All You Need to Do for Stress-Free Corporate Tax Preparation

If you own a corporation or have formed an LLC, you’re required to file a corporate tax return every year. Understanding your business structure and determining the necessary documents can help you prepare your corporate tax return more easily and efficiently. This article will walk you through the most practical steps for stress-free corporate tax preparation. 

Determine if your business is an S Corporation or a C Corporation

If you establish a corporation, your business will be automatically classified as a C corporation for federal income tax purposes. A C-corporation is a traditional corporation that pays corporate income tax on its profits and pays tax on its shareholders’ salaries and dividends.

This taxation on both the corporate and individual sides is sometimes known as “double taxation.”

Small businesses can avoid double taxation by requesting to be classified as S-corps because S corporations don’t have to pay any corporate tax. S corporations’ profits and losses are passed through to their shareholders’ individual tax returns, and those profits are taxed at their individual income tax rates. 

To be qualified as an S-corp, a corporation must meet specific requirements, including: 

  • Having fewer than 100 shareholders
  • Having only one type of stock
  • Not having corporations, partnerships, or non-resident aliens as stockholders
  • Being a domestic corporation

Prepare essential information

The necessary information for corporate tax preparation includes the company name, address, employer’s ID number, date of incorporation, and total assets. The corporate financial officer will also need to provide detailed information about the corporation’s income, including: 

  • Gross revenue
  • Cost of goods sold
  • Dividends
  • Royalties
  • Interests
  • Rental costs
  • Capital gains

Claim tax-deductible expenses

Corporations are able to claim many tax-deductible expenses against income, including employee salaries, bonuses, the cost of employee health insurance, and retirement programs.

Understanding and making the best use of these deductions will help you maximize your tax savings. To claim these expenses, the corporation’s financial officers should track these details throughout the year and be able to provide complete documentation in the event of an audit. The most common tax-deductible expenses are the following:

  • Employees’ compensation, allowance, bonuses, and other salaries
  • Employees’ benefit packages
  • Repairs and maintenance fees
  • Rents
  • Taxes and licenses
  • Interests
  • Contributions to charity
  • Depreciation costs
  • Advertising costs
  • Pensions and profit-sharing plans
  • Domestic production activities

Submit essential forms for corporate tax preparation

Form 1040

If you formed an LLC or hired yourself as an employee of your corporation and gave yourself a salary, you must list that personal income on your Form 1040. Some corporations can be considered “pass-through” entities, which means a legal business entity that passes any income it makes straight to its owners, shareholders, or investors. The company’s members or owners must then list the income, profit, and losses on their individual income tax returns.

Form 1120

Form 1120 is the tax form that C corporations (and LLCs filing as corporations) use to file their income taxes. This form also includes Schedule C. This form requires basic information about the corporation, including your employer identification number, the date you incorporated, total income, a list of deductions, and employees’ compensation. Form 1120 also includes other schedules that may or may not apply to your business, such as Schedule A (containing the cost of goods sold,) and Schedule K (listing your corporation’s information, e.g., your business type).

Schedule C

Schedule C records deductions, dividends, and any profit or losses that your business incurred. On this form, you can also record essential expenses to run your business (e.g., the mileage to and from business meetings or business meal expenses). Schedule C is not a stand-alone document and is usually supported by your Form 1040 or Form 1120.

Form 1065

If you have income through a partnership, such as a limited liability partnership, you may need to file Form 1065. According to the IRS, partnerships do not pay taxes on their income. On the other hand, their profit and loss are passed on to the partners’ individual tax returns. 

Other tax forms

If you hire employees or independent contractors, you need to submit other necessary forms as well. For example, if you withhold Social Security and Medicare from your employees, you must send W-2s and W-3s to the Social Security Administration. You must also file Form 944 electronically for federal unemployment taxes. If you paid more than $600 for each independent contractor for their work or services, you must submit Form 1099-MISC. You may also need to issue Form 1099-MISC if you paid more than $10 in royalties or broker compensation. 

File your federal tax return

The type of federal tax return you file for your corporation depends on whether you’re an S-corp or a C-corp. 

S-corp owners need to file the following forms: 

  • Form 1120-S: This form contains your corporation’s income, expenses, and losses. 
  • Form K-1: This form lists your corporation’s shareholders and their share of the corporation’s income, deductions, and credits. You must also provide your shareholders with copies of their K-1 forms so they can report their share of the corporate income or loss on their individual income tax returns.

