By Justin Smith
For the Opelika
Observer
Many people own and operate small businesses, either as their full-time job or as a side hustle in the current gig economy. While your sole proprietorship (reported on Schedule C of Form 1040) is due on April 15 with your individual tax return, businesses that are organized as partnerships and S corporations have a much shorter deadline. You may file for an automatic six-month extension, but it must be filed before March 15 to avoid late filing penalties.
LLCs Do Not Automatically Obtain Tax Preference
Taxpayers often organize Limited Liability Companies (LLCs) with their state to obtain limited liability, separate business and personal activities, and often to establish a brand for their business. The act of organizing the LLC does not create a tax benefit. LLCs are primarily designed to protect your personal assets in the event of a lawsuit against your business. In Alabama, you must typically pay for the privilege of creating and maintaining an LLC by paying a minimum $100 Business Privilege Tax every year. The tax is due by March 15. While you can extend the deadline to file your annual Business Privilege Tax return, the payment date cannot be extended, and results in a minimum $50 penalty for missing the deadline.
Self-Employment Taxes
One of the advantages to being self-employed is the opportunity to deduct business expenses that employees of companies cannot take. For example, self-employed business owners can deduct business expenses such as cell phone service, Internet service, marketing & advertising expenses and office supplies. However, some expenses such as cell phone services are only deductible to the extent that they are directly related to the business. In many cases, small business owners use their personal cell phone for business, so it cannot be fully deducted as a business expense.
Taxpayers who experience growth and financial success in their self-employment or side gig should beware! Self-employment taxes (15.3% of your profits) cover Social Security and Medicare. Employees only pay half of this tax from their paychecks; their employers pay the other half (or, more correctly, simply provide lower wages to employees knowing that they must pay this tax). However, when you work for yourself, you have the burden of paying that entire tax. Many first-time self-employed taxpayers get a terrible sticker shock when they file their tax return.
One of the nice aspects of having a self-employed sole proprietor is the relative ease of tax reporting.
You simply prepare Schedule C, which attaches to Form 1040, and your business tax return is handled.
Partnerships and S Corporations
Businesses that are not sole proprietorships are classified as partnerships. S corporations are another business structure that provide certain tax benefits to taxpayers. One of the complications of partnerships and S corporations is that they require entirely separate tax returns in addition to your personal tax return. Partnerships require taxpayers to file Form 1065, and S corporation returns must be filed on Form 1120S. Because both of these types of corporate entities stand alone from the individual taxpayers, they provide a report (Schedule K-1) that must be reported on the individual taxpayer’s return. While there are advantages to this, the level of complexity rises dramatically when you operate a small business using one of the entity structures.
Make sure to file your return or extension soon and pay your privilege tax!
Justin Smith is a licensed Certified Public Accountant in Opelika, specializing in individual and small business tax and accounting. He can be contacted at 251-209-2579 or Justin@JSmithCPA.net. His Website is www.jsmithcpa.net.