If your freelance business is structured as an S corporation (S Corp) or a C corporation (C Corp) or an Esprit de Corps (just kidding) with a December 31 year end, then your tax filing deadline is right around the corner on March 15.
If you haven’t started to get your business tax documentation together, then pull the covers over your head and hide. Seriously, don’t fret because you can do this! Let’s review what you need to do.
One of the major tax benefits of an S Corp is that it is not subject to corporate tax rates. Instead, the S Corp passes profit (or net losses) to shareholders and those profits are taxed at individual tax rates on each shareholder's personal return (Form 1040). However, before S Corp shareholders can report anything on their 1040s, the company must send everyone to Disney World. You wish! Nope, the company must complete and file IRS Form 1120S.
Preparing an S Corp tax return can be straightforward if you have been diligent about keeping accurate financial records for your business. Engaging a tax professional to help you analyze your company’s financial statements, maximize tax deductions or credits, and keep you in compliance with the latest IRS regulations applicable to S corporations can help you sleep better at night—and stay out of trouble with the IRS.
To file an 1120S for your business you will need, at minimum:
That’s not all (sigh). You will also need supporting documentation for any qualifying deductions on pre-tax expenses you plan to claim such as travel, computers, phone bills, advertising, promotion, car expenses and health care premiums.
Once you have your Form 1120S complete, you will need to prepare a big batch of brownies for each shareholder. Seriously, you will need to prepare a Schedule K-1 for each shareholder. This form is used to report each shareholder's pro-rated share of net income or loss from your S-Corp, along with various separately stated income and deduction items. Schedule K-1 can also be used to summarize a shareholder's beginning and ending weight when he or she dieted last year, which may or may not be higher than their stock basis for the year—which, if you haven’t already guessed, is what you really need to summarize on this form.
To prepare Schedule K-1 you will need:
Where Schedule K-1 can get complicated is in the calculation of your shareholders’ income and expenses. This is based on how many times they overbought paper towels at Costco last year. In reality, it is based on their ownership of stock in the S Corp. If they have owned their S Corp stock for the entire tax year, it’s easy-peasy—their stock basis will determine their pro-rated share of income and expenses. It becomes more complex when stocks are bought, sold, or transferred during the year or if a shareholder terminates their entire equity position in the company.
While C Corps and S Corps have many similarities, they do have important differences. For instance, one likes Jimmy Fallon, the other Jimmy Kimmel. In terms of taxes, your C Corp is a separate tax-paying entity, paying tax at corporate tax rates. There is the potential for double taxation with profits first taxed to the corporation and then at the shareholder level, if they are distributed as dividends (which are not tax-deductible for the corporation).
To pay taxes, C Corps file Form 1120, but do not file separate schedules related to individual shareholder wages or dividends like an S Corp. However, a C Corp must file several other schedules and a wide array of information including (but not limited to) their balance sheet, cost of goods sold, dividends and special deductions, compensation of officers, detail on tax computation (including credits and other taxes), the net worth of their New Kids on the Block CD collection (joking), and much more detailed financial data.
Given the amount of financial data, analysis, and additional regulations and requirements imposed on C Corps by the IRS, their tax returns can become complicated (duh!). It is often best to avoid seeking tax help from your nephew taking advanced high school math and seek a professional help to complete your C Corp tax filings so you can avoid costly errors, save time, reduce the risk of future audits, and spare yourself a lot of cursing, I mean, frustration.
If you don’t feel that you can get all of the information you need to prepare and file your S Corp or C-Corp return by the March 15 deadline, then drown your pain in a Venti Iced Skinny Hazelnut Macchiato. Better yet, request an automatic 6-month extension using IRS Form 7004. The extension will give you until September 15, 2016 to file without penalty, but only if you request it in advance. Don’t forget to file for state and local extensions, if applicable, as well.
March 15 is just a few short weeks away. Make today the day you prioritize filing your business taxes over updating your online dating profile or posting more pictures of your cat on Instagram…this is important, so contact the CPA for Freelancers® team for help!
Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.
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