Publication 334: Tax Guide for Small Business; Chapter 1

This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Introduction

This chapter explains the business taxes you may have to pay and the forms you may have to file. It also discusses taxpayer identification numbers.

Table 1-1 lists the benefits of filing electronically.

Table 1-2 lists the federal taxes you may have to pay, their due dates, and the forms you use to report them.

Table 1-3 provides checklists that highlight the typical forms and schedules you may need to file if you ever go out of business.

You may want to get Publication 509, Tax Calendars for 2005. It has tax calendars that tell you when to file returns and make tax payments.

Useful Items - You may want to see:

Publication

505 Tax Withholding and Estimated Tax

Form (and Instructions)

1040
U.S. Individual Income Tax Return
1040-ES
Estimated Tax for Individuals
Sch C (Form 1040)
Profit or Loss From Business
Sch C-EZ (Form 1040)
Net Profit From Business
Sch SE (Form 1040)
Self-Employment Tax

See chapter 12 for information about getting publications and forms.

Identification Numbers

This section explains three types of taxpayer identification numbers, who needs them, when to use them, and how to get them.

Social security number (SSN). Generally, use your SSN as your taxpayer identification number. You must put this number on each of your individual income tax forms, such as Form 1040 and its schedules.

To apply for an SSN, use Form SS-5, Application for a Social Security Card. This form is available at Social Security Administration (SSA) offices or by calling 1-800-772-1213. It is also available from the SSA website at www.socialsecurity.gov.

Individual taxpayer identification number (ITIN). The IRS will issue an ITIN if you are a nonresident or resident alien and you do not have and are not eligible to get an SSN. In general, if you need to obtain an ITIN, you must attach Form W-7, Application for IRS Individual Taxpayer Identification Number, with your signed, original, completed tax return and mail both to the Philadelphia Service Center. The exceptions are covered in detail in the instructions for Form W-7 (Rev. 12-17-2003). If you must include another person's SSN on your return and that person does not have and cannot get an SSN, enter that person's ITIN. The application is also available in Spanish. The form is available from the IRS website at www.irs.gov or you can call 1-800-829-3676 to order the form.

An ITIN is for tax use only. It does not entitle the holder to social security benefits or change the holder's employment or immigration status.

Employer identification number (EIN). You must also have an EIN to use as a taxpayer identification number if you do either of the following.

Pay wages to one or more employees.
File pension or excise tax returns.

If you must have an EIN, include it along with your SSN on your Schedule C or C-EZ.

You can apply for an EIN:

Online by clicking on the EIN link at www.irs.gov/businesses/small. The EIN is issued immediately once the application information is validated.
By telephone at 1-800-829-4933 from 7:00 a.m. to 10:00 p.m. in your local time zone.
By mailing or faxing Form SS-4, Application for Employer Identification Number.

New EIN. You may need to get a new EIN if either the form or the ownership of your business changes. For more information, see Publication 1635, Understanding Your EIN.

When you need identification numbers of other persons. In operating your business, you will probably make certain payments you must report on information returns. These payments are discussed under Information Returns, later in this chapter. You must give the recipient of these payments (the payee) a statement showing the total amount paid during the year. You must include the payee's identification number and your identification number on the returns and statements.

Employee. If you have employees, you must get an SSN from each of them. Record the name and SSN of each employee exactly as they are shown on the employee's social security card. If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. This may occur if the employee's name was changed due to marriage or divorce.

If your employee does not have an SSN, he or she should file Form SS-5 with the SSA.

Other payee. If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. If you must report payments to an organization, such as a corporation or partnership, you must get its EIN.

To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification.

A payee who does not provide you with an identification number may be subject to backup withholding. For information on backup withholding, see the Form W-9 instructions and the General Instructions for Forms 1099, 1098, 5498, and W-2G.

Income Tax

This part explains whether you have to file an income tax return and when you file it. It also explains how you pay the tax.

Do I Have To File an Income Tax Return?

You have to file an income tax return for 2004 if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions.

How Do I File?

File your income tax return on Form 1040 and attach Schedule C or Schedule C-EZ. Enter the net profit or loss from Schedule C or Schedule C-EZ on page 1 of Form 1040. Use Schedule C to figure your net profit or loss from your business. If you operated more than one business as a sole proprietorship, you must attach a separate Schedule C for each business. You can use the simpler Schedule C-EZ if you operated only one business as a sole proprietorship, you did not have a net loss, and you meet the other requirements listed in Part I of the schedule. (Part I of Schedule C-EZ is printed in chapter 10.)

