Once you decide to launch a business or start working for yourself, it takes time to establish your business entity. If taxes are due before you have an LLC or an S-Corp, you may be wondering how to handle your taxes. Here are the answers to frequently asked business tax questions about filing taxes after starting a business.
Does your business have to be registered to file taxes?
If you’re running a business operation and earning income from it, the IRS considers you self-employed for tax purposes – even if you don’t have a business license or entity. A business entity defines how a business is structured in terms of ownership, legal responsibility, and taxation. It determines how your business is recognized by the government.
As a rule of thumb, the IRS requires you to file an income tax return if your net earnings from your self-employment are $400 or more. If you are new to filing taxes as a self-employed worker, you may want to learn about the basics of self-employment taxes. If your net earnings from self-employment were less than $400, you must still file an income tax return if you meet any other federal filing requirements.
If your business earned a profit this year, that amount should be included in your income on page 1 of Form 1040. But if your expenses exceed your income, you will report a business loss.
TaxSlayer Self-Employed will walk you through your return step by step, ensuring your income and expense information is entered into the correct tax forms.
Can I write off business expenses if I don’t have an LLC or an S-Corp?
Yes, even when filing as an individual, you can still write off business expenses. All businesses can deduct ordinary and necessary expenses from their revenue.
The IRS will tax you as a sole proprietor if you are the only owner. This means you will need to file a Schedule C to calculate the tax for your business operations. Form Schedule C will also allow you to deduct business expenses like business mileage, home office, advertising, and many more.
You don’t have to be an expert to file your taxes as a small business owner. TaxSlayer will enter the information you provide into the appropriate tax forms and help you claim the tax breaks you deserve.
If I have an LLC or an S-Corp, do I have to file a personal return?
Yes, if you are a member of an LLC or an S-Corp, you must file a personal return. An LLC is what the IRS calls a “pass-through entity.” Any business profits or losses are passed through to the members of the LLC, who report this information on their personal tax returns. While the LLC does not pay federal income taxes, it may pay state income taxes. The LLC must also file its own return, even if it is not responsible for paying the taxes because the tax liability will fall to the members.
If you are a member of an S-Corp, you are also required to file a personal return. Even though an S-Corp operates as a corporation, it is similar to an LLC because its shareholders pay federal income tax on the business profits. Therefore, the S-Corp is required to file an annual tax return as well.
It’s important to understand how pass-through taxation works in practice. For both LLCs and S-Corps, business profits are considered personal income to the owners, even if those profits are not distributed. This means that members and shareholders may be required to pay taxes on their share of income that remains in the business.
For LLC members, each individual reports their share of the company’s profits or losses on their personal tax return. As a result, tax liability is based on the profits of the business, not on the amount of money actually withdrawn.
How do I report LLC losses?
If your LLC operates at a loss, those losses are passed through to the members. Each member reports their share of the business loss on their personal tax return.
For single-member LLCs, the loss is typically reported on Schedule C. For multi-member LLCs, the business files an informational return and provides each member with a Schedule K-1, which is used to report their share of the loss.
In many cases, these losses can be used to offset other types of income, which may reduce your overall tax liability. However, there are limitations that may apply, such as basis limitations, at-risk rules, and passive activity loss rules. These rules determine how much of the loss can be deducted in a given year.
While LLC losses can provide a tax benefit, the amount you are able to claim will depend on your individual tax situation.
Should I set up an LLC for my side hustle?
Consider forming an LLC for your side hustle when your business starts to grow beyond the limits of a sole proprietorship. It’s important to seek professional legal advice when deciding whether to form an LLC or remain a sole proprietor. Starting an LLC provides your business with additional personal liability protection. This is the main reason most LLCs form. Otherwise, you may be exposing yourself to unnecessary risk by continuing to operate as a sole proprietor.
It is also important to understand that forming an LLC is not required for tax purposes. A sole proprietorship already reports business income on a personal tax return, and an LLC does not change this by default. In most cases, an LLC is still taxed as a pass-through entity, meaning the income is reported on the owner’s personal return. The decision to form an LLC is typically based on legal protection and business considerations, rather than tax savings alone.
Do I need a business license as a sole proprietor?
Any business entity – including sole proprietors – must typically obtain a business license to operate legally. Having a business license will designate your business as legitimate. Not only do most jurisdictions require a business license to perform most trades and professions, but also for insurance and liability reasons. Depending on the line of work, you may need more than one license, including:
- Operational license
- Occupational license
- Federal licenses
- Permits
You may still be required to pay tax on your business income if you operate as a sole proprietor without a business license. Being taxed as a sole proprietor means that your business income is reported on your individual tax return. You’ll file a Schedule C (Profit or Loss from Business) with your Form 1040. Filing Schedule C allows you to pay self-employment taxes on your net earnings, including Social Security and Medicare taxes.
Can a sole proprietor have W-2 employees?
Yes, sole proprietors are allowed to hire and pay employees. However, you’ll need an Employer Identification Number (EIN) from the IRS to be compliant. You’ll also need to file and remit payroll taxes.
When you hire a W-2 employee, it does not make you an employee. As the sole proprietor, your earnings are still subject to self-employment tax. But your employees’ salaries and benefits count as labor costs, which you can deduct as a business expense.
If you hire independent contractors instead of employees, these self-employed individuals are responsible for reporting their own taxes, meaning you won’t deduct taxes from their wages.
If you’re considering hiring your kids to work for you, ensure you understand the tax implications and requirements in order to stay complaint with the IRS.
Should I be collecting sales tax if I don’t have a business entity?
Yes, if you sell a product or provide a taxable service, you should be collecting sales tax even if you don’t have an entity. However, if you operate your business in Alaska, Delaware, Montana, New Hampshire, or Oregon, you don’t have to worry about state sales tax because these states do not charge it.
