<p>As a business owner, you know first-hand that running and growing your company is a daily challenge. The same thing can be said about your tax situation.</p>



<p>This article gives a brief overview of the primary types of business taxes you’ll likely encounter as a business owner: Income taxes, self-employment taxes, payroll taxes, and excise &amp; sales taxes.</p>



<h2 class="wp-block-heading">Why Understanding Business Taxes is Important</h2>



<p>All businesses need cash to survive. If you fall behind paying your business’s taxes, you’ll need to divert a lot of this cash to get current on your tax obligation. And much of this cash was supposed to be used to sustain the business’s day-to-day operations.</p>



<p>This is why understanding business taxes and <a class="link" href="https://1800accountant.com/blog/calculate-small-business-taxes">how to calculate them</a> is so important - failing to pay business taxes can potentially cause your company to go <a class="link" href="https://1800accountant.com/blog/what-happens-if-you-dont-file-taxes"><em>out of business</em></a>!</p>



<p>With that said, let’s take a look at the primary types of business taxes.</p>



<h2 class="wp-block-heading">Business Tax #1: Income Taxes</h2>



<p><strong><em>Definition:</em></strong> Taxes paid on your business’s profit after all business expenses are paid and qualifying individual income tax deductions are applied.</p>



<p><strong><em>Filing your income taxes:</em></strong> Sole proprietors, shareholders of S corporations, partners of a partnership, and members of limited liability companies report their business’s taxable income on their <a class="link" href="https://1800accountant.com/services/income-taxes">individual tax return (Form 1040)</a>. Shareholders of C corporations only pay income taxes on wages or dividends they receive, not their business’s entire taxable income.</p>



<p>In addition to federal income taxes, don’t forget about state and local income taxes if applicable.</p>



<p><strong><em>Tax rate:</em></strong> Federal income tax rates can be as high as 37%. Higher incomes may also be subject to a 0.9% surtax.</p>



<p><strong><em>Tax planning tip:</em></strong> To minimize income taxes, you’ll want to reduce your business’s net profit. To lower your business’s taxable income, consider purchasing a major piece of equipment or asking a customer to postpone an end-of-the-year payment to the following year. Certain individual deductions can also reduce your business’s net profit, such as qualified contributions to a retirement account, the standard deduction, or itemized deductions.</p>



<h2 class="wp-block-heading">Business Tax #2: Self-Employment Taxes</h2>



<p><strong><em>Definition:</em></strong> Taxes paid on your business’s profit after all business expenses are paid <a class="link" href="https://www.ssa.gov/pubs/EN-05-10022.pdf" target="_blank" rel="noreferrer noopener">is  self-employment tax</a>. Government revenue generated from self-employment taxes goes to fund Social Security and Medicare. Unlike income taxes, you can’t use the standard or itemized deductions to reduce your taxable income subject to self-employment taxes.</p>



<p><strong><em>Filing your self-employment taxes:</em></strong> Fill out Form SE and attach it to your individual tax return (Form 1040).</p>



<p><strong><em>Tax rate:</em></strong> 12.4% for Social Security taxes is due on your first $160,200 of taxable income, and 2.9% for Medicare taxes on all your taxable income, for a total of 15.3%.</p>



<p><strong><em>Tax planning tip:</em></strong> Consider becoming an S corporation. As an S corp shareholder, you’ll only pay self-employment taxes on the wages you pay yourself from the business. The remaining profits from the S corporation are not subject to self-employment taxes.</p>



<h2 class="wp-block-heading">Business Tax #3: Capital Gains Taxes</h2>



<p><strong><em>Definition:</em></strong> When you sell an asset for more than what you originally paid for that asset, you have to pay capital gains taxes.</p>



<p><strong><em>Filing your capital gains taxes:</em></strong> When you sell a business asset such as a vehicle, equipment, or a building, you must report this transaction on Form 4797 and attach it to your Form 1040.</p>



<p><strong><em>Tax rate:</em></strong> If you owned the recently sold business asset for more than 12 months, the maximum tax rate you’ll pay is 20%. If you owned the asset for less than 12 months, the tax rate can be as high as 37%.</p>



<p><strong><em>Tax planning tip:</em></strong> Consider having the party who bought your asset pay in installments. Instead of receiving one large lump sum of money all at once, spreading payments across several years can also help spread out the taxes you owe over the same number of years.</p>



<h2 class="wp-block-heading">Business Tax #4: Payroll Taxes</h2>



<p><strong><em>Definition:</em></strong> Payroll taxes are taxes paid on the wages and salaries of employees. Similar to self-employment taxes, <a class="link" href="https://www.cbpp.org/research/federal-tax/federal-payroll-taxes" target="_blank" rel="noreferrer noopener">payroll taxes are used to fund Social Security and Medicare</a>. A state’s unemployment tax, which covers that state’s unemployment compensation fund, is also considered a payroll tax and is paid by the employer. However, several states require some contribution from employees. The federal unemployment tax is paid only by the employer.</p>



<p><strong><em>Filing your payroll taxes:</em></strong> Here’s a quick look at the various forms used to file payroll taxes:</p>