IRS e-file (Electronic Filing)

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E-file logo

You may be able to file your tax returns electronically using an IRS e-file option. Table 1-1 lists the benefits of IRS e-file. IRS e-file uses automation to replace most of the manual steps needed to process paper returns. As a result, the processing of e-file returns is faster and more accurate than the processing of paper returns. As with a paper return, you are responsible for making sure your return contains accurate information and is filed on time.

Using e-file does not affect your chances of an IRS examination of your return.

You can file most commonly used business forms using IRS e-file. For more information, visit the IRS website at www.irs.gov.

Electronic signatures. Paperless filing is easier than you think and it's available to most taxpayers who file electronically—including those first-time filers who were 16 or older at the end of 2004. If you file electronically using tax preparation software or a tax professional, you may be able to participate in the Self-Select PIN (personal identification number) program. If you are married filing jointly, you and your spouse will each need to create a PIN and enter these PINs as your electronic signatures.

To create a PIN, you must know your adjusted gross income (AGI) from your originally filed 2003 income tax return (not from an amended return, Form 1040X, or any math error notice from the IRS). You will also need to provide your date of birth (DOB). Make sure your DOB is accurate and matches the information on record with the Social Security Administration before you e-file. To do this, check your annual Social Security Statement.

If you use a Self-Select PIN, there is nothing to sign and nothing to mail—not even your Forms W-2. For more details on the Self-Select PIN program, visit the IRS website at www.irs.gov.

Forms 8453 and 8453-OL. Your return is not complete without your signature. If you are not eligible or choose not to sign your return electronically, you must complete, sign, and file Form 8453, U.S. Individual Income Tax Declaration for an IRS e-file Return, or Form 8453-OL, U.S. Individual Income Tax Declaration for an IRS e-file Online Return, whichever applies.

State returns. In most states, you can file an electronic state return simultaneously with your federal return. For more information, check with your local IRS office, state tax agency, tax professional, or the IRS website at www.irs.gov.

Refunds. You can have your refund check mailed to you, or you can have your refund deposited directly to your checking or savings account.

With e-file, your refund will be issued in half the time as when filing on paper. Most refunds are issued within 3 weeks. If you choose Direct Deposit, you can receive your refund in as few as 10 days.

Offset against debts. As with a paper return, you may not get all of your refund if you owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support. You will be notified if the refund you claimed has been offset against your debts.

Refund inquiries. You can check the status of your refund if it has been at least 3 weeks from the date you filed your return. Be sure to have a copy of your tax return available because you will need to know the filing status, the first social security number shown on the return, and the exact whole-dollar amount of the refund. To check on your refund, do one of the following.

Go to www.irs.gov, and click on Where's My Refund.
Call 1-800-829-4477 for automated refund information, and follow the recorded instructions.
Call 1-800-829-1954 during the hours shown in your form instructions.

Balance due. If you owe tax, you must pay it by April 15, 2005, to avoid late-payment penalties and interest. You can make your payment electronically by scheduling an electronic funds withdrawal from your checking or savings account or by credit card.

Using an Authorized IRS e-file Provider

Many tax professionals can electronically file paperless returns for their clients. You have two options.

You can prepare your return, take it to an authorized IRS e-file provider, and have the provider transmit it electronically to the IRS.
You can have an authorized IRS e-file provider prepare your return and transmit it for you electronically.

You will be asked to complete Form 8879 to authorize the provider to enter your self-selected PIN on your return.

Depending on the provider and the specific services requested, a fee may be charged. To find an authorized IRS e-file provider near you, go to www.irs.gov or look for an “Authorized IRS e-file Provider” sign.

Using Your Personal Computer

A computer with a modem or Internet access is all you need to file your tax return using IRS e-file. Best of all, when you use your personal computer, you can e-file your return from the comfort of your home any time of the day or night. Sign your return electronically using a self-selected PIN to complete the process. There is no signature form to submit or Forms W-2 to send in.

