By Justin Smith
Many taxpayers own and operate small businesses as a full-time job or as a side job to make extra money. April 15 is well known as Tax Day, but many other dates are relevant as well. The due date for filing taxes (but not paying them) can be extended to Oct. 15, but the Partnership and S Corporation deadline is March 15 (and can be extended to Oct. 15).
If you file as a Sole Proprietor for your small business or side gig, the normal April 15 deadline still applies. However, it’s easy to miss the March 15 deadline and be subjected to late filing penalties from the IRS.
Also, if you have incorporated a business or organized a Limited Liability Company (LLC) in Alabama, March 15 is the only deadline to pay the minimum $100 ($110 for S Corporations) Alabama Business Privilege Tax. The tax return can be filed later, but missing the payment date by even a day is going to cost a minimum $50 in penalties.
LLCs Do Not Automatically Obtain Tax Preference
Taxpayers may often organize LLCs with their state to obtain limited liability, separate business and personal activities, and often to establish a brand for their business. The mere 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.
Partnerships and S Corporations
Businesses that are not sole proprietorships (e.g., multiple owners) 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 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 (and cost) rises dramatically when you operate a small business using one of these entity structures.
Beware of 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 business mileage, technology expenses, cell phone service, Internet service, marketing and advertising expenses and office supplies. However, some expenses such as cell phone services are only deductible to the extent 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.
Many first-time self-employed taxpayers get a terrible sticker shock when they file their tax return. Self-employment taxes (15.3% of your profits) cover Social Security and Medicare. Company employees only pay half of this tax from their paychecks; their employers pay the other half.
On the other hand, one of the nice aspects of being a 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.
Bottom line for business owners – 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 334-400-9234 or Justin@JSmithCPA.net. His website is www.jsmithcpa.net.