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How Do I Fill Out Tax Forms?

Filing your own taxes is one of the most daunting tasks that a new business owner faces. The truth is that even experienced business owners face a lot of challenges when it comes to this task, and many people choose to seek professional help. If done incorrectly, business owners can face thousands of dollars of fines to the IRS. 

Nonetheless, a lot of business owners decide to file their own taxes every year. If you think you want to try it, be sure to follow these tips.

  1.  Keep good records. For a lot of business owners, filling out their taxes becomes stressful when they can't find the numbers that the IRS is asking for. Your business' total sales and expenditures are absolutely critical to be able to fill out your taxes properly. If you don't have these numbers, then you'll need to start by getting your books in order.

If you're having trouble with keeping your books, it may be time to hire professional help. It's very common for business owners to need to focus on growing and maintaining their business operations.  Just as a restaurant owner may hire another cook or server to keep up with high demand periods, hiring bookkeeping help is a good way to ensure that your business stays a float while you deal with more important things.

  1.  Keep separate books. When people first start a business, they often make the mistake of mixing their personal finances with their business' money. That often means that business expenses are paid for from a personal checking account, and money received from clients is deposited into the same account.

The result of this is that when it comes time to file taxes, it can be next to impossible to remember what expenses were for the business and which ones were personal expenditures. That can make filing taxes extremely difficult because there's no way to show that some of the income you received was used for legitimate (and deductible) business expenses.

While it can be time consuming to set up a separate set of bank accounts and books for a new business, it really is worth the hassle. Separate books will allow you and your bookkeeper to easily determine your overall income and expenses, which will make filling out your tax forms a lot easier.

  1.  Determine which forms you're going to file. Once your books are separated, you'll actually have to file two separate sets of forms. One set will be for your personal income, and the other set will be for the business. 

When it comes to filing your personal tax forms, read the requirements for each type of form very carefully. You'll generally be filing a 1040 form, but you need to know which type to choose.  From the IRS website:

Form 1040EZ is the simplest version of a 1040. Choose this form if:

  • You have no dependents
  • You're younger than 65
  • You earned less than $100,000. Keep in mind this is your salary or "take-home" pay from the business. It is not the total amount of revenue or even the total profit from the business, it's the amount of money that you personally took out as your personal pay. If you took profits without paying taxes on them as a salaried part of your company (otherwise known as self-employment income), this is not the form for you.
  • Don’t plan to itemize your deductions

Form 1040A is more comprehensive than 1040EZ, but simpler than the regular 1040. Choose this form if you:

  • Have dependents
  • Need to make adjustments to your taxable income, such as child tax credits or the deduction for student-loan interest
  • Don't need to itemize deductions.
  • Earn less than $100,000
  • Don’t have self-employment income. Again, this means that you will need to pay yourself as an employee of your business rather than take a portion of the profits as the owner. For this reason, most small business owners do not fill out a 1040A

Form 1040 applies if the other two tax forms don’t. For many business owners, it's the right form to choose, especially if they want to deduct personal expenses such as mortgage interest. This is also the form you need to use if you're declaring your income as self-employment income.

In addition to these main forms, you'll also need to select the right forms to attach to your 1040. From the IRS website, you'll also likely need 

Schedule A to itemize deductions. This is the most commonly used attachment because it includes the mortgage interest and property tax deductions as well as deductions for medical or dental expenses, charitable contributions, and local sales tax.

Schedule B to report taxable interest or ordinary dividends exceeding $1,500. If you have invested your personal money in the markets, then you will need to fill out this form. You should be able to pull the numbers you need from your brokerage statements.

Schedule C is the form you need to report the profit or loss and any deductible expenses from your business. This applies to sole proprietorships; it isn't to be used if you have formed a corporation. Schedule C forms are the form where you will report the gross profits and expenses for your business. Allow yourself a lot of time to fill out this form. It can be very involved and will ask a lot of questions about the assets that are owned by the business.

Schedule D is for reporting capital gains and losses from stock sales or other transactions. Again, you should be able to get the numbers you need for this form from your brokerage statement.

Schedule SE calculates the self-employment tax. If you are running your business on your own without employees, you may be able to get away with this form instead of a Schedule C.