Free Internet filing options. More taxpayers can now prepare and e-file their individual income tax returns free using commercial tax preparation software accessible through www.irs.gov or www.firstgov.gov. The IRS is partnering with the tax software industry to offer free preparation and filing services to a significant number of taxpayers. Security and privacy certificate programs will assure tax data is safe and secure. To see if you qualify for these services, visit the Free Internet Filing Homepage at www.irs.gov.

If you cannot use the free services, you can buy tax preparation software at various electronics stores or computer and office supply stores. You can also download software from the Internet or prepare and file your return completely online by using a tax preparation software package available on the Internet.

Through Employers and Financial Institutions

Some businesses offer free e-file to their employees, members, or customers. Others offer it for a fee. Ask your employer or financial institution if they offer IRS e-file as an employee, member, or customer benefit.

Free Help With Your Return

Free help in preparing your return is available nationwide from IRS-trained volunteers. The Volunteer Income Tax Assistance (VITA) program is designed to help low-income taxpayers and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 or older with their tax returns. Some locations offer free electronic filing.

Table 1-1. Benefits of IRS e-file

Accuracy	•	Your chance of getting an error notice from the IRS is significantly reduced.
Security	•	Your privacy and security are assured.
Electronic signatures	•	Create your own personal identification number (PIN) and file a completely paperless return through your tax preparation software or tax professional. There is nothing to mail!
Proof of acceptance	•	You receive an electronic acknowledgement within 48 hours that the IRS has accepted your return for processing.
Fast refunds	•	You get your refund in half the time, even faster with Direct Deposit—in as few as 10 days.
Free Internet filing options	•	Use the IRS website www.irs.gov to access commercial tax preparation and e-file services available at no cost to eligible taxpayers.
Electronic payment options	•	Convenient, safe and secure electronic payment options are available. E-file and pay your taxes in a single step. Schedule an electronic funds withdrawal from your checking or savings account (up to and including April 15, 2005) or pay by credit card.
Federal/State filing	•	Prepare and file your federal and state tax returns together and double the benefits you get from e-file.

When Is My Tax Return Due?

Form 1040 for calendar year 2004 is due by April 15, 2005. If you use a fiscal year (explained in chapter 2), your return is due by the 15th day of the 4th month after the end of your fiscal year. If you file late, you may have to pay penalties and interest. If you cannot file your return on time, use Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, to request an automatic 4-month extension.

How Do I Pay Income Tax?

Federal income tax is a pay-as-you-go tax. You must pay it as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. You generally have to make estimated tax payments if you expect to owe taxes, including self-employment tax (discussed later), of $1,000 or more when you file your return. Use Form 1040-ES to figure and pay the tax. If you do not have to make estimated tax payments, you can pay any tax due when you file your return. For more information on estimated tax, see Publication 505.

What are my payment options? You can pay your estimated tax electronically using various options. If you pay electronically, there is no need to mail in Form 1040-ES payment vouchers. These options include:

Paying electronically through the Electronic Federal Tax Payment System (EFTPS).
Paying by authorizing an electronic funds withdrawal when you file Form 1040 electronically.
Paying by credit card over the phone or by Internet.

Other options include crediting an overpayment from your 2004 return to your 2005 estimated tax, and mailing a check or money order with a Form 1040-ES payment voucher.

EFTPS

To enroll in EFTPS, go to www.eftps.gov or call 1-800-555-4477.
Effective in January 2004, when you request a new EIN and you will have a tax obligation, you are automatically enrolled in EFTPS.
Benefits of EFTPS:
1. The chance of an error in making your payments is reduced.
2. You receive immediate confirmation of every transaction.

Penalty for underpayment of tax. If you did not pay enough income tax and self-employment tax for 2004 by withholding or by making estimated tax payments, you may have to pay a penalty on the amount not paid. The IRS will figure the penalty for you and send you a bill. Or you can use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you have to pay a penalty and to figure the penalty amount. For more information, see Publication 505.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.

If you earned income as a statutory employee, you do not pay SE tax on that income.

Social security coverage. Social security benefits are available to self-employed persons just as they are to wage earners. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

By not reporting all of your self-employment income, you could cause your social security benefits to be lower when you retire.

How to become insured under social security. You must be insured under the social security system before you begin receiving social security benefits. You are insured if you have the required number of credits (also called quarters of coverage), discussed next.

Earning credits in 2004 and 2005. For 2004, you received one credit, up to a maximum of four credits, for each $900 ($920 for 2005) of income subject to social security taxes. Therefore, for 2004, if you had income (self-employment and wages) of $3,600 that was subject to social security taxes, you received four credits ($3,600 ÷ $900).