<ul>
<li><em>Form 940 -</em> Federal unemployment tax return, filed annually (there’s also a corresponding state unemployment tax return)</li>



<li><em>Form 941 -</em> Tax return to report income, Social Security, and Medicare taxes withheld from employees’ paychecks and filed quarterly.</li>



<li><em>Form W-2 -</em> The information report provided to employees that shows total wages earned for a particular year</li>



<li><em>Form W-3 -</em> Information report filed with the Social Security Administration summarizes all W-2s issued by an employer. Copies of all W-2s are also included with the W-3.</li>
</ul>



<p><strong><em>Tax rate:</em></strong> Similar to the self-employment tax, 12.4% of employees’ wages are taxed to fund Social Security, while 2.9% of wages are taxed to fund Medicare, for a total tax rate of 15.3%. The employer pays half of these taxes (7.65%), while the employee pays the other half (7.65%).</p>



<p><strong><em>Tax planning tip:</em></strong> Many employers take the 7.65% payroll taxes they are responsible for paying and bake it into an employee’s overall compensation package. So, while technically responsible for paying its 7.65% of payroll taxes, the employer passed this cost to the employee.</p>



<h2 class="wp-block-heading">Business Tax #5: Excise &amp; Sales Taxes</h2>



<p><strong><em>Definition:</em></strong> Sales taxes are normally collected as a percentage of the overall selling price of goods or services, such as an 8% sales tax on all clothing, while excise taxes are imposed on very specific goods and services, such as a $2 excise tax on a 20-pack of cigarettes.</p>



<p><strong><em>Filing your excise and sales taxes:</em></strong> <a class="link" href="https://www.taxpolicycenter.org/briefing-book/what-are-major-federal-excise-taxes-and-how-much-money-do-they-raise" target="_blank" rel="noreferrer noopener">Federal excise taxes</a> are filed quarterly using Form 720. State filing requirements for sales taxes can vary depending on the amount of tax you owe. Businesses that collect a high amount of sales tax must usually file a return once a month; a business that collects a small amount of sales tax may only need to file an annual return.</p>



<p><strong><em>Tax rate:</em></strong> Check with your state or local tax authority <a class="link" href="https://taxfoundation.org/data/all/state/2023-sales-tax-rates-midyear/" target="_blank" rel="noreferrer noopener">to determine your sales tax rate</a>. Federal excise rates also vary depending on the product being taxed.</p>



<p><strong><em>Tax planning tip:</em></strong> While businesses are responsible for paying sales and excise taxes, many pass this cost to their customers.</p>



<h2 class="wp-block-heading">Partner With a Tax Expert to Ensure Business Success</h2>



<p>As you can see, you need to understand many types of business taxes if you want to comply with all of your tax obligations.</p>



<p>The good news is that while many of these taxes can be extremely complicated, help is only a phone call or email away.</p>



<p>Partner with a 1-800Accountant <a class="link" href="https://1800accountant.com/services/small-business-taxes">small business tax expert</a> to stay compliant while minimizing the total amount of taxes you owe.</p>

As a business owner, you know first-hand that running and growing your company is a daily challenge. The same thing can be said about your tax situation. This article gives a brief overview of the primary types of business taxes you’ll likely encounter as a business owner: Income taxes, self-employment taxes, payroll taxes, and excise [&hellip;]

