Small business tax help website
 
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Small Business Tax Preparation

Unemployment Insurance Tax

Small businesses with employees must also pay the unemployment insurance tax. Check with your accountant or small business tax preparation service. The Unemployment insurance tax has the state and federal component.

Self employment tax

If the small business is a sole proprietorship or a partnership that earn more than a minimum amount set by the IRS per year, then the small business will need to pay self employment taxes. Self employment tax is reported on the IRS tax form 1040 Schedule SE. The self employment tax is based on the net self employment income of the small business. It is taxes after all the deductions. Most self employed sole proprietors don't pay this self employment tax because the expenses far exceed the income from self employment.

Federal and State income tax

A small business needs to file separate federal and state income tax returns based on the legal business structure as follows.

Sole Proprietor

If you operate your small business as a sole proprietor, then you need to file taxes as an individual using the IRS tax form 1040 Schedule C or C-EZ. You will be able to itemize all your small business related expenses and arrive at the net profit or loss figure. Your small business tax will be based on this net profit amount.

Partnership

If a small business is a partnership, then the partnership needs to file an IRS tax form 1065 with schedule K-1. Schedule K-1 divides the income or loss of the partnership between you and other partners. The income is then included in the IRS tax form 1040 that you file for personal income tax.

C Corporation

If your small business is a C corporation, then it is a separate legal entity and the small business must file the IRS tax form 1120 which is the Corporate Income Tax Return. Two things happen when a small business is a corporation. Federal corporate tax brackets are different from other tax brackets.

  • The small business needs to pay the corporate income taxes on its income.
  • Shareholders need to pay tax on the dividends they receive from the small business.

S Corporation

If a small business is an S corporation, then the small business must file the IRS tax form 1120S. However, the small business S corporation does not pay tax on its income, similar to the partnership. Instead, shareholders pay taxes on their share of income.

Limited Liability Company (LLC)

If the small business is an LLC, then it has many tax advantages. The LLC combines the best of part of a partnership and the best of a corporation. The LLC can choose to be taxes as a partnership or a C corporation. An LLC has partners, not employees and therefore is not subject to self employment tax.

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