IRS Tax Forms Every Business Owner Should Know
Being the owner of a business comes with a myriad of responsibilities that never seems to end, including your tax obligations that are significantly more complex than those of individual employees. While the start of tax season almost always comes with a negative connotation, it doesn’t have to. Spoken by the words from American basketball coach, Bobby Knight, “What’s more important than wanting to succeed is the will to prepare.” This simple yet powerful quote not only provides a perspective shift but can and should be applied to the manner in which a healthy business is run. And by healthy, we are referring to good standing, compliance, and being informed on the IRS tax forms for business owners.
At Ryan & Wetmore, we understand thoroughly that there are numerous other factors that come into play when evaluating the success and fitness of a business, but we believe that knowing which forms your business needs and being well versed in them is a prerequisite for any business to continue operating.
To ensure that your business is well informed come tax season, our accountants and CPAs have created a simplified guide to some of the most important IRS forms that every business owner should know including links to each.
What is it? Form W-4 is a form that is completed by employees so that employers can withhold the correct federal income tax from their pay.
Business owners should consider having their employees complete a new Form W-4 each year and when their personal or financial situation changes.
What is it? Form W-2 is an annual form filed with the IRS that is to be given to each employee.
The W-2 form is used to report wages and taxes withheld from employee paychecks. As a business owner, you are responsible for issuing W-2 forms to your employees and submitting copies to the IRS no later than January 31st.
What is it? Form 941 reports how much federal income tax and payroll taxes you withheld from employee paychecks, including Social Security tax and Medicare tax.
Unlike the W-2, form 941 is to be submitted on a quarterly basis. Below are the corresponding due dates:
- First quarter: April 30th
- Second quarter: July 31st
- Third quarter: October 31st
- Fourth quarter: January 31st (of the following year)
What is it? Form 940 reports annual Federal Unemployment Tax Act (FUTA) tax.
This form is used when employees are let go for reasons out of their control. Form 940 determines the amount an employer contributes to the Federal Unemployment Fund. This fund provides former employees with unemployment insurance. Form 940 is to be submitted annually but is contributed quarterly.
Forms to Record Income
What is it? Form W-9 is a request for taxpayer identification number and certification. It should be used to either obtain or give your taxpaid identification number to a person or business who may be required to file an information return with the IRS. Examples of situations where a W-9 may need to be obtained or filled out include:
- Income paid to you.
- Real estate transactions.
- Mortgage interest you paid.
- Acquisition or abandonment of secured property.
- Cancellation of debt.
- Contributions you made to an IRA.
Business owners should consider obtaining a W-9 from all subcontractors they hire so that you have confirmation of legal name/business name, address, and tax identification number.
What is it? Form 1099-NEC is the nonemployee compensation form for independent contracting jobs, such as freelance work and driving for DoorDash or Uber.
1099-NEC needs to be filed if a taxpayer has been paid more than $600. To learn more about the recent updates regarding Form 1099-NEC, click here.
What is it? Form 1099-K is used for payments received via third-party networks (such as PayPal and freelancing platforms such as Upwork) and/or credit/debit card transactions.
This form should be filed with individual tax returns.
What is it? Form 1099-MISC is a form used to document and report income that does not fall into other 1099 categories, though it is still specifically used for prize and award income.
Partnership and S-Corp Specific Forms
What is it? Form 2553, Election by Small Business Corporation, is a form completed to elect to be treated as an S corporation. This form must be completed within two months and 15 days after the start of the tax year in which you want the election to take effect for existing entities or within two months and 15 days of the day of incorporation for new entities.
A late S Election with Form 2553 can also be filed, but requires an explanation of reasonable cause and additional documentation.
A completed Form 2553 should be attached to the entity’s tax return in which it is the first year filing Form 1120-S, U.S. Income Tax Return for an S Corporation.
What is it? Schedule K-1 is a schedule of IRS Form 1065 that is used for members of a business partnership to report their share of a partnership’s profits, losses, deductions, and credits to the IRS.
Technically speaking, partnerships are “pass through” entities, meaning the profits (or losses) of a business “pass through” to the owners without having to pay corporate taxes. If your business is a general partnership, limited partnership, limited liability partnership, or an LLC that has elected to be taxed as a partnership, you will need to submit Schedule K-1 (Form 1065) to the IRS.
To learn more about the Maryland pass through tax election, click here.
Sole Proprietor Specific Forms
What is it? Schedule C is a form to be completed in conjunction with Form 1040. Both Schedule C and the supplemental Form 1040 are for individuals involved in a sole proprietorship (or single-member LLC).
Schedule C’s are used to report both the profits and losses of a business during a tax year. This form helps to determine the amount of federal taxes a sole proprietor owes. Income and expenses to be documented include but are not limited to:
- Rent and mortgage interest
- Travel and meals
- Machinery and equipment
What is it? Schedule SE is a form used for self-employed taxpayers. Every self-employed taxpayer who earned at least $400 needs to complete a Schedule SE with Form 1040. Self-employed taxpayers include:
- Contractors receiving non-employee compensation
- Individual business owners who file taxes with a Schedule C
- Single-member LLC owners
- Sole proprietors
- Partners who actively provide services to partnerships, such as a multi-member LLC
What is it? Form 8829 is a form used by taxpayers to claim a tax break for their home-based business.
Please note that this deduction only applies to taxpayers with a home-based business, not taxpayers with home offices. If you are an employee who is working from home during COVID-19, your home office expenses are not deductible. When using this form, taxpayers must have their home as the principal place of business, meaning that the home workplace can not be used for anything else (including a bedroom, family room, or anything of the like). This rule does not apply to daycare businesses.