types-of-taxes-for-small-businesses_blog-header

The Primary Types of Business Taxes

<p>Most small businesses must calculate and file tax returns with the IRS multiple times per year. It's a crucial aspect of operating a business that all owners should be familiar with to remain compliant and avoid repercussions.<br /><br />How and when do you pay taxes as a small business? Why is it so hard to find a straight answer about your filing deadlines for tax year 2023? Use this guide to get quick, comprehensive answers to those tax questions.&nbsp;</p><h2 class="wp-block-heading">Business Tax Deadlines</h2><p>Income tax is pay-as-you-go, and the IRS expects business owners to make regular quarterly payments throughout the year based on revenue.<br /><br />Quarterly estimated tax <a class="link" href="https://money.com/tax-deadlines-state-federal-extension/" target="_blank" rel="noreferrer noopener">due dates for tax year 2023</a> are as follows:&nbsp;</p><ul><li>April 18, 2023</li><li>June 15, 2023</li><li>September 15, 2023</li><li>January 16, 2024</li></ul><p>Freelancers and independent contractors must also file Form 1099-NEC with the IRS on January 31 for non-employee compensation.<br /><br />Failure to submit on time or to accurately calculate what is owed can result in fines and increased scrutiny from the IRS. IRS fines aren’t fixed and will accumulate until action is taken, so submitting as soon as possible is in your best interest.</p><h2 class="wp-block-heading">Personal Tax Filing Deadline vs. Business Tax Deadline</h2><p>The primary deadline for a personal income tax return is April 15 every year. If the 15th falls on a weekend or holiday, your income tax return will be due the following business day. The deadline for 2023 was Tuesday, April 18.<br /><br />Whatever the state of your business, your personal return will still be due on that date. However, the due date for your business may vary based on your fiscal year and how you choose to file with the IRS. Some LLCs will have to file a business return apart from their personal return, while others will not.&nbsp;</p><h2 class="wp-block-heading">What’s an LLC, and Why is This So Complicated?</h2><p>A limited liability company, commonly called an LLC, is a <a class="link" href="https://1800accountant.com/blog/business-entity-llc">flexible business entity</a> established at the level of the state. States allow individuals with varying criteria to organize an LLC to separate their assets and identity from the business entity.<br /><br />However, an LLC has no separate tax process on the federal level. The IRS does not recognize an LLC as its own business category. This means every LLC can <a class="link" href="https://1800accountant.com/blog/llc-vs-s-corp-taxes">effectively choose</a> which approach to follow for their federal income tax. LLCs can use IRS Form 8832 and elect to classify themselves under one of these categories:&nbsp;</p><ul><li>C corporation</li><li>S corporation</li><li>Sole proprietorship</li><li>Partnership</li></ul><h2 class="wp-block-heading">Types of LLCs and How to File</h2><p>When do LLC taxes need to be filed with the IRS? The date will depend on how your business is classified with the IRS for tax purposes.<br /></p><h3 class="wp-block-heading">S Corporation</h3><p>An S corporation or S corp is a small corporation that files IRS Form 2553 to receive that tax status. The filing deadline for tax year 2023 was March 15. For an alternative fiscal year, your business return will be due on the 15th day of the third month after the year ends.<br /><br />Your March 15 return will use tax Form 1120-S, an informational return. You report your profits and expenses to the IRS, but your business is not taxed directly.<br /><br />An S corp is a pass-through entity whose income is untaxed and goes directly to business owners who will report and pay taxes for it on their personal returns.<br /><br />Along with 1120-S, you will file Schedule K-1 to report how LLC members split corporate profits. Then, each member will file Form 1020.<br /></p><h3 class="wp-block-heading">C Corporation</h3><p>A C corporation is any corporation that has not filed separately with the IRS to be taxed as an S corporation. If you file your tax return as a C corporation, your LLC tax filing deadline for tax year 2023 was April 18. This assumes you're following the calendar year.&nbsp;<br /><br />Most businesses follow the calendar year, starting their fiscal year in January and ending in December. If your business has an alternate fiscal year offset from the calendar year, your due date will be the 15th day of the 4th month after your fiscal year ends.</p><h3 class="wp-block-heading">All About Corporate Taxes</h3><p>C corporations are taxed as a separate entity apart from ownership. They are subject to double taxation, which means the corporation pays and files taxes according to the business income tax. An Individual business owner will also pay and file taxes on that income through their individual income tax return.<br /><br />You’ll file IRS Form 1120 for your corporate tax return and IRS Form 1020 for your personal return. Note that tax forms for corporations often require more in-depth reporting than other business entities. You will not have to pay self-employment taxes as you will function as an employee and shareholder of the corporation.</p><h3 class="wp-block-heading">Partnership (Multi-Member)</h3><p>If you don’t file as a corporation, then the IRS will not recognize your business as a taxable entity apart from its members. Your LLC will be taxed as a partnership if you have multiple members.<br /><br />Your partnership (multi-member) LLC tax filing deadline for 2023 was March 15, with a similar process to that of S corporations. You must submit Form 1065 as an informational return by the multi-member LLC tax filing deadline, along with the Schedule K-1. Then, each member will file and pay taxes on their personal share of the LLC income in April.</p><h3 class="wp-block-heading">Sole Proprietorship (Single Member)</h3><p>If you are self-employed and don’t file as a corporation, you can be taxed as a sole proprietorship. Owners of this type of business are called sole proprietors. The <a class="link" href="https://1800accountant.com/blog/single-owner-llc">single-member LLC</a> tax filing deadline for 2023 was April 18.<br /><br />Instead of filing a separate return for your business, you will provide all relevant business information on your personal 1040 tax return using Schedule C.&nbsp;</p><h2 class="wp-block-heading">How to File a Tax Extension as a Small Business Owner</h2><p>You can <a class="link" href="https://1800accountant.com/blog/file-for-an-extension">file for an extension</a> if you need more time to complete your tax return. Anytime before your tax return deadline, you can file a tax extension request with the IRS online or by mail with Form 4868. This extends your deadline by six months with no penalties.<br /><br />Your LLC tax extension deadline in 2023 will be October 17 for the original April deadlines and September 15 for extended March deadlines.<br /><br />It’s important to note that extending your business return deadline does not extend the deadline for your tax payments. You should immediately make payments if you owe money on your taxes. Avoid late fees by paying now, and look forward to a possible refund when your return is finally completed.&nbsp;</p><h2 class="wp-block-heading">Tax Deadline FAQ</h2><h3 class="wp-block-heading">What happens if you miss the tax filing deadline, but the IRS owes you a refund?</h3><p>Small businesses that <a class="link" href="https://1800accountant.com/blog/file-late-taxes">miss a deadline</a> but are owed a refund will not receive a penalty from the IRS.&nbsp;&nbsp;</p><h3 class="wp-block-heading">What happens if you miss the deadline and owe taxes?</h3><p>Small businesses that <a class="link" href="https://www.forbes.com/advisor/taxes/missed-income-tax-deadline/" target="_blank" rel="noreferrer noopener">miss a tax deadline</a> and owe taxes will be subject to penalties and increased attention from the IRS. Interest from penalties will snowball until they are addressed, so it's important to file as soon as possible.</p><h3 class="wp-block-heading">What happens if you miss an estimated tax payment deadline?</h3><p>Small businesses that miss an estimated tax payment will typically receive a penalty from the IRS. Submitting the payment as soon as possible is optimal and will minimize the penalty owed.&nbsp;</p><h3 class="wp-block-heading">How do you pay estimated quarterly taxes?</h3><p>Workers or business owners receiving tax forms other than a W-2 are expected to pay directly to the IRS four times a year. They must accurately <a href="https://1800accountant.com/quarterly-tax-calculator" target="_self">calculate their taxes</a> to avoid underpayment penalties and submit by the deadline to avoid additional penalties. Learn more about <a class="link" href="https://1800accountant.com/blog/quarterly-estimated-taxes">quarterly estimated taxes here</a>.&nbsp;</p><h2 class="wp-block-heading">Work With a Tax Expert to Optimize Your LLC’s 2023 Taxes</h2><p>Hitting every deadline and calculating accurate tax estimates is the last thing busy small business owners and entrepreneurs want to deal with. That's why ownership trusts 1-800Accountant, America's leading virtual accounting firm for small businesses, for their needs.&nbsp;</p><p>Whether it's <a class="link" href="https://1800accountant.com/services/small-business-taxes">tax preparation</a>, calculating and filing quarterly estimated tax payments, tax deductions, or any of our professional accounting services, we have the solution you need at a price that fits your budget. Schedule a quick consultation – usually 30 minutes or less – to learn how we can help.</p><h2 class="wp-block-heading">&nbsp;</h2>

