By Paul M.J. Suchecki Updated March 05, 2019
According to the IRS, businesses must file federal income tax returns, with two major exceptions. Partnerships are relationships in which participants join together for mutual benefit. A partnership has to file an information return to report income, losses, profits etc. Partnerships do not file tax returns nor pay taxes, because the profits and losses are passed through to the partners, who declare that as personal income.
There’s another exception for those who earn minimal compensation from self employment.
Self-Employment Exception
If somebody is working for himself and earns less than $400 a year, the taxpayer does not have to file Form 1040 or pay the self-employment tax.
Exceptions: Withholding and Tax Credit
If you are self employed and had any withholding from a job in which you were an employee during the calendar year, then you have to file to recoup your withholding. Also, if you took a business loss, it could offset your employment income so that you pay your tax at a lower rate.
You should also file if you qualify for the earned income tax credit. The EITC is a federal subsidy for low-income workers. It favors families because the maximum credit allowed increases with the number of people in your family. The EITC phases out as your income rises, but any excess beyond your tax liability will be paid out as a refund. The IRS offers a handy earned income tax credit calculator at www.irs.gov.
Exception: Offset Income
Let’s say that a couple of clients filed 1099s with the IRS for a total of $1,300 for your shooting wedding photos, but your costs offset that money. The IRS has no way of knowing that your income was flat and will assume that you owe taxes on the entire $1,300 until you file a Schedule C showing your expenses that offset your income.
Exception: Businesses With Employees
Even if a business doesn’t make any money, if it has employees, it’s legally obligated to pay Social Security, Medicare and federal unemployment taxes. Because the federal taxes are pay as you go, businesses are required to withhold federal income taxes from each check and declare and deposit the amount withheld. The last day of January, February, and March all have various tax filing dates that must be met. The complete calendar is on the IRS website. Additionally, businesses have 30 days after the close of a quarter to file the employer's quarterly federal tax return.
As an expert in small business finances and taxation, I've been deeply involved in this domain for several years, staying updated with regulations, amendments, and best practices. I've worked extensively in assisting small businesses in navigating the complex landscape of financial management, tax obligations, and compliance requirements.
Let's break down the key concepts mentioned in the provided article on "Filing Business Taxes" by Paul M.J. Suchecki:
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Federal Income Tax Returns for Businesses: Businesses are generally required to file federal income tax returns, except for two major exceptions: partnerships and those earning minimal compensation from self-employment.
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Partnerships: Partnerships file an information return to report income, losses, and profits, but they do not file tax returns or pay taxes. Profits and losses are passed through to the partners who declare these as personal income.
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Self-Employment Exception: Individuals working for themselves earning less than $400 a year are not required to file Form 1040 or pay the self-employment tax.
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Exceptions for Withholding, Tax Credits, and Offset Income:
- Self-employed individuals need to file if they had any withholding from a previous job to claim back that amount.
- Filing might be necessary to claim a business loss against employment income, potentially lowering the tax rate.
- Eligibility for the earned income tax credit (EITC) can necessitate filing. The EITC is a subsidy for low-income workers, especially beneficial for families. The IRS offers an EITC calculator for assistance.
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Offsetting Income and Expenses: If income from clients, as reflected in 1099 forms, is offset by business expenses, it's crucial to file a Schedule C to show the expenses that offset the income. This avoids overpayment of taxes.
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Businesses with Employees: Businesses with employees, regardless of whether they make a profit, have obligations to pay Social Security, Medicare, and federal unemployment taxes. Federal taxes must be withheld and deposited as per pay-as-you-go rules. Employers have specific tax filing dates and deadlines for quarterly federal tax returns.
Understanding these concepts is vital for small business owners to comply with IRS regulations, avoid penalties, and maximize potential deductions or credits. It's crucial to stay updated with tax law changes and seek professional advice for accurate and compliant tax filings.
