Do You Need to File Personal and Business Taxes Separately?
As a business owner, how do you go about filing personal and business taxes with the IRS? The answer to this question actually depends on the way your business is structured, so there’s not a one-size-fits-all approach to filing small business taxes.
But that doesn’t mean that tax season needs to cause you stress. We’ve prepared this helpful guide explaining tax preparation for small business owners in the hope that it will help you learn to meet the requirements of both your personal and business taxes.
Are Business Taxes and Personal Taxes Filed Together?
When your business earns money, you’ll have to submit a tax return to the IRS for the income you receive. But does that mean you’ll be filing personal and business taxes together? That depends entirely on the structure of your business.
For example, many small businesses are set up as pass-through entities. This setup means that any income the business earns is passed directly to the business owner. Such pass-through means that rather than filing separate tax returns, you’ll simply pay the tax on your business income via your personal tax return.
Sole Proprietorships and Single-Owner LLCs
Some of the most common pass-through entities include sole proprietorships and single-owner LLCs (see below for other types of LLCs).
The IRS does not consider these business types to be separate tax-paying entities. That means you can simply submit your personal tax return (Form 1040) along with any related schedules or documents, showing income that came from your business and was passed on to you personally.
Some businesses may be asked to file information returns, which simply detail your business earnings to the IRS. You’re not subject to any separate taxation on this income; information returns simply function to report your income to the IRS in an effort to be thorough. Ask a tax advisor if your business needs to file one of these documents.
In a partnership, each partner will pay tax based on business income on their personal tax return (Form 1040).
Partnerships, therefore, follow the following process:
- Partnerships report income and deductions to the IRS using Form 1065
- Partnerships distribute a K-1 to each partner indicating their portion of the profits
- Each partner will include the data from the K-1 on their personal tax return
This approach means that partnerships will also not file personal and business taxes separately, though you’ll still need to file Form 1065 with the IRS.
S corporations are also considered pass-through entities, which also means you won’t be filing a separate business tax return.
However, S corporations work a bit differently than the examples we listed above. For one thing, S corporations pay taxes through their owners, more commonly known as shareholders. The process will therefore look something like this:
- S corporations file information return Form 1120-S to report their income
- Shareholders receive form K-1 to show their portion of the company’s profits
- Shareholders report data from the K-1 on Form 1040 Schedule E
Additionally, if any shareholders participate in managerial decisions, the IRS may classify them as employees. If so, you’ll have to ensure that these shareholders receive Form W-2 in addition to their K-1 and pay taxes on both sets of earnings.
C corporations are the one business type that must file separate business tax returns. The IRS considers these companies separate tax-paying entities, and if you operate a C corporation, you’ll report your company’s income to the IRS using Form 1120.
If any shareholders receive dividends, then the C corporation must distribute Form 1099-DIVs so that shareholders can report this income on their personal taxes.
How do you Separate Business and Personal Taxes?
If you operate a sole proprietorship, it can be especially difficult to keep your personal and business taxes separate. The best way is to maintain detailed, accurate books throughout your fiscal year so you have an accurate understanding of what your business earns.
Many business owners take active steps to keep their personal and business finances completely separate. Opening up a business bank account, for example, can make it easier to distinguish between personal and company funds, plus it will shield you from personal liability if your business ever goes under.
Are LLC and Personal Taxes Separate?
While individual states recognize limited liability companies (LLCs), the federal government does not. This distinction means that when filing personal and business taxes, your LLC will have to be taxed in the same way as one of the other major business entities:
- Sole proprietorship
- S corporation
- C corporation
For instance, some LLCs are classified as single-owner LLCs. This designation means that the owner will be taxed in the same way as a sole proprietorship and only be required to submit a personal tax return.
If your LLC has more than one owner, your business is automatically taxed as a partnership. This classification also means that the business will not pay taxes, but each partner will include business income on their individual tax return.
An LLC can also be taxed as an S corporation, which means you’ll have to fulfill your obligations to any shareholders you have.
However, an LLC can also be taxed as a C corporation. When this happens, you will have to file a separate business tax return for your company using Form 1120.
In other words, you can only file separate LLC taxes if your LLC meets the criteria to be taxed as a C corporation. In all other circumstances, you’ll simply file your LLC taxes as part of your personal income.
Are Personal and Business Taxes the Same?
As long as your business meets the criteria of a pass-through entity, your business income and personal income are considered to be the same. Granted, some business owners may have additional income apart from their business, but any profit from their business is classified as personal income unless they are set up as a C corporation.
Therefore, instead of filing personal and business taxes separately, most business owners will simply report business earnings on their individual tax forms.
That also means that your business will be taxed on the same basis as your personal income. The IRS does not impose a different tax percentage or tax bracket for business income vs. personal income. All of your income will be treated equally and be taxed at whatever tax bracket you fall into.
Can I File My LLC and Personal Taxes Together?
If you operate an LLC, your small business taxes will depend on how your company is recognized by the IRS. At the federal level, LLCs are not recognized. Therefore, you’ll have to pay taxes the same way you would a sole proprietorship, partnership, or C corporation.
To be clear, this means that you’ll nearly always file an individual tax return, with no separate tax return for income from your LLC. Single-owner LLCs will simply file their taxes in the same way as a sole proprietorship, reporting business income using Form 1040.
LLCs with multiple owners will be taxed in the same way as partnerships and have to report income to the IRS using Form 1065. Each partner will receive a K-1 detailing their portion of the profits. While the IRS receives the notification of the profits, the LLC will not pay taxes separate from the personal tax returns of each partner.
LLCs taxed as S corporations will likewise submit Form 1120 to the IRS and distribute K-1s to their shareholders, who will report income on their personal tax returns.
The only instance in which an LLC will file a separate tax return is when they are set up as a C corporation, which is treated as a separate taxable entity by the IRS. This designation means that your business will have to file Form 1120 with the IRS and file a separate business tax return based on company earnings.
Thankfully, the latter situation is relatively rare, at least for the small business community. In most cases, LLC owners will simply include earnings from their company in their personal income and then pay these taxes when they file their personal tax returns in April.
Tax Preparation Made Easy
Of course, the easiest solution of all is to have someone else do the work for you. Why focus on last year’s earnings when this year has so much untapped potential? At Xendoo, our financial wizards can provide expert-level tax services that let you meet your obligations and deadlines, all without you lifting a finger.
Xendoo will help you file your business taxes and your personal taxes, and our team of experts is familiar with every type of business you can throw at us. You’ll not only save yourself the headache of filing your taxes, but you’ll also be better prepared for next year.
As every business owner knows, tax season is always right around the corner. Give us a click today, and sign up for our free trial offer. We can keep you on target for your personal and business taxes and help you stay focused on your business.