shows only that individual partners share of profits (or losses) for the year.
• Partners gain/loss added to 1040 individual tax return. It will be combined with any other earned income (second jobs, gifts, side work etc.). This accumulated total is added, minus your deductions, and serves as the basis of your total yearly income. This amount will then be taxed at the individual tax rate (both state and federal).
• The Schedule SE calculates the self-employment tax. This is not based on the company’s net profit, but only the amount distributed to that partner.
• Remaining taxes same as sole proprietor.

Basic Small Business Tax Requirements: limited liability company (LLC)

The LLC’s main function is to protect business owners from liability. This means that any lawsuits are filed against the assets of the company, not the individual. For example: If there’s a judgement against your business, the plaintiffs can’t come after your house, personal belongings or first-born child. They can only touch your business assets like the company car, boat, plane or pizza oven. However, every state is different and may not accept how the federal governments treats an LLC. Always talk to a lawyer before you sign or implement any agreement in writing.

For general tax purposes it works like this –

• A single-member (one person) LLC will pay income taxes as a sole proprietorship.
• A multiple-member LLC pays income taxes as a partnership.

The LLC is also filed with the state, but under a written operating agreement (basically a glorified and larger partnership agreement). Some states require LLC registration with the Department of Commerce as well. Both the LLC and Partnership do have the additional task of registering with the IRS to receive a Federal Employer Identification Number (EIN). Sole proprietors may use their social security number.

Basic Small Business Tax Requirements: Other Considerations

Selecting your companies legal structure is probably the most important and far-reaching decision made in business. We must carefully consider which style of ownership/control we want, future employee hiring decisions, how much personal asset protection we need, and which taxing situation serves us best. Here are a few areas that should be considered.

• Yearly tax obligations. How much control do you want over your taxable income? Filing for an S or C Corporation is also possible, but requires more structure, legal issues and paperwork than other entities.
• Compensation and Other Perks. Is there a way to include special items or benefits pertinent to you. And will the entity support these?
• Ownership Structure, Reorganization and Capitalization. Will a partner’s bad credit ruin our chances for loans and capital expansion? Can we modify our agreement if things don’t go as planned? Do we have the resources to do it on our own?
• Business Termination. Will there be penalties for ending contracts and agreements? Is it easy to walk away, or will we be tied to the failures of others?
• Business Growth. Will the entity we decide upon help us grow, or provide an avenue for change?
• Legal Protection: How does our partnership or operating agreement open us up for litigation or fraud. Will our personal assets and that of our family be protected?  Is our target market and business plan high risk, and if so, what changes need to be made for our protection.
• End of Life Choices & Estate Planning: Will our family be able to enjoy what we built? Or will the business entity leave behind a huge tax burden? Is my estate protected and free from potential legal or ethical issues? How will our business entity fit in when we’re making plans for our estate?

Again,  this is an important step. Many adhere to the advice of making every small business an LLC. It requires only a little more paperwork, and can protect our assets separate from our companies. In the end, we have to determine which is best for us. Seeking outside professional help is also highly recommended for decisions such as these.