Profit & Loss Forms for the Self-Employed

by Randolf Saint-Leger; Updated September 26, 2017
Tax forms for the self-employed can be confusing.

If you are self-employed, the type of operating structure you elect determines which form you use to report the profit and losses of your business. Timely filings help you avoid an IRS audit. The IRS imposes fines, interest and penalties for untimely business tax filings. If you earn income but are not subject to receiving a W-2, such as working under a sole proprietorship, partnership, LLC or corporation, the IRS considers you self-employed.

Income Taxes

Generally, all businesses must report and pay income taxes. Other than partnerships, all businesses must file an annual tax return. Partnerships file an informational return disclosing the changes in the income and loss position of its partners. The type of form you use to report income and losses depends on your operating structure.

Sole Proprietorship

Unlike a C corporation, a sole proprietor reports income and losses directly on his personal income tax return using Schedule C (Form 1040), Profit or Loss from Business. If you are self-employed, use Form 1040-ES to make estimated tax payments throughout the year. Making estimated tax payments reduces your tax liability when it comes time to file an annual return.

Partnership

A partnership does not pay income tax. A partnership, like a sole proprietorship, passes its income and losses from the business to its partners. Each partner includes his ownership share of the profit or loss of the partnership on his individual tax return using Form 1040. A partner is not an employee of the company, so he does not receive a W-2. Instead he receives a Schedule K-1 (Form 1065) which details in changes in his ownership interest in the partnership. The IRS uses Schedule K for informational purposes only. If the partnership earns income from rental real estate, it must file Schedule E (Form 1040), Supplemental Income and Loss.

S Corporation

S corporations and LLCs pass along their profits and losses to their owners. A shareholder of an S corporation reports his distributive share in the profit or loss of a company on his personal tax return using Form 1040. However, the S corporation must file an annual income tax return using Form 1120S.

LLC

An LLC is unique because it has flexibility in how it files and pays taxes depending on its number of members. A single-member of an LLC reports income directly onto Schedule C (Form 1040) similar to a partnership. S corporations and LLCs use Schedule E to report supplemental income from rental property. If the LLC files as a corporation, it should file Form 1120, U.S. Corporation Income Tax Return. If it files as an S corporation, it should file Form 1120S. An LLC filing as a partnership uses Schedule K-1 (1065).

Insight

Failing to pay the appropriate amount of tax based on your self-employed income whether from a sole proprietorship, partnership, S corporation or LLC may trigger a tax audit of your company. If you are unsure which forms to file and when, consult with a tax professional or an accountant who can help you navigate the ins and outs of the tax system. Filing and paying the proper income taxes prevents IRS interest and penalties.

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