Filing Small Business Taxes: Sole Proprietor vs. S Corp vs. C Corp

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Just as individuals need to file their tax returns on time, so too do businesses. Let’s take a look at business taxes for smaller organizations rather than for the IBMs and Apples of the world.

A small business may file as a sole proprietor, in which there is no separate corporate entity, or as one of several types of corporate structures. Here’s what you need to know if you are a sole proprietor or have registered your business as an S or C corporation.

Sole Proprietor

A sole proprietor files and pays their business taxes as part of their individual income tax return. They use a portion of Form 1040, called a Schedule C, on which they account for their business’s revenue and expenses. The business’s net income counts as income on the tax return. If they have employees, the normal payroll tax reporting and payment rules apply. Other than that, sole proprietorship business taxes are paid as part of the owner’s overall income taxes and flow through their Form 1040.

Federal or state regulations may require the business owner to pay quarterly estimated taxes, which is a good practice that helps ensure they do not get hit with a large tax bill on the annual filing date.

Subchapter S Corporation

Subchapter S corporations (S corps) elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This is often the next step for a sole proprietor.

Although the S corp’s profits or losses are passed through to the business’s shareholders, who then account for them on their personal income tax returns, the corporation still is required to file a separate business income tax return. This also applies to situations in which a limited liability company (LLC) chooses to be treated as an S corp for tax purposes. This treatment helps avoid the double taxation of profits that occurs with a regular C corporation.

Additionally, any compensation paid to the owners and employees is subject to payroll taxes, and the appropriate filing must be made during the year.

C Corporation

A C corporation is a completely separate entity from its shareholders and employees, and it pays income taxes at corporate tax rates.

Employees are paid wages, on which they pay income taxes via their personal income tax returns. As mentioned above, C corporations are subject to double taxation because the corporation pays taxes on its income and shareholders are taxed on the dividends received, which are paid out of the corporation’s already-taxed profits.

Filing Requirements

Forms, filing requirements, and dates vary based on the business entity type. Business owners and managers need to understand the filing requirements for their particular business type and adhere to them on time—accidental noncompliance or missed deadlines can result in costly penalties. The more complex your business situation, the more it makes sense to hire a tax professional to assist you. After all, major corporations have entire tax departments that do all this work.

Smaller businesses might be wise to hire a certified public accountant who specializes in small businesses and who understands the various deductions and tax-saving strategies available to smaller companies.

Roger Wohlner is an experienced financial advisor based in Arlington Heights, Ill.  Roger contributes to his own popular finance blog, The Chicago Financial Planner, where he writes about issues concerning financial planning, investments and retirement plans.  The blog received over 50,000 page views during the most recent 30 days.   In addition his work has been featured on Investopedia, US News & World Report, Yahoo! Finance, Equifax Finance Blog and other publications. Roger is available for additional freelance financial writing assignments.