If your business is a C corporation, you’ll file a corporate tax return on Form 1120. The corporation’s dividends are then filed on the shareholder’s individual tax returns.

File your state tax returns

You’ll also have to file a state corporate income tax return based on your tax status and the state where your corporation was formed. The corporate tax rate is commonly a fixed percentage that varies by state. If your corporation and/or its owners are registered to run business in other states, they may also need to file other state tax returns.

Pay estimated corporate taxes

While C-corps must pay estimated corporate income tax, S-corps must make estimated tax payments for certain S corporation taxes. You need to submit these estimated tax payments on a quarterly basis throughout the year.

Corporations that fail to pay their estimated tax payments on time may face interest and underpayment penalties.

Corporate tax preparation can be confusing, so it would be a good idea to consult with a tax professional or a certified accountant. By that, you can understand the consequences of C-corps or S-corps taxation, identify the deadlines for paying different corporate taxes, maximize your business tax deductions, and file your tax return easily. 

Explore more about tax and tax deduction articles on the Shoeboxed blog:

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How to File Taxes as an Independent Contractor: A Step-by-Step Guide

If you work as a freelancer or self-employed person, you likely get paid as an independent contractor rather than an employee. This kind of work affects the way you file and pay your taxes. You’ll have extra responsibilities, file additional forms to make sure you’re paying the government enough during the year, and pay a self-employment tax. 

It’s important to understand independent contractors’ taxes correctly so you won’t get slapped with fines and penalties by the IRS. This article will give you an overview of independent contractors’ taxes and a step-by-step guide on how to file as an independent contractor. 

What is an independent contractor?

An independent contractor refers to a person, business, or corporation that provides products or services under a written contract or a verbal agreement. Unlike employees, independent contractors do not work for an employer on a regular basis but rather on a project-by-project basis, when they may be subject to the agency’s laws.

The key characteristic of an independent contractor is the ability to retain control over the work they’re being paid to complete. According to that guideline, there is a wide range of careers that allows you to work as an independent contractor, including, but not limited to:

  • Freelance accountants or bookkeepers
  • Freelance writers
  • Virtual assistants
  • Hairstylists
  • Lawn care providers
  • Physicians
  • Dentists
  • Mechanics
  • Carpenters
  • Manicurists 
  • Personal trainers
  • Therapists

You may qualify as an independent contractor regardless of your business’s structure. For example, you could be considered an independent contractor if you work as a sole proprietor, form a limited liability company (LLC), or a corporation. In short, you can be considered an independent contractor as long as you’re not classified as an employee. 

Note: If you run a small business and hire people to work for you, you’ll have to classify them as independent contractors or employees. Misclassifying an employee as an independent contractor could trigger an IRS tax penalty

How to file taxes as an independent contractor

Before you start gathering paperwork and crunching the numbers in preparation for tax season, you need to be sure if you need to file taxes. In the US, you’ll only need to file a tax return if your annual net earnings as an independent contractor total more than $400. 

Filing independent contractor taxes will take different steps depending on your business structure. However, they generally share the same steps in common that you need to follow.  

Specify tax deductions for independent contractors

As an independent contractor, you may be eligible for certain deductions for both business and personal expenses. Those deductions can significantly lower your taxable income for the year, so be sure to save these kinds of receipts:

  • Business travel, accommodations, and meals expenses
  • Marketing and advertising expenses
  • Gas, car mileage, and other vehicle-related expenses
  • Equipment purchases
  • Rental or lease payments
  • Home office expenses, including mortgage and property taxes
  • Self-employment retirement plan expenses
  • Business insurance 
  • Phone and internet bills
  • Legal expenses

Independent contractors can also claim a deduction for out-of-pocket health insurance premiums. This deduction includes medical, dental, and long-term care insurance premiums. You may also be eligible to deduct the expenses for your spouse’s and children’s insurance. However, there is an exception that if you have access to a spouse’s insurance plan, you can’t deduct health insurance premiums.

Other independent contractors’ deductions include mortgage interest, student loan interest, and real estate taxes. An independent contractor can also get a tax break for contributing to a self-employed retirement plan or a traditional IRA (Individual Retirement Account.) 