Most small businesses must calculate and file tax returns with the IRS multiple times per year. It&#8217;s a crucial aspect of operating a business that all owners should be familiar with to remain compliant and avoid repercussions. How and when do you pay taxes as a small business? Why is it so hard to find [&hellip;]

llc-tax-deadline-2023_blog-header

LLC Tax Deadline 2023: Key Deadlines for Your Small Business

<p>The legal entity type you select will have significant tax implications for you and your small business. That's why it's so important to understand the strengths and weaknesses of each entity before making a selection.<br><br>In this blog, we'll tell you everything you need to know about C corporations, including what it is, the steps you would take to form a C corp, the benefits of that entity type for your small business, potential downsides, and more.&nbsp;</p>



<h2 class="wp-block-heading">What is a C Corporation?</h2>



<p>You may have heard of partnerships or a limited liability company and their tax advantages, but a C corp is a different type of corporation.<br><br>A C corporation is a type of corporate structure taxed separately from its owners and shareholders. While other entities, such as S corporation, share similarities, there are some key differences between the two entities.<br><br>S corporation or C corporation business structure? Here are the differences, including the taxation of a C corporation, that you should know about when evaluating a <a class="link" href="https://1800accountant.com/blog/s-corp-vs-c-corp">C corp vs. S corp</a>:&nbsp;</p>



<ul>
<li>C corp taxes are applied at both the corporate income tax and personal income tax levels, called double taxation, while S corporations pay taxes at an individual level.</li>



<li>C corporations must issue stock and can have an infinite number of shareholders. S corporations are limited to 100 stockholders.</li>



<li>C corporations are required to make quarterly estimated income tax payments, while S corporations only do it once a year.</li>



<li>Unlike S corporations, owners and shareholders of C corporations do not have to be U.S. citizens or residents. Other businesses rather than individuals can own C corporations.</li>



<li>As a C corporation, there’s no deduction for corporate losses, so shareholders cannot deduct losses on their personal tax returns.</li>
</ul>



<h2 class="wp-block-heading">How to Form a C Corporation&nbsp;</h2>



<p>The steps you'll take for forming your business as a C corporation are reasonably straightforward and similar to the formation process for other entities.</p>



<ol>
<li><strong>Select a business name.</strong> The name you select must be unique. You’ll want to check with your state and local business authorities to ensure no other company uses a similar or identical name.<br></li>



<li><strong>Articles of incorporation. </strong>You’ll need to develop your business's articles of incorporation and submit them to your Secretary of State to form your business legally. It's essential to include your unique business name, address, registered agent information, and details about the type of stock you'll be issuing.<br></li>



<li><strong>Stock.</strong> The stock highlighted in your articles of incorporation is distributed to shareholders who comprise the ownership of your business.<br></li>



<li><a class="link" href="https://1800accountant.com/blog/ein"><strong>Employer Identification Number (EIN)</strong></a><strong>.</strong> An EIN, also known as a Federal Tax ID, is like a Social Security number for your business, which the IRS uses to identify you for tax purposes. If you intend to hire employees, open a business bank account, or file business taxes, you must obtain an EIN.<br></li>



<li><strong>Board of Directors.</strong> You must establish a board of directors who will oversee your C corporation's operations.&nbsp;</li>
</ol>



<h2 class="wp-block-heading">C Corporation Taxes</h2>



<p>C corporations are subject to double taxation at the corporate and individual levels. The current <a class="link" href="https://1800accountant.com/blog/corporate-tax-rates">corporate tax rate</a> is 28%. Here's what to know about the taxation of a C corporation.</p>



