Clients are often concerned with how to handle their business. For tax purposes, the answer to this question is completely dependent upon how the business is structured.
Let’s say you are the sole owner of your business, structured as an LLC. In this case, you would be filing a Schedule C on your Form 1040. This schedule is simply an addition to your typical individual income tax return (Form 1040). Many clients are sad to hear that income generated on this schedule is subject to self-employment tax. There are strategies for avoiding this additional tax.
Partnership or S-Corporation
A company that has more than one member can be taxed as either a partnership or an S-Corporation. However, they have in common the fact that a separate tax return must be filed for either type of entity. A partnership is filed on Form 1065 and is classified as a “pass-through” entity. This means that Form 1065 is simply an informational form that breaks down the income and expenses attributable to each partner. The partners then report their allocable income and expenses on their own individual income tax returns.
The same idea applies to the S-Corporation, except it is filed on Form 1120S. Specifically, an S-Corporation is used to avoid self-employment tax and can be very effective. Inquire with David as to how to go about electing S-Corp status here.
The keystone to successful business tax compliance is a timely and accurate filing. The Tax Cuts and Jobs Act of 2018 has brought about significant changes in the business tax world. However, the tax filings for partnerships and S-Corps will continue to perplex taxpayers. David is here to assist you in navigating this climate.