When you think about filing tax returns with the IRS, there are a lot of similarities between business and personal taxes that come to mind. However, weighing personal and business taxes on the same scale will demonstrate how different the two concepts actually are.
At 1800Accountant, we’re experts at making sure your personal and business taxes comply with the necessary tax requirements. Let’s explore what separates the two unique processes of filing personal income taxes and handling the long list of duties involved in filing business income taxes.
1. There are unique business tax returns to choose from
While Form 1040 is the standard tax return for most filers for personal income tax purposes, being a business owner opens the door to a host of new and unique business income tax returns. You must choose the appropriate returns to file in order to accurately report your business income to Uncle Sam.
Sole proprietors report their self-employment income directly on Form 1040, as do those with pass-through business structures. C corporation owners file Form 1120, while S corporation owners must submit Form 1120S. Partnerships file an information return known as Form 1065, and nonprofits must do the same using Form 990. Plus, don’t forget about estimated tax payments made on Form 1040-ES.
This list also may include tax forms to file payroll taxes, sales and use taxes, and a variety of other state and local tax filings depending on where you do business.
2. Business taxes come with additional filing deadlines
In addition to more tax forms to select from, the responsibility of handling business taxes also comes with additional filing deadlines. Individuals are used to the longstanding tradition of Tax Day, which falls on April 15. When operating a business, there are due dates on the calendar throughout the year.
For example, business owners must make estimated tax payments every quarter on January 15, April 15, June 15, and September 15. Some businesses are on the hook for monthly payroll tax filings. In addition, some business tax return filing deadlines fall in March, April, and May.
Of course, these can vary based on tax extensions. So, it’s critical to maintain a comprehensive calendar and note each and every filing deadline throughout the year to avoid potential late-filing or late-payment penalties.
3. There are far more business tax deductions than personal write-offs
Tax deductions are a staple of being in business. Whether you run a hair salon out of a brick-and-mortar facility downtown or you operate a small fleet of taxis, you’re immediately eligible for far more tax write-offs as a business owner than those available to individuals.
With personal taxes, you may qualify to deduct unreimbursed employee expenses you incur in your W-2 job. Deducting mortgage interest and student loan interest could also be an option. But the list of personal deductions does not go much further than that.
As a business owner, you’re spending lots of money on ordinary and necessary expenses to keep your venture up and running. More expenditures means more to write off. If you conduct work out of a spare bedroom in your house, you may be able to claim the home office deduction. If you use your personal vehicle for business trips between worksites, the vehicle deduction may be calling your name.
Startup costs of up to $5,000 to get your enterprise rolling are also deductible, along with 50 percent of business-related meals and entertainment and most out-of-pocket medical expenses you incur. Of course, nearly any business expenses you incur within your specific field are generally deductible—everything from computers to paper clips to printer paper.
The key to claiming business deductions is to record each and every one of your expenses. Save receipts and organize them for easy access in the future. The IRS often requires business owners to provide supplemental documentation to prove that they do indeed qualify for the write-offs they are claiming on their income tax returns.
4. Personal and business tax rates vary
Never assume that all personal and business tax rates are the same. As a sole proprietor, you will likely face personal tax rates on your self-employment income, which range from 10 to 39.6 percent. Remember that this figure does not include the 15.3 percent self-employment tax amount.
But if you have formally established a corporate entity, you may incur special corporate income tax rates on the money you earn. Corporate tax rates vary just like personal tax rates. In general, the more money your business generates, the higher the tax bracket will be when paying Uncle Sam his fair share.
Current federal tax rates for corporations range from 15 to 39 percent. Don’t forget that many states and local municipalities impose a corporate income tax as well, so what you’re paying in corporate taxes to the federal government is not necessarily going to be your total corporate income tax liability.
Be sure you understand how your specific business entity type is taxed so that you know how much of the income you earn will remain in your business bank account, and how much you’ll owe.
5. With business taxes, it’s all on you
If you work as a W-2 employee, there’s a good chance that you get a paper paycheck or a payment that is directly deposited into your personal bank account every other Friday.
If you were to examine your pay stub, you’d notice that several taxes are withheld from this payment. This is because your employer is required to withhold Social Security and Medicare tax, unemployment tax, and other relevant taxes. Basically, you don’t have to do anything other than file a personal income tax return on which you report your annual earnings.
However, working for yourself is a whole new ballgame. You are the one required to make all tax payments that an employer normally makes to various tax authorities throughout the year. For instance, you must cover the Social Security and Medicare tax payments yourself that an employer would normally withhold from your paycheck as an employee.
This is why it’s critical to always be on top of every single tax you must pay to a local, state, or federal tax agency. It’s incredibly easy to miss a tax filing or payment due to the significant number of unique tax obligations for business owners.
The bottom line on taxes
No matter if you’re simply an individual filer with a basic return or you own multiple business entities that require numerous filings, it’s a good idea to work with an accounting professional to ensure you’re staying compliant—and to help you save more of your hard-earned money.
The last thing you want is to receive IRS penalty notices when you open your mailbox, simply because you didn’t understand your filing requirements as a taxpayer.