With most small businesses, the income you receive from your business goes directly to your personal tax return. That means that the profits from the business you receive each year must be reported and paid as part of your total personal income on your personal tax return.
Your income from all sources—business and personal—ultimately ends up somewhere on your personal tax return. Each source of income has its box on Form 1040.
Business Income on Your Personal Tax Return
There are a few different structuring options for small businesses. The most common are pass-through businesses that require income from the business to be passed through to Form 1040 where it is taxed as income. There are basically two categories for pass-through businesses:
Sole proprietors and single-member LLC businesses must file their business taxes on a Schedule C. The Schedule C is primarily used by anyone who has a one-person business.
Partnerships, multiple-member LLCs and S corporations are also pass-through businesses. However, these companies must file their business income on an informational form and provide partners with a Schedule K-1.
In General Business Income into Personal Taxes
How this business tax information gets into your personal return depends on the type of business you own. As discussed above:
- If your business is a sole proprietorship or a single-member LLC, you report your business income on a Schedule C for your 1040.
- If your business is a partnership or a multiple-member LLC, you get your business income on a Schedule K-1 for your 1040.
- If your business is an S corporation, you get your business income on a slightly different type of Schedule K-1 for your 1040.
Don't worry, all of this will be explained. Below are the details for each business type.
Filing Taxes as a Sole Proprietorship or Single-Member LLC
If you are filing business taxes as a sole proprietor or single-member LLC (which is taxed as a sole proprietorship), you will use Schedule C to determine the net income of your business.
Enter the information on net income or loss, as calculated on your Schedule C on Line 12 (Business Income or Loss) of your personal 1040. The net profit or loss of your business is used along with any other income you might have to calculate your adjusted gross income and your personal taxes.
More information on Schedule C can be found, including instructions on how to prepare, when you can use Schedule C-EZ, and more.
Filing Taxes as a Partner or Multiple-Member LLC
If you are filing business taxes as a partner in a partnership or member of a multiple-member LLC, you receive a Schedule K-1 from your partnership. Schedule K-1 reports all income from the partnership, including earned income, dividends, distributions, interest, royalties, and capital gains. Your Schedule K-1 reflects your income from your portion of the profits (or losses) of the partnership.
For example, if you are in a partnership with one other person, and you have agreed to split profits 50/50, a $100,000 profit would give you $50,000, recorded on your Schedule K-1.
Schedule K-1 information is obtained from the partnership tax return Form 1065, which is completed and filed separately with the IRS on behalf of the business. The totals on Form 1065 are divided among the partners based on their share of the partnership, as detailed in the partnership agreement or operating agreement. No taxes are paid on the business’s Form 1065, it is only an information return.
Partners (and owners of a multiple-member LLC) receive a Schedule K-1 which includes several pieces of information for the partner that must be included in the correct place on the personal tax return of the owner. Different types of partner income are entered at different places on the return.
Special Situation for Spouses as Partners
If you and your spouse are partners in a business, you may qualify to file your business tax return as a qualified joint venture (QJV). In this case, you may be able to file two Schedule C's instead of a partnership return. Your eligibility to elect QJV status depends on your state and other circumstances.
Depending on how you agree to split the profits, your individual Schedule Cs would reflect your percentage of the income (and expenses) from the business. Both Schedule C forms are filed with your tax return (depending on how you file).
Filing Taxes as an S Corporation Owner
If you have income as an owner (shareholder) of an S corporation, you file a slightly different type of Schedule K-1 for Form 1120S. The information is similar to that of the Schedule K-1 for a partnership, and it's based on your share of the various kinds of income from the S corporation.
The S corporation files a business tax return on Form 1120-S, then the net income is split between the owners, on the Schedule K-1.
Schedule SE for Self-Employment Taxes
Don't forget self-employment taxes. In addition to paying income taxes on your business income, you may also have to pay self-employment taxes (Social Security/Medicare for self-employed business owners).
Your business net income (profit) is used to determine the amount of self-employment tax, which means if you don't have a profit for the year, you don't have to pay self-employment tax for that year.
You must insert in Schedule SE the information on your net income from Schedule C, your share of partnership income from Schedule K-1, or from S corp income on Schedule K-1 (1120-S). Schedule SE uses this information to calculate your self-employment tax liability.
Mail Your Tax Return on Time
Make sure you file your tax return so it is received by the IRS no later than the due date. Check out the most up-to-date information on the due dates for business tax returns for the filing tax year. Reading more about how to file your business tax return helps you make sure your tax return is received on time.
Getting Help with Business Tax Filing
In some cases, you may want to consult a tax preparer to help you with this work. Many people choose do-it-yourself options with a tax software program. Multi-person small businesses may employ a financial professional with responsibilities for record-keeping and tax.
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