We are quickly coming to the end of another calendar year. For most small business owners, this means it’s time to begin thinking about taxes and filing your tax return. Below are some common tax questions I get asked by small business owners.
What’s The Difference Between An EIN And A TIN?
EIN is short for employer identification number and TIN, for taxpayer identification number. Basically, every EIN is a TIN but not every TIN is an EIN.
What that means is that an employer identification number is a type of taxpayer identification number. Another common type of taxpayer identification number is a social security number. There are also ITINs (individual taxpayer identification numbers) and PTINs (preparer taxpayer identification numbers).
An EIN is a number that is used to identify a business entity while a social security number identifies a person. Both numbers have nine digits but the format of the numbers is slightly different. A social security number is shown as 999-99-9999 while an employer identification number is shown as 99-9999999.
Does My Business Need An Employer Identification Number?
If you are a sole proprietor and have no employees and do not file any excise or pension plan tax returns, then no, you do not need an employer identification number or EIN. You will use your social security number as your taxpayer identification number on all tax forms (e.g. 1040, Schedules C and SE, W-9, etc.) A single member LLC that has no employees won’t need an EIN, either.
However, if at any time you do hire employees or will start filing excise or pension plan tax returns, then yes, you will need to obtain an EIN. File Form SS-4 with the IRS to request an EIN.
All other entities such as partnerships, LLCs and corporations (both C and S) must have an EIN even if they don’t initially intend to hire employees.
What Tax Form Should My Business Use to File Its Tax Return?
Sole proprietors and single member LLCs will use Schedule C to report their business income and expenses. The net income or loss reported on Schedule C is then input into your personal Form 1040. Sole proprietors and single member LLCs will also need to complete Schedule SE and information from that Schedule will likewise be included on your 1040.
Partnerships and multi-member LLCs will generally file Form 1065. Those that elect to be taxed as a corporation will file Form 1120. Partnerships and multi-member LLCs will also need to complete and file a Form K-1 for each partner/member of the entity. The income or loss from the K-1 is then transferred to the partner/member’s Schedule E. From the Schedule E, total income or loss will be input into your individual 1040 return.
Corporations with Subchapter S status will file a Form 1120-S. The corporation will also need to prepare a Form K-1 for each shareholder. As stated above, information from the K-1 is transferred to Schedule E and then total income or loss is input into the shareholder’s Form 1040.
Corporations (aka C Corporation) file Form 1120. C Corporations do not prepare K-1’s for their owners/shareholders. Instead, a corporation prepares and sends out a Form 1099-DIV for any shareholders who were paid a dividend during the year. Any owner or shareholder who received wages for the year will receive a W-2. Information from the 1099-DIV and W-2 then goes on the individual’s Form 1040.
Partnerships, LLCs and S Corps have a choice as to how they want to be taxed by the IRS. Either as a corporation, a partnership or as a disregarded entity. A disregarded entity means that the owners will be taxed on an individual basis. All eligible entities must file Form 8832 with the IRS to elect their federal tax classification if that classification will be different from the default classification.
What Period Must My Tax Return Cover?
The IRS requires all small businesses to figure their taxable income based on a tax year. A “tax year” is an annual (12 consecutive months) accounting period for keeping records and reporting income and expenses. There are two types of tax years that can be used:
- Calendar Year – a calendar year is the 12 consecutive months beginning January 1 and ending December 31, or
- Fiscal Year – a fiscal year is 12 consecutive months ending on the last day of any month other than December. A common fiscal year is July 1 to June 30.
Unless your business entity is required by the IRS to adopt a specific tax year, you can establish whatever tax year makes sense for your business. However, once your business adopts a tax year, you must get approval from the IRS before you can change it.
The IRS will allow a business to file a return for a short tax year (less than 12 months) if the business hasn’t been in existence for the entire 12 months of the tax year chosen.
When Is My Tax Return Due?
Generally, an individual operating as a sole proprietor or single member LLC must adopt a calendar year as their tax year. In this case, the business tax return (Schedule C) would be due at the same time as the personal tax return (Form 1040), which is the 15th day of the fourth month after the end of the tax year. Generally, April 15th of the following year.
A sole proprietor may adopt a fiscal year other than a calendar year. But if you’re going to do this, make sure that the period chosen encompasses a full business cycle and that the business books and records are maintained on the basis of the fiscal year chosen.
Partnerships and multi-member LLCs that file Form 1065 must adopt their tax year based on the tax year of its partners or members unless it can establish a business purpose for a different tax year. This means that if each of the individual partners/members uses the calendar year as their tax year, then the partnership will use the calendar year as well. The Form 1065 return is due the 15th day of the fourth month after the end of the tax year. Generally, April 15th.
If any of the partners has a tax year different from the others, then the partnership must determine which partner(s) own a majority interest in the partnership and the tax year of those partners is used.
Generally, S Corporations must use the calendar year as their tax year. An S Corporation’s annual return is due on the 15th day of the third month following the end of the tax year, or March 15th. If an S Corp wishes to adopt a tax year other than the calendar year, it must request approval from the IRS.
C Corporations may choose whichever tax year they want. The annual tax return is then due on the 15th day of the third month following the end of the tax year. For example, if your corporation’s fiscal year is July 1 to June 30, then your tax return would be due by September 15th.
For non-profit organizations who file a Form 990, the return is due on the 15th day of the fifth month following the end of the tax year.
Where To Go For Help
IRS Publication 538 contains a lot of valuable information regarding tax years, accounting periods and accounting methods. It can be obtained from the IRSs website at www.IRS.gov. I highly recommend it for a new business owner.
Also, I welcome your questions, so please, feel free to post one.