<p>To prepare your C corporation taxes, you must use <a class="link" href="https://1800accountant.com/blog/1120-tax-form">Form 1120</a> to report your business’s financial information, including taxable income, gains, losses, deductions, and credits. If your assets surpass $10 million and you file over 250 returns annually, you must file this form online.</p>



<p>C corporations must also pay employment taxes, which include FICA (Social Security and Medicare) and unemployment taxes. You must use Forms 940 and 941 to report these taxes.</p>



<p>Sections you'll need to complete in Form 1120:</p>



<ul>
<li>Basic Information About Your C corporation: This consists of your business’s legal name, address, EIN, date of incorporation, and total assets.</li>



<li>Corporate Income: This is your gross receipts or sales, returns and allowances, cost of goods sold, gross profit, dividends, interest, gross rents, gross royalties, and capital gains.</li>



<li>Tax-Deductible Expenses: These expenses include advertising, charitable contributions, repairs and maintenance, employee benefit programs, etc. You do not need to attach documentation, but keep your records in case of an IRS audit.</li>



<li>Tax, Refundable Credits, and Payments: This section aims to determine if you need to receive a tax refund or owe taxes to the IRS.</li>



<li>Schedule A – Cost of Goods Sold: If your business deducts the cost of goods from gross income, you must report this information in this section.</li>



<li>Schedule C – Dividends and Special Deductions: If dividends or special deductions have been claimed, you must record this information here.</li>



<li>Schedule E – Compensation of Officers: Document the compensation amounts of your corporate officers in this section.</li>



<li>Schedules J and K: These sections indicate your business's accounting method and information that can affect your corporate tax rate.</li>



<li>Schedules L, M-1, and M-2: In these sections, you need to attach your business’s balance sheet, document the reconciliation of income loss, and analyze unappropriated retained earnings.</li>
</ul>



<h2 class="wp-block-heading">Benefits of forming a C Corporation</h2>



<p>There are numerous advantages of a C corporation,&nbsp; including the following popular features.&nbsp;</p>



<h3 class="wp-block-heading">Limited liability protection&nbsp;</h3>



<p>C corporation shareholders/owners enjoy limited liability protection, which protects their personal assets. This means they aren't personally responsible for their C corporation's liabilities and debt.&nbsp;</p>



<h3 class="wp-block-heading">Unlimited number of shareholders</h3>



<p>Unlike S corporations, which must limit their shareholders, C corporations can offer shares to an unlimited number of shareholders, including both private individuals and public entities.&nbsp;</p>



<h3 class="wp-block-heading">Perpetual existence</h3>



<p>C corporations feature perpetual existence, meaning they will continue to exist even after ownership departs.&nbsp;</p>



<h3 class="wp-block-heading">Increased credibility&nbsp;</h3>



<p>C corporations often have greater credibility than other entities in the eyes of third parties, including suppliers, vendors, and potential investors.&nbsp;&nbsp;</p>



<h2 class="wp-block-heading">Potential downsides&nbsp;</h2>



<p>If your business would benefit from forming as a C corporation, there aren't many downsides. However, two issues often give prospective C corporation ownership pause.&nbsp;</p>



<ul>
<li>C corp double taxation. C corporations are subject to double taxation at the corporate and individual levels. This differs from other business entity types, where ownership is only taxed on the individual level.</li>
</ul>



<ul>
<li>Complex. It is much more challenging to run a C corporation than other entities. There are many more requirements to comply with as a C corporation, while entities such as sole proprietorships or single-owner LLCs are less formal.&nbsp;&nbsp;</li>
</ul>



<h2 class="wp-block-heading">Role of Shareholders, Directors, and Officers in a C Corporation</h2>



<p>While these roles are unique in certain ways, they might also intersect. For instance, a person appointed to a director role might also own shares in the corporation.<br><br>Shareholders are the owners of the corporation and appoint directors. Directors are typically appointed to oversee management and will appoint officers. Officers are usually involved in the day-to-day happenings of the corporation.&nbsp;</p>



<h2 class="wp-block-heading">Partner with C Corporation Experts to ensure a path to success</h2>



<p>Complying with the various C corp requirements can be difficult. That's why so many small business owners and entrepreneurs trust 1-800Accountant, America's leading virtual accounting firm for small businesses, for their corporate needs.<br><br>Whether it's <a class="link" href="https://1800accountant.com/services/entity-formation">C corp formation</a>, <a class="link" href="https://1800accountant.com/services/business-tax-advisory">tax advisory</a>, or any of our professional accounting services, we have the affordable solution you need to help your C corporation stay compliant. Schedule a quick consultation – usually 30 minutes or less – to learn how we can help.&nbsp;</p>

