Up to this point, we have been talking about the forms and processes you will need to follow as the sole proprietor of your freelance business. If you have a partner or employees, the rules and processes for paying taxes are a bit different. Tax season also looks different if your business is registered as a corporation rather than an LLC.
If none of the above applies to you, you can either skip this chapter or, since knowledge is power, use it to inform any future decisions about registering a business down the road.
For our partnerships, corporations, and freelance employers, let’s get into your side of things.
Any LLC that has two or more owners is taxed as a partnership, unless you are registered as an S or C corporation.
As a partner in a business, you will pay taxes on your portion of the business’ income, with a personal tax return. You will file Form 1040 using the process we discussed in Chapter 3, but you won’t need to complete a Schedule C. Your partner(s) will need to file their own returns as well.
You will also need to file Form 1065, also called the “U.S. Return of Partnership Income” form, and a Schedule K-1 form for each partner. This form shows how much of the profits, capital, losses, and liabilities each person is responsible for. Both of these forms must be submitted by March 15th.
Each partner will then need to file a Schedule E form with their personal tax return. You will use this form to report how much your business made or lost during the year, information you can get from the Schedule K-1 form you already completed. Depending on the partnership’s operation and how involved you are in the business, your profits may be subject to self-employment tax. In that case, you will need to file a Schedule SE with your personal tax return as well.
You may also need to file state taxes, depending on where you live or where the partnership does business.
If your business is registered as a C corporation, you will file a personal tax return for your salary, or the profit you received from your business. This money is then taxed as a dividend. The company will also need to pay taxes and file a tax return for the money it’s made, after deductions and credits are applied. Owners of C corporations are said to be subject to “double taxation” because they pay taxes on the company’s income and taxes on their personal income, which has also already been taxed as business income.
If your business is established as an LLC or a corporation, you can elect to be taxed as an S corporation by filing an election with the IRS. S corps can have between 1-100 owners who are all individuals, not partnerships or groups. To comply with tax requirements, you will need to file Form 1120-S, also called the “U.S. Income Tax Return for an S Corporation” form for the business. You will also include a Schedule K-1 form for each shareholder. These forms must be submitted by March 15th each year.
S corporations are required to pay a salary to the shareholders (owners) who provide services to the company, so the business will have to pay quarterly and annual payroll taxes for each of these employees. Since the business is paying taxes on your income, you won’t have to make any additional payments, including the self-employment tax. Instead, you will get a W-2 form from the business, file a personal tax return with Form 1040, and include a Schedule E form to report the business’ total profits or losses. Every other shareholder will need to do the same.
If your company has hired employees, you will need to withhold and pay both payroll and income taxes for these workers. These taxes include both federal taxes and any taxes required by the states your employees live in.
There are several forms you will have to file and payments that you will have to make as an employer, all separate from your income tax returns. Generally, they will also increase the amounts of your quarterly and annual tax filings.
If you employ any workers, we recommend hiring a professional tax accountant to help with your tax needs.