Other Miscellaneous IRS Tax Forms and Elections for Business Owners
Report of Foreign Bank and Financial Accounts (FBAR)
What is it? The FBAR is a requirement that U.S. individuals and entities must report certain foreign financial accounts (bank accounts, brokerage accounts, etc.) to the Treasury Department. Generally, an account at a financial institution located outside the United States is a foreign financial account. If the account exceeded $10,000 at any time during the calendar year, an FBAR should be filed.
It is important to keep records of accounts that may be required to be reported on an FBAR. Important information includes:
- Name on the account
- Account number
- Name and address of the foreign bank
- Type of account
- Maximum value during the year
Willful and non-willful violation of these reporting requirements have severe penalties, so it is important to file the FBAR completely and in a timely manner.
What is it? Form 2848, Power of Attorney and Declaration of Representative, is used to authorize an individual to represent you before the IRS. This individual must be authorized to practice before the IRS. The authorization also allows the representative to receive and inspect confidential tax information, including tax notices, IRS tax transcripts, etc.
Individuals and business owners should consider filing a Form 2848 if they are subject to an IRS audit, received a tax notice they believe is incorrect, or need someone else to sign their returns. Form 2848 will allow the representative appointed to assist you with these matters and represent you when needed.
De Minimis Safe Harbor Expensing Election
What is it? Taxpayers may elect annually to apply a de minimis safe harbor under which amounts paid to acquire or produce tangible property are not capitalized under Reg. 1.263(a)-2 or 1.263(a)-3 or, if applicable, treated as materials or supplies under Reg. 1.162-3. The election can be made for items with an economic useful life of 12 months or less or that cost less than a specified threshold. For taxpayers with an applicable financial statement (AFS), the safe harbor threshold is $5,000 per invoice or per item, as substantiated by invoice. For taxpayers without an AFS, the safe harbor threshold is $2,500 per invoice or per item, as substantiated by invoice.
This could provide taxpayers with a key advantage if they owe taxes in the current year. This election allows them to claim the full cost of the item as a deduction in the current year rather than capitalize it and take depreciation deductions on the item over its economic useful life.
Partnership Centralized Partnership Audit Rules
What is it? Partnerships under the IRS tax code are considered what is called “flow through entities”, meaning that income and tax liabilities flow through to the individual partners rather than the partnership itself. However under the centralized partnership audit rules [effective for partnership tax years beginning after 2017 and for partnership tax years beginning after November 2, 2015, and before 2018 for which a valid election was made under Reg. 301.9100-22 (see E210 )], any adjustment to partnership-related items is determined at the partnership level and the partnership is liable for any outstanding tax or imputed underpayment based on partnership adjustments.
It is generally advised that partnerships elect out of these new rules if they can. The reason being is that it prevents partners from being unfairly obligated to pay tax/penalties for items in which they are not necessarily individually applied to. This is especially true if ownership changes result in current partners bearing the economic burden of tax, even if the adjustment relates to a year in which they were not a partner.
This election must be made each year, and the partnership must verify that they are considered a small partnership and have 100 or fewer eligible partners. Once they have over 100 eligible partners, they can no longer elect out of the centralized partnership audit rules.
Electing to Capitalize Start-up Expenses
What is it? Under Reg. 1.195-1 a taxpayer is automatically deemed to make the election to deduct and amortize business start-up expenses in the tax year the active trade or business begins. (See E103 .) The taxpayer may choose to forgo the deemed election to deduct and amortize the start-up costs and instead affirmatively elect to capitalize its start-up costs. The election either to deduct and amortize or to capitalize these start-up costs is irrevocable and applies to all start-up expenses that are related to the active trade or business.
This can prevent a key tax advantage to taxpayers because in most cases a business in its first year is not making very much revenue. As a result, deductions are generally significantly higher than revenue in the first year, resulting in a large loss. This allows a taxpayer to alleviate that by allowing them to depreciate some of those deductions over a few years rather than all at once in the first year.
Don’t Forget About the Your State’s Sales Tax
Sales tax is a tax paid to a governing body for the sale of tangible personal property and certain taxable services. Generally speaking, the sale or use of tangible personal property is presumed to be taxable unless specifically exempted by statute. Services in most states are presumed not to be taxable unless they are specially identified in statute as taxable.
Companies act as agents of their respective states by collecting the tax on taxable goods and services from purchasers and then passing it along to the state and local tax authority.
Sales tax rates and taxability rules vary by state and local taxing authorities. It is the company’s responsibility to manage the taxes that are required to be collected in order to remain in compliance with state laws and avoid any penalty and interest payments. This can be particularly challenging since sales tax rules vary by state.
If you are anything like the CPAs and accountants here at Ryan & Wetmore, information is a required component for making important decisions as it relates to taxes and beyond. Knowledge is power and we encourage all business owners to be educated on the proper tax forms that need to be submitted. If your business would like more information on tax forms or assistance with filing taxes, get in touch today by clicking below.
Today’s Thought Leaders
Contact us today by calling 301-585-0506.
About Eric Ingis
Supervisor & CPA
With the firm since 2014, Eric has become an integral part of the firm’s tax team. Eric focuses on providing various tax advisory services for high net worth individuals, corporations, and partnerships as well as providing state and local tax (SALT) advisory services to businesses of all sizes in order to mitigate risk, identify tax savings opportunities, and remain in compliance with various state and local laws.
Read Eric’s full bio.
About Jessica Ross
Jessica Ross is a Senior Accountant at Ryan & Wetmore. She focuses mainly on tax services and is experienced in Non-Profit bookkeeping. Jessica graduated from George Mason University with a Bachelor of Science in Accounting.