The legal entity type you select will have significant tax implications for you and your small business. That&#8217;s why it&#8217;s so important to understand the strengths and weaknesses of each entity before making a selection. In this blog, we&#8217;ll tell you everything you need to know about C corporations, including what it is, the steps [&hellip;]

everything-you-need-to-know-about-a-c-corporation_blog-header

Everything You Need to Know About Your C Corporation

<p>You may be wondering: "Why create a chart of accounts?"<br><br>Even a basic chart of accounts is an excellent way to view your <a class="link" href="https://1800accountant.com/blog/bookkeeping-101-keep-good-financial-records">business's finances</a>. The purpose of a chart of accounts is to aid in decision-making for your small business by tracking transactions and organizing the results in an easily digestible format.<br><br>In this blog, we'll go into detail about what a chart of accounts is, how to create one for your business, critical real-world examples, and other helpful information that provides you with a comprehensive picture. </p>



<h2 class="wp-block-heading">Understanding the small business chart of accounts</h2>



<h3 class="wp-block-heading">What is a chart of accounts?</h3>



<p>Your chart of accounts allows you to view multiple <a class="link" href="https://1800accountant.com/blog/common-bookkeeping-terms">financial transactions</a> along with a description, identification number, and name of each. You're able to view the chart of accounts categories within a general ledger, which includes:&nbsp;</p>



<ul>
<li>Assets</li>



<li>Liabilities</li>



<li>Shareholder’s equity</li>



<li>Revenue</li>



<li>Expenses</li>
</ul>



<h3 class="wp-block-heading">Main chart of accounts components</h3>



<p><strong>Assets</strong><br>What your business owns are called assets, and you'll track two types: current and noncurrent. The assets section in your chart of accounts will begin with the account number "1000."<br><br>Current assets include assets your business will use in the next year, such as:</p>



<ul>
<li>Accounts receivable&nbsp;</li>



<li>Cash</li>



<li>Inventory</li>



<li>Prepaid expenses</li>
</ul>



<p>Noncurrent assets or long-term assets are assets that will be used for longer than one year, including the following: </p>



<ul>
<li>Accumulated depreciation</li>



<li>Buildings</li>



<li>Furniture and fixtures</li>



<li>Leases&nbsp;</li>



<li>Plant and equipment</li>



<li>Vehicles</li>
</ul>



<p><strong>Liabilities</strong><br>Your business owes liabilities. This section begins with the account number "2000," and like your assets, you'll track both current and noncurrent liabilities.</p>



<p>Current liabilities, or short-term liabilities, include liabilities that your business will use next year. Current liabilities include:&nbsp;</p>



<ul>
<li>Loans and mortgages payable</li>



<li>Payroll taxes payable</li>



<li>Sales taxes payable</li>
</ul>



<p>Noncurrent liabilities or long-term liabilities are liabilities that will be used for longer than one year, including:&nbsp;</p>



<ul>
<li>Loans payable</li>



<li>Mortgages payable</li>
</ul>



<p><strong>Equity</strong><br>Equity refers to shareholder equity in your chart of accounts and will begin with the account number "3000." Common examples of equity found in your chart of accounts include: </p>



<ul>
<li>Common stock</li>



<li>Preferred stock</li>



<li>Retained earnings</li>
</ul>



<p><strong>Revenue</strong><br>Revenue is the income your business makes, primarily or secondarily. There are two revenue types that begin with the account number "4000" in your chart of accounts: operating revenue and non-operating revenue.</p>



<p>Operating income is the income that your business primarily makes. Non-operating revenue is revenue that your company makes indirectly. This form of revenue can come from:&nbsp;</p>



<ul>
<li>Asset write-downs</li>



<li>Dividend income&nbsp;</li>



<li>Foreign exchange gains or losses</li>



<li>Interest income</li>



<li>Profits or losses from investments</li>



<li>Rental income from property</li>
</ul>



<p><strong>Expenses</strong><br>There are two expense types: operating expenses and non-operating expenses, which will begin with the account number "5000."</p>



<p>Operating expenses are expenses that occur to cover operational costs. You may have expenses from the following:&nbsp;</p>



<ul>
<li>Equipment&nbsp;</li>



<li>Insurance</li>



<li>Inventory costs&nbsp;</li>



<li>Marketing</li>



<li>Payroll</li>



<li>Step costs</li>
</ul>



<p>Non-operating expenses are expenses unrelated to business operations. These include:&nbsp;</p>



<ul>
<li>Amortization&nbsp;</li>



<li>Depreciation</li>



<li>Interest charges</li>
</ul>



<h3 class="wp-block-heading">Importance of structure and organization&nbsp;</h3>



<p>There are two critical areas where your chart of accounts is vital for your business.<br><br><strong>1) Structure</strong>. How your chart of accounts is structured allows you to view all of your business's financial transactions based on the general ledger. This allows you to search transactions swiftly.<br><br><strong>2) Organization</strong>. A second benefit to the organization of a chart of accounts is that you can use this information for investment opportunities. This lets prospective investors or shareholders determine your business's financial health via the financial information provided. </p>



<h2 class="wp-block-heading">Components of a chart of accounts</h2>



<p>The information you record in your chart of accounts provides the data necessary to create your business's financial statements. All of your accounts will appear in these statements, with the chart of accounts determining which statement they should appear in. If your chart of accounts is outdated or incorrectly structured or organized, your statements won't be correct, either.<br><br>The financial statements include the following:&nbsp;</p>



<ul>
<li><strong>Income Statement</strong>. Also known as a profit and loss statement, this statement focuses on your business's revenue and expenses.&nbsp;</li>