For an explanation of the number of credits you must have to be insured and the benefits available to you and your family under the social security program, consult your nearest Social Security Administration (SSA) office.

Making false statements to get or to increase social security benefits may subject you to penalties.

The Social Security Administration (SSA) time limit for posting self-employment income. Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. The SSA will not change its records to increase your self-employment income.

Who must pay self-employment tax. You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

Your net earnings from self-employment (excluding church employee income) were $400 or more.
You had church employee income of $108.28 or more.

The SE tax rules apply no matter how old you are and even if you are already receiving social security or Medicare benefits.

Methods for figuring net earnings. There are three ways to figure net earnings from self-employment.

The regular method.
The nonfarm optional method.
The farm optional method.

You must use the regular method unless you are eligible to use one or both of the optional methods. Multiply your total earnings subject to SE tax by 92.35% (.9235) to get your net earnings under the regular method.

Why use the optional methods? You may want to use the optional methods when you have a loss or a small net profit and any one of the following applies.

You want to receive credit for social security benefit coverage.
You incurred child or dependent care expenses for which you could claim a credit. (An optional method may increase your earned income, which could increase your credit.)
You are entitled to the earned income credit. (An optional method may increase your earned income, which could increase your credit.)
You are entitled to the additional child tax credit. (An optional method may increase your earned income, which could increase your credit.)
You are entitled to the self-employed health insurance deduction.

SE tax rate. The SE tax rate on net earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).

Maximum earnings subject to SE tax. Only the first $87,900 of your combined wages, tips, and net earnings in 2004 is subject to any combination of the 12.4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax.

All your combined wages, tips, and net earnings in 2004 are subject to any combination of the 2.9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax.

If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $87,900, do not pay the 12.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings.

Deduct one-half of your SE tax as an adjustment to income on line 30 of Form 1040.

More information. For more information on the SE tax, see Publication 533, Self-Employment Tax.

Table 1-2. Which Forms Must I File?

IF you are liable for:	THEN use Form:	DUE by: ¹
Income tax	1040 and Schedule C or C-EZ ²	15th day of 4th month after end of tax year.
Self-employment tax	Schedule SE	File with Form 1040.
Estimated tax	1040-ES	15th day of 4th, 6th, and 9th months of tax year, and 15th day of 1st month after the end of tax year.
Social security and Medicare taxes and income tax withholding	941	April 30, July 31, October 31, and January 31 ⁴.
	8109 (to make deposits) ³	See Publication 15.
Providing information on social security and Medicare taxes and income tax withholding	W-2 (to employee) W-2 and W-3 (to the Social Security Administration)	January 31 ⁴. Last day of February (March 31 if filing electronically) ⁴.
Federal unemployment (FUTA) tax	940 or 940-EZ	January 31 ⁴.
	8109 (to make deposits) ³	April 30, July 31, October 31, and January 31, but only if the liability for unpaid tax is more than $500.
Filing information returns for payments to nonemployees and transactions with other persons	See Information Returns	Forms 1099–to the recipient by January 31 and to the IRS by February 28 (March 31 if filing electronically).
		Other forms—See the General Instructions for Forms 1099, 1098, 5498, and W-2G.
Excise tax	See Excise Taxes	See the instructions to the forms.

¹ If a due date falls on a Saturday, Sunday, or legal holiday, the due date is the next business day. For more information, see Publication 509, Tax Calendars for 2005.

² File a separate schedule for each business.

³ Do not use if you deposit taxes electronically.

⁴ See the form instructions if you go out of business, change the form of your business, or stop paying wages.

Employment Taxes

If you have employees, you will need to file forms to report employment taxes. Employment taxes include the following items.

Social security and Medicare taxes.
Federal income tax withholding.
Federal unemployment (FUTA) tax.

For more information, see Publication 15 (Circular E), Employer's Tax Guide. That publication explains your tax responsibilities as an employer.

To help you determine whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. That publication has information to help you determine whether an individual is an independent contractor or an employee.

If you incorrectly classify an employee as an independent contractor, you may be held liable for employment taxes for that worker plus a penalty.

An independent contractor is someone who is self-employed. You do not generally have to withhold or pay any taxes on payments to an independent contractor.

