Tax Requirements
Which Tax Forms to File?
Sole Proprietor
Business income reported on Form 1040, Schedule C Social Security Tax reported on Schedule SE.
Business income is taxable to the owner.
Partnership
Partnership files its own tax return on Form 1065, Owner's share of income/loss reported on Schedule E, Social Security Tax is reported on Schedule SE. Payroll taxes are required if there are employees.
S-Corporation
Corporation files its own tax return on Form 1120S. Owner's share of income/loss reported on Schedule E. Owner is an employee, so payroll taxes are required. S Corporation distributions are not subject to SE tax, however a reasonable salary must be paid to the owner.
C-Corporation
Corporation files its own tax return on Form 1120 and pays its own tax. Owner is an employee, so payroll taxes are required.
If you have employees, you will have a number of payroll tax forms to file including quarterly federal reports (Form 941), quarterly state tax reports (Form DE6), annual federal unemployment tax reports (From 940). annual state reports (DE7), and annual W-2 forms.
If your workers are independent contractors, you must report payments over $600 in a calendar year on Form 1099.
You must also report other types of payments such as rent or interest on Form 1099-MISC or Form 1099 INT. Check with a tax specialist or the IRS for more specific information.
Getting Started
Challenges and Opportunities
Starting your own business will probably complicate your tax situation. Keeping records such as auto mileage logs, receipts for meals, and entertainment expenses will challenge you. So will the rules of payroll taxes. Remember that keeping accurate records of these expenses will bring you deductions on your tax return.
Tax laws can be complex and confusing. Consult a tax professional for assistance in getting your business established. You can also visit the IRS and the Franchise Tax Board's web site for more helpful information:
Methods of Accounting
There are two generally accepted methods of accounting. They are the cash method and the accrual method of record keeping.
Cash Method
Income is recognized when payment is received and expenses are deducted when the expense is paid.
Accrual Method
Income is recognized when earned and expenses are deducted when incurred. Example: If you bill a client for services, you count that as income when you generate the invoice, not when the client actually pays you. When you receive a bill, you consider that as an expense at the time you receive it, not when you pay the bill.