<li><strong>Cash Flow Statement</strong>. This statement records the total cash from various sources, including petty cash, and cash going out of your business in support of your operations.&nbsp;</li>



<li><strong>Balance Sheet</strong>. This sheet records your business's assets, liabilities, shareholder equity, and debt.&nbsp;</li>
</ul>



<h2 class="wp-block-heading">How to create a chart of accounts</h2>



<p>To set up your chart of accounts, you'll create three columns to help you categorize: an Account Name, Type of Account, and Description.</p>



<ul>
<li><strong>Account Name</strong>. You’ll list your account names in this column.&nbsp;</li>



<li><strong>Type of Account</strong>. This column, to the right of Account Name, will list the account that you’re adding. You can select from an asset, cost of goods sold, equity, expense, income, or liability.</li>



<li><strong>Description. </strong>The final column, to the Type of Account's right, describes the transaction that occurred.&nbsp;</li>
</ul>



<h2 class="wp-block-heading">Real-world examples of standard chart of accounts</h2>



<p>Medical practice chart of accounts (chart of accounts example 1)</p>



<figure class="wp-block-table"><table><tbody><tr><td><strong>Account Type</strong></td><td><strong>Account Code</strong></td><td><strong>Account Name</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>1010</strong></td><td><strong>Cash - Operating Account</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>1020</strong></td><td><strong>Cash - Savings Account</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>1030</strong></td><td><strong>Medical Supplies Inventory</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>2010</strong></td><td><strong>Medical Equipment</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>2020</strong></td><td><strong>Office Furniture</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>2030</strong></td><td><strong>Accumulated Depreciation - Equipment</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>2040</strong></td><td><strong>Accumulated Depreciation - Furniture</strong></td></tr><tr><td><strong>Liabilities</strong></td><td><strong>3010</strong></td><td><strong>Accounts Payable</strong></td></tr><tr><td><strong>Liabilities</strong></td><td><strong>3020</strong></td><td><strong>Payroll Liabilities</strong></td></tr><tr><td><strong>Liabilities</strong></td><td><strong>3030</strong></td><td><strong>Unearned Revenue</strong></td></tr><tr><td><strong>Equity</strong></td><td><strong>4010</strong></td><td><strong>Owner's Capital</strong></td></tr><tr><td><strong>Equity</strong></td><td><strong>4020</strong></td><td><strong>Retained Earnings</strong></td></tr><tr><td><strong>Revenue</strong></td><td><strong>5010</strong></td><td><strong>Patient Service Revenue</strong></td></tr><tr><td><strong>Revenue</strong></td><td><strong>5020</strong></td><td><strong>Miscellaneous Revenue</strong></td></tr><tr><td><strong>Cost of Goods Sold</strong></td><td><strong>6010</strong></td><td><strong>Medical Supplies Expense</strong></td></tr><tr><td><strong>Expenses</strong></td><td><strong>7010</strong></td><td><strong>Salaries &amp; Wages</strong></td></tr><tr><td><strong>Expenses</strong></td><td><strong>7020</strong></td><td><strong>Rent or Mortgage Expenses</strong></td></tr><tr><td><strong>Expenses</strong></td><td><strong>7030</strong></td><td><strong>Utilities</strong></td></tr></tbody></table></figure>



<p>Restaurant chart of accounts (chart of accounts example 2)</p>



<figure class="wp-block-table"><table><tbody><tr><td><strong>Account Type</strong></td><td><strong>Account Code</strong></td><td><strong>Account Name</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>1010</strong></td><td><strong>Beverage Supply Inventory</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>1020</strong></td><td><strong>Food Supply Inventory</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>1030</strong></td><td><strong>Prepaid Expenses</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>2010</strong></td><td><strong>Kitchen Equipment</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>2020</strong></td><td><strong>Dining Furniture</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>2030</strong></td><td><strong>Accumulated Depreciation - Kitchen Equipment</strong></td></tr><tr><td><strong>Assets</strong></td><td><strong>2040</strong></td><td><strong>Accumulated Depreciation - Dining Furniture</strong></td></tr><tr><td><strong>Liabilities</strong></td><td><strong>3010</strong></td><td><strong>Accounts Payable</strong></td></tr><tr><td><strong>Liabilities</strong></td><td><strong>3020</strong></td><td><strong>Payroll Liabilities</strong></td></tr><tr><td><strong>Liabilities</strong></td><td><strong>3030</strong></td><td><strong>Loans</strong></td></tr><tr><td><strong>Equity</strong></td><td><strong>4010</strong></td><td><strong>Owner's Capital</strong></td></tr><tr><td><strong>Equity</strong></td><td><strong>4020</strong></td><td><strong>Retained Earnings</strong></td></tr><tr><td><strong>Revenue</strong></td><td><strong>5010</strong></td><td><strong>Dining Revenue</strong></td></tr><tr><td><strong>Revenue</strong></td><td><strong>5020</strong></td><td><strong>Miscellaneous Revenue</strong></td></tr><tr><td><strong>Cost of Goods Sold</strong></td><td><strong>6010</strong></td><td><strong>Food, beverage, and employee Expense</strong></td></tr><tr><td><strong>Expenses</strong></td><td><strong>7010</strong></td><td><strong>Salaries &amp; Wages</strong></td></tr><tr><td><strong>Expenses</strong></td><td><strong>7020</strong></td><td><strong>Insurance</strong></td></tr><tr><td><strong>Expenses</strong></td><td><strong>7030</strong></td><td><strong>Depreciation Expense</strong></td></tr></tbody></table></figure>