Excise Taxes

This section explains the excise taxes you may have to pay and the forms you have to file if you do any of the following.

Manufacture or sell certain products.
Operate certain kinds of businesses.
Use various kinds of equipment, facilities, or products.
Receive payment for certain services.

For more information on excise taxes, see Publication 510, Excise Taxes for 2005.

Form 720. The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following.

Environmental taxes on the sale or use of ozone-depleting chemicals and imported products containing or manufactured with these chemicals.
Communications and air transportation taxes.
Fuel taxes.
Tax on the first retail sale of heavy trucks, trailers, and tractors.
Manufacturers taxes on the sale or use of a variety of different articles.

Form 2290. There is a federal excise tax on the use of certain trucks, truck tractors, and buses on public highways. The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. For more information, see the instructions for Form 2290.

Depositing excise taxes. If you have to file a quarterly excise tax return on Form 720, you may have to deposit your excise taxes before the return is due. For details on depositing excise taxes, see the instructions for Form 720.

Information Returns

If you make or receive payments in your business, you may have to report them to the IRS on information returns. The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. You must give a copy of each information return you are required to file to the recipient or payer. In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. For more details on information returns and when you have to file them, see the General Instructions for Forms 1099, 1098, 5498, and W-2G.

Form 1099-MISC. Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your business. These payments include the following items.

Payments of $600 or more for services performed for your business by people not treated as your employees, such as fees to subcontractors, attorneys, accountants, or directors.
Rent payments of $600 or more, other than rents paid to real estate agents.
Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows.
Royalty payments of $10 or more.
Payments to certain crew members by operators of fishing boats.

You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment.

Form W-2. You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes, and advance earned income credit payments. For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3.

Penalties. The law provides for the following penalties if you do not file Form 1099-MISC or Form W-2 or do not correctly report the information. For more information, see the General Instructions for Forms 1099, 1098, 5498, and W-2G.

Failure to file information returns. This penalty applies if you do not file information returns by the due date, do not include all required information, or report incorrect information.
Failure to furnish correct payee statements. This penalty applies if you do not furnish a required statement to a payee by the required date, do not include all required information, or report incorrect information.

Waiver of penalties. These penalties will not apply if you can show that the failure was due to reasonable cause and not willful neglect.

In addition, there is no penalty for failure to include all required information, or for including incorrect information, on a de minimis (small) number of information returns if you correct the errors by August 1 of the year the returns are due. (A de minimis number of returns is the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year.)

Form 8300. You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction, or two or more related business transactions. Cash includes U.S. and foreign coin and currency. It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. Cash does not include a check drawn on an individual's personal account (personal check). For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business).

Penalties. There are civil and criminal penalties, including up to 5 years in prison, for not filing Form 8300, filing (or causing the filing of) a false or fraudulent Form 8300, or structuring a transaction to evade reporting requirements.

Table 1-3. Going Out of Business Checklists

(Note. The following checklists highlight the typical final forms and schedules you may need to file if you ever go out of business. For more information, see the instructions for the listed forms.)

IF you are liable for:		THEN you may need to:
Income tax	□	File Schedule C or C-EZ with your Form 1040 for the year in which you go out of business.
	□	File Form 4797 with your Form 1040 for each year in which you sell or exchange property used in your business or in which the business use of certain section 179 or listed property drops to 50% or less.
	□	File Form 8594 with your Form 1040 if you sold your business.
Self-employment tax	□	File Schedule SE with your Form 1040 for the year in which you go out of business.
Employment taxes	□	File Form 941 for the calendar quarter in which you make final wage payments. Note. Do not forget to check the final return box on line A and enter the date final wages were paid above line 1.
	□	File Form 940 or 940-EZ for the calendar year in which final wages were paid. Note. Do not forget to check the box, If you will not have to file returns in the future..., under Question C.
Information returns	□	Provide Forms W-2 to your employees for the calendar year in which you make final wage payments. Note. These forms are generally due by the due date of your final Form 941.
	□	File Form W-3 to file Forms W-2. Note. Note. These forms are generally due within 1 month after the due date of your final Form 941.
	□	Provide Forms 1099-MISC to each person to whom you have paid at least $600 for services (including parts and materials) during the calendar year in which you go out of business.
	□	File Form 1096 to file Forms 1099-MISC.

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Chapter 1 - Filing and Paying Business Taxes