Fill out essential tax forms for independent contractors

There are hundreds of IRS forms when it comes to filing taxes. Fortunately, as an independent contractor, you only need to focus on a couple of essential documents. Let’s take a closer look at the essential records that an independent contractor needs to complete for tax season:

  • Form 1040: Both traditional employees and independent contractors must complete and submit Form 1040 before the tax deadline each year. This form records the details and specifics of your gross income and calculates how much you owe Uncle Sam or how much of a refund you can get back.
  • Schedule C: You need to submit this form together with your Form 1040 if you work as a sole proprietor or are the only owner of an LLC. You’ll have to provide precise details regarding your income, mileage records, inventories, and business expenses in this form. 
  • Schedule SE: This document helps you determine the amount you owe in self-employment taxes based on your net income for the year.  
  • Form 1099-MISC: While Form 1040 and Schedule C are the paperwork you submit to the IRS, Form 1099-MISC is the document you receive from clients you’ve done business with throughout the year. It’s a record of the payment you received from the companies who hired your services.

Set up a practical timeline to pay your taxes

Now that you have a better understanding of what is an independent contractor and how to file taxes as an independent contractor, let’s make your tax-filing process more efficient with a practical timeline. 

  • Keep track of your business expenses and earnings 

An independent contractor usually works with many different projects, contracts, and clients. This makes staying on top of all these earnings and expenses a bit tricky. Using a meticulous tracking tool of your business’s inflows and outflows throughout the year will help make tax season less stressful.

  • Set up a payment plan

Instead of paying a sizable amount of taxes at the end of the fiscal year, you can consider planning as soon as you receive your first paycheck of the year. Try estimating how much money you expect to make and how much you anticipate owing for taxes at the start of the year. Based on this estimate, you can make payments quarterly to reduce the expected total of your tax liability.

As payments come in, set aside a certain amount to a separate account to get ahead of your tax bills. You can avoid overspending that part of your income by saving them for a later date.

  • Note your deadline

When you run your own business, you’ll be accountable for keeping track of various critical deadlines. One of them is the deadline by which you must file your taxes. It could be a good idea to mark your calendar for April 15th, the last day to submit your taxes to the IRS.

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The bottom line 

After knowing how to file taxes as an independent contractor, it’s time to start gathering all your tax information, receipts, and other expenses documents, storing them all in a safe place before filing your taxes. 

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.

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What Are The Differences Between Tax Deductions And Tax Credits?

We all like to claim tax deductions and credits when filing our tax returns. They both allow us to pay less tax—and who doesn’t like that? 

But do you know that tax deductions and tax credits lower our taxes using totally different mechanisms? In other words, they are not the same thing and many people often don’t realize this. 

So, how can you tell these two confusing concepts apart? 

Read on to find out! 

What is a tax deduction?

A deduction lowers the income subject to taxation, resulting in you paying less in taxes. In other words, before calculating how much tax you owe, you subtract deductions from your income. Common tax deductions include home office deduction, student loan interest, and retirement contributions.  

How much you can save from tax deductions depends on your marginal tax rate. Simply multiply the tax deduction by the marginal tax rate to figure out how much that deduction can decrease your taxes. For example, if you have a $2000 deduction and you fall into the 22% tax bracket, you will be able to lower your taxes by $440. So, the higher the tax bracket you’re in, the more value deductions will bring to you. 

What is a tax credit? 

A tax credit lowers the amount of taxes you owe directly. Common tax credits include the American Opportunity Tax Credit (AOTC), the Child Tax Credit, and the Saver’s Tax Credit

It’s very simple to know how much your tax credit will save you. You don’t need any marginal tax rate or calculation. Once you meet all the requirements of a specific tax credit, subtract the value of that tax credit directly from your taxes. 

For example, let’s say you have a tax bill worth $6000 this year. A $2,000 tax credit decreases your taxes straight down dollar for dollar—now you only owe $4000 to the IRS! 

Tax deduction vs. Tax credit: Which one should you choose? 

Generally, tax credits benefit you more than tax deductions since they lower your tax bill directly. Still, if you can only take a tax credit or a deduction for the same expenses, do the math to determine which one will save you the most money possible. 

In conclusion 

Knowing how to distinguish between these two important tax terms, tax deductions and tax credits will help you file taxes quicker and more accurately and prevent you from making unfortunate costly mistakes. 

After you file your tax return, you may think the tax nightmare is over. However, to be cautious, experts advise keeping a copy of tax receipts for up to seven years in the event of audits. If you need an easy way to deal with this, Shoeboxed can help you! 

Shoeboxed is an online application that can transform your receipts and documents into digital in just a click. Then, it automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes. 
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