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Frequently Asked Tax Questions And Answers
Keyword: Sole Proprietor 12.1 Small Business/Self-Employed/Other Business : Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation
Can a husband and wife run a business as a sole proprietor or do they need
to be a partnership?
It is possible for either the husband or the wife to be the owner of the sole proprietor
business. The other person could work in the business as an employee. If the spouses
intend to carry on the business together and share in the profits and losses, then
they have formed a partnership. See Rev. Proc. 2002-69 for Special Rules for Spouses
in Community States.
References:
For IRS purposes, how do I classify a limited liability company? Is it a
sole proprietorship, partnership or a corporation?
A limited liability company (LLC) is an entity formed under state law by filing
articles of organization as an LLC. Unlike a partnership, none of the members of an
LLC are personally liable for its debts. An LLC may be classified for Federal income
tax purposes as a sole proprietorship (referred to as an entity to be disregarded
as separate from its owner), partnership or a corporation. If the LLC has only one
owner, it will automatically be considered to be a sole proprietorship (referred to
as an entity to be disregarded as separate from its owner), unless an election is
made to be treated as a corporation. If the LLC has two or more owners, it will automatically
be considered to be a partnership unless an election is made to be treated as a corporation.
If the LLC does not elect its classification, a default classification of partnership
(multi-member LLC) or sole proprietorship (single member LLC) will apply. The election
referred to is made using the Form 8832 (PDF), Entity
Classification ElectionIf a taxpayer does not file Form 8832 (PDF) , a default classification will apply.
References:
12.2 Small Business/Self-Employed/Other Business : Form 1099–MISC & Independent Contractors
I work as an independent contractor, but I do not own a business and do
not perform services in the name of a business. Can I file my tax return without filing
Schedule C or Schedule SE?
The income you earn as an independent contractor generally will be considered income
from self-employment and you will need to file Form 1040, Schedule C (PDF), Profit
or Loss from Business (Sole Proprietorship), or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business.
You will also need to use Form 1040, Schedule SE (PDF), Self-Employment
Tax, if you had net earnings from self-employment of $400 or more. Since there
is no withholding on your self-employment income, you may need to make quarterly estimated
tax payments. This is done using a Form 1040-ES (PDF), Estimated
Tax for Individuals.
References:
- Form 1040, Schedule C (PDF), Profit
or Loss from Business (Sole Proprietorship)
- Form 1040, Schedule C-EZ (PDF), Net
Profit from Business
-
Instructions for Form 1040, Schedule C
- Form 1040, Schedule SE (PDF), Self-Employment
Tax
- Tax Information for Business
- Form 1040-ES (PDF), Estimated Tax for
Individuals
- Publication 1779 (PDF), Employee Independent Contract
Brochure
- Publication 533, Self Employment Tax
- Publication 505, Tax Withholding and Estimated Tax
- Publication 334, Tax Guide for Small Business
12.5 Small Business/Self-Employed/Other Business : Form SS–4 & Employer Identification Number (EIN)
As a sole proprietor, do I need an employer identification number (EIN)?
As a sole proprietor, you would need to obtain an identification number if either
of the following apply: (1) you pay wages to one or more employees, or (2) you file
pension or excise tax returns. If these conditions do not apply, your social security
number is your taxpayer identification number.
References:
Is an employer identification number (EIN) required if the husband and wife
are the only persons working in the business?
If both of you carry on a business together and share in the profits and losses,
you are a partnership and each would receive a Form 1065, Schedule K-1 (PDF) that
is important for determining your self-employment income. If you work for your spouse,
you should receive a Form W-2, showing taxes withheld and the owner spouse would claim
the wages paid to you as a deduction. Both a partnership and a sole proprietor with
an employee must have an EIN.
References:
Does a small company need a tax ID number?
A sole proprietor who does not have any employees and who does not file any excise
or pension plan tax returns is the only business person who does not need an employer
identification number. In this instance, the sole proprietor uses his or her social
security number as the taxpayer identification number.
References:
12.8 Small Business/Self-Employed/Other Business : Schedule C & Schedule SE
I am a sole proprietor. Can I use Schedule C-EZ instead of Schedule C?
You can use Form 1040, Schedule C-EZ (PDF) to determine
your net profit if you have only one sole proprietorship and you meet all of the following
requirements: your business expenses were not more than $2,500, and you did not have
a net loss from your business, you use the cash method of accounting, and you did
not have an inventory during the year. There are other requirements. Refer to page
1 of Schedule C-EZ to see if you qualify. Additional information is also available
in Tax Topic 408, Sole Proprietorship.
References:
12.9 Small Business/Self-Employed/Other Business : Starting or Ending a Business
How do I report the closing of a sole proprietorship business?
When a sole proprietor ends a business, the last Form 1040, Schedule C (PDF), Profit or Loss from Business, filed for that business
does not require notation as a final return because the business is not a separate
entity from the sole proprietor. You simply quit filing a Schedule C with your income
tax return.
References:
Which form do I use to file my business income tax return?
To determine which form you should file for your business entity, select one of
the following links:
. Publication 541, Partnerships
. Publication 542, Corporations
. Publication 3402 (PDF), Tax Issues for LLCs
. Publication 334, Tax Guide for Small Business
. Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership
(LLC/LLP), Corporation, Subchapter S Corporation
References:
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