Business Topics

 I am a new business, how can you help me?
First, we can help you with the preparation of a business plan, including financial forecasts needed in the loan application process, entity selection and applications for federal and state identification numbers. Second, with the assistance of our Technology Department, the proper accounting software can be chosen and installed onto your computer system. Finally, we can train you and/or your personnel to use the software. In addition, we will help you develop a financial reporting plan. We will monitor the plan’s progress with you to insure its accuracy and value to you as well as enable us to provide tax planning. 

Are partners considered employees of a partnership or are they self-employed? 
Partners are considered to be self-employed. If you are a member of a partnership that carries on a trade or business, your distributive share of its income or loss from that trade or business is net earnings from self-employment. Limited partners are subject to self-employment tax only on guaranteed payments, such as salary and professional fees for services rendered. 

As a Domestic LLC (limited liability company), what forms do I use to file a return? 
The form you use will depend on what kind of entity your business is for Federal tax purposes. Following are some general guidelines and the forms which go with each entity:
• If your business has only one owner, it will automatically be considered to be a sole proprietorship (referred to as an entity to be disregarded as separate from its owner) unless an election is made to be treated as a corporation. A sole proprietorship files Form 1040(PDF), U.S. Individual Income Tax Return and will include Form 1040, Schedule C (PDF),Profit or Loss from Business. If an election is made to be treated as a corporation, Form 1120 (PDF), U.S. Corporation Income Tax Return, is filed. 
• If your business has two or more owners, it will automatically be considered to be a partnership unless an election is made to be treated as a corporation. A partnership filesForm 1065 (PDF), U.S. Partnership Return of Income. If an election is made to be treated as a corporation, Form 1120 (PDF), U.S. Corporation Income Tax Return, is filed. The election referred to is made by filing Form 8832 (PDF), Entity Classification Election. 

For IRS purposes, how do I classify a limited liability company? Is it a partnership or a corporation? 
A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for Federal income tax purposes as a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), partnership or a corporation. If the LLC has only one owner, it will automatically be considered to be a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), unless an election is made to be treated as a corporation. If the LLC has two or more owners, it will automatically be considered to be a partnership unless an election is made to be treated as a corporation. If the LLC does not elect its classification, a default classification of partnership (multi-member LLC) or sole proprietorship (single member LLC) will apply. The election referred to is made using the Form 8832 (PDF), Entity Classification Election. 

How do I set up a company as a subchapter S corporation? 
Once you have established your corporation according to your state's requirements, you elect S corporation status for federal tax purposes by filing Form 2553 (PDF), Election by a Small Business Corporation. Several requirements must be met before you can elect S corporation status. Instructions for Form 2553, Election by a Small Business Corporation, provides the information on these requirements.

How do you determine if a person is an employee or an independent contractor? 
The distinction between whether a worker is an employee or an independent contractor has important tax consequences. Worker classification affects how you pay your Federal income tax, social security and Medicare taxes, and how you file your tax return. The classification also affects your eligibility for employee benefits. Those who should be classified as employees, but aren't, may lose out on workers' compensation, unemployment benefits, and, in many cases, group insurance (including life and health), and retirement benefits.
Certain workers are considered employees by statute for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or for federal income tax withholding from wages. Examples of workers considered employees by statute include corporate officers, certain agent, or commission-drivers, full-time life insurance sales persons, certain home workers, certain traveling of city sales persons.
Where there is no controlling statute, a worker's status is determined by applying the common law test, which applies for purposes of FICA, FUTA, Federal income tax withholding, and the Railroad Retirement Tax Act. A worker's status under the common law test is determined by applying relevant facts that fall into three main categories: behavioral control, financial control, and the type of relationship itself. In each case, it is very important to consider all the facts - no single fact provides the answer.

BEHAVIORAL CONTROL: These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done -- as long as the employer has the right to direct and control the work. For example:
• Instructions -- if you receive extensive instructions on how work is to be done, this suggests that you may be an employee. Instructions can cover a wide range of topics, for example: how, when, or where to do the work, what tools or equipment to use, what assistants to hire to help with the work, and where to purchase supplies and services. If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed. 
• Training -- if the business provides you with training about required procedures and methods, this suggests that the business wants the work done in a certain way, and you may be an employee. 

