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:
Schedule C
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.
K-1
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 asole proprietorship or a single-member LLC,you report your business income on a Schedule C for your 1040.
- If your business is apartnership or a multiple-member LLC,you get your business income on a Schedule K-1 for your 1040.
- If your business is anS 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 asole proprietororsingle-member LLC(which is taxed as asole proprietorship), you will useSchedule Cto determine thenet incomeof 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 youradjusted gross income and your personal taxes.
Moreinformation on Schedule C can be found,including instructions on how to prepare, when you can useSchedule C-EZ, and more.
Filing Taxes as a Partner or Multiple-Member LLC
If you are filing business taxes as apartner in a partnershipormember of a multiple-member LLC, you receive aSchedule K-1from 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 agreementor operating agreement. No taxes are paid on the business’s Form 1065, it is only aninformation return.
Note
Partners (and owners of a multiple-member LLC) receive a Schedule K-1which 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 aqualified 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 statusdepends on your state and other circ*mstances.
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 ScheduleK-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.
TheS corporation files a business tax returnon Form 1120-S, then the net income is split between the owners, on the Schedule K-1.
Schedule SEfor Self-Employment Taxes
Don't forget self-employment taxes. In addition to paying income taxes on your business income, you may also have to payself-employment taxes (Social Security/Medicare for self-employed business owners).
Yourbusiness 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 SEuses this information to calculateyourself-employment taxliability.
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 thedue dates for business tax returnsfor the filing tax year.Reading more about how to file your business tax returnhelps 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.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented withoutconsideration of the investment objectives, risk tolerance or financial circ*mstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