FINANCIAL CONTROL: These facts show whether there is a right to direct or control the business part of the work. For example:
• Significant Investment -- if you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor. 
• Expenses -- if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high. 
• Opportunity for Profit or Loss -- if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor. 

RELATIONSHIP OF THE PARTIES: These are facts that illustrate how the business and the worker perceive their relationship. For example:
• Employee Benefits -- if you receive benefits, this is an indication that you are an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor. 
• Written Contracts -- a written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts. 

If you are not sure whether you are an independent contractor or an employee, completeForm SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Publication 1779 (PDF), Employee Independent Contractor Brochure, and Publication 15-A (PDF), Employer's Supplemental Tax Guide, provide additional information on independent contractor or employee status. 
For information on the tax responsibilities of self-employed persons, refer to Publication 505(PDF), Tax Withholding and Estimated Tax, and Publication 533 (PDF), Self-Employment Tax. 

I made several thousand dollars moonlighting as an independent contractor. What taxes do I need to pay? 
You are responsible for Federal income tax and self-employment taxes on your income as an independent contractor. Self-employment taxes are your contributions to social security and Medicare. Your self-employment income and expenses will be reported on Form 1040, Schedule C (PDF), Profit or Loss from Business, or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You will use Form 1040, Schedule SE(PDF), Self-Employment Tax, to compute and report your social security and Medicare tax. Since there is no withholding on your self-employment income, you may need to make quarterly estimated tax payments. This is done using a Form 1040ES (PDF), Estimated Tax for Individuals. 

What, if any, quarterly forms must I file to report income as an independent contractor? 
There are no quarterly income reporting requirements for Federal income tax purposes. However, because you will have no Federal Income Tax withheld from your income, you may need to make quarterly estimated tax payments. You use Form 1040ES (PDF), Estimated Tax for Individuals, for this purpose.
You may be subject to a penalty for underpaying your estimated tax installments. For more information refer to Publication 505 (PDF), Tax Withholding and Estimated Tax. You need to be aware that there may also be state and local quarterly reporting requirements. You can start looking for information at How to Contact Us. You may want to go to your state's individual web site for additional information. To access the state you need to direct your question to, please go to our Alphabetical State Index. 

What forms do you use when you have a small business? The annual income tax forms that you would use to report you business activity to the IRS would depend on the type of entity you operate your business under.

• Sole Proprietorships use Form 1040, Schedule C (PDF), Profit and Loss from Business (Sole Proprietorship) or Form 1040, Schedule C-EZ (PDF), Net Profit from Business andForm 1040, Schedule SE (PDF), Self-employment Tax. 
• Partnerships use Form 1065 (PDF), U.S. Partnership Return of Income and Schedule K-1. 
• Corporations use Form 1120 (PDF), U.S. Corporation Income Tax Return. 
• S Corporations use Form 1120S (PDF), U.S. Income Tax Return for an S Corporation. 
• Limited Liability Companies use one of the choices above according to their structure. If you hired employees to work in your business, if you are liable for excise tax, or heavy highway vehicle use tax, other forms and publications would come into play. 

I am waiting for K-1s to file my return. What is due date for sending a K-1 to the partners/shareholders? 
The due date for a K-1 is the same as the due date of a Partnership or S Corporation return that created the K-1. For example, if you are a partner in a partnership and the partnership return has a due date of April 15, then the due date for the K-1 is also April 15. You may wish to file an extension if you do not believe you will receive your K-1 in time to adequately prepare your return.

What is the due date for business returns? 
Some forms and entities have due dates other than the well-known April 15th due date. The instructions for the each type of form used will have the appropriate due date(s) noted. In general, sole proprietor's schedule of income and expenses is attached to the 1040. Therefore, the due date is the same as the 1040.
A Corporation must generally use the calendar year, unless the entity can establish a business purpose for having a different tax year. The due date is usually March 15th.
A partnership generally must conform its tax year to the tax year of the partners unless the partnership can establish a business purpose for having a different tax year. The tax year is the same as one or more partners that own (in total) more than a 50-percent interest in partnership profits and capital. If there is no majority interest tax year, the partnership must adopt the same tax year as that of its principal capital holder. Where neither condition is met, a partnership must use the calendar year. A Limited Liability Company reporting as a partnership has the same tax year as a majority of its partners.