<h2 class="wp-block-heading">Maintaining and updating a chart of accounts</h2>



<p>You will make adjustments to your chart of accounts as time goes on. But before you start, here are a couple of things to keep in mind.&nbsp;</p>



<ul>
<li>First, if you want to add an account to your chart of accounts, you should do so before it becomes a problem. While you can add transactions at any point in the year, you don’t want to delay adding transactions and their accompanying information. If you wait, then you may need to adjust other entries in related categories or subcategories, causing more issues.</li>
</ul>



<ul>
<li>Second, if you add an account, it is helpful to designate a name for it. The name most commonly used for newly added accounts is Miscellaneous Expenses. You should use this name whether you have one uncategorized transaction out of the year or multiple uncategorized transactions.&nbsp;</li>
</ul>



<ul>
<li>Third, if you add a Miscellaneous Expense to your account, provide a more detailed explanation than usual. Even though you’ve already added a description, you want to explain how and why this expense differs. As you add accounts to this category, make adjustments as needed.</li>
</ul>



<ul>
<li>Finally, and most importantly, you shouldn’t delete any accounts until the end of the year. If you delete the accounts earlier, that can create additional disruptions.&nbsp;</li>
</ul>



<h2 class="wp-block-heading">Partner with professionals who understand the chart of accounts</h2>



<p>Financial data and financial reporting are an important addition to any small business and can be harvested from many areas, including the following: </p>



<ul>
<li>Expense accounts</li>



<li>Asset accounts</li>



<li>Balance sheet accounts</li>



<li>Equity accounts</li>



<li>Financial accounts</li>



<li>Liability accounts</li>



<li>Revenue accounts</li>



<li>Sub-accounts</li>
</ul>



<p>A chart of accounts isn't required, but the valuable insights it provides can contribute to critical data-backed decision-making for your small business. However, creating and managing a chart of accounts is often too much for many busy owners and entrepreneurs to handle, which is why so many of them trust 1-800Accountant, America's leading virtual accounting firm for small businesses, <a class="link" href="https://1800accountant.com/blog/outsourced-bookkeeping-guide">for their needs</a>.</p>



<p>Whether it's <a class="link" href="https://1800accountant.com/services/business-tax-advisory">tax advisory</a>, <a class="link" href="https://1800accountant.com/services/bookkeeping">bookkeeping for the chart of accounts</a>, robust <a class="link" href="https://1800accountant.com/blog/catch-up-bookkeeping">educational content</a>, or any of our professional accounting services, we have the solution you need at a price that fits within your budget. Schedule a quick consultation – usually 30 minutes or less – to learn how we can help.&nbsp;</p>

You may be wondering: &#8220;Why create a chart of accounts?&#8221; Even a basic chart of accounts is an excellent way to view your business&#8217;s finances. The purpose of a chart of accounts is to aid in decision-making for your small business by tracking transactions and organizing the results in an easily digestible format. In this [&hellip;]

chart-of-accounts-a-comprehensive-guide_blog-header

Chart of Accounts: A Comprehensive Guide with Real-World Examples

<p>Taxes can be a headache, especially when you’re unsure of the technical rules.&nbsp;</p>



<p>Section 179 allows taxpayers to take an immediate <a class="link" href="https://1800accountant.com/blog/tax-deductions-work">tax deduction</a> for property placed in service during the year instead of deducting the cost over several years.&nbsp;</p>



<p>This article will explain the Section 179 rules and help you understand how to take advantage of the tax deduction.&nbsp;</p>



<p>You’ll also get a step-by-step guide for compliance with Section 179 tax reporting requirements.&nbsp;</p>



<h2 class="wp-block-heading">What Is Section 179?</h2>



<p>Section 179, described in <a class="link" href="https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section179&amp;num=0&amp;edition=prelim" target="_blank" rel="noreferrer noopener">Internal Revenue Code Section 179</a>, is a tax depreciation deduction. Taxpayers can take the Section 179 tax deduction for business equipment purchases. The rules encourage business growth by incentivizing equipment purchases.</p>



<p>Eligible property should meet IRS requirements, which we’ll discuss next.&nbsp;</p>



<h2 class="wp-block-heading">Who Is Eligible for Section 179?</h2>



<p>The following business types may take the Section 179 tax deduction:&nbsp;</p>



<ul>
<li>C corporations<br></li>



<li>Partnerships<br></li>



<li>S corporations<br></li>



<li>Sole proprietorships&nbsp;</li>
</ul>



<p>Pass-through entities should report the Section 179 expense and pass the tax deduction on to the business owners. Trusts and estates are not eligible for the Section 179 deduction.&nbsp;</p>



<p><a class="link" href="https://1800accountant.com/services/small-business-taxes">Consult your tax professionals</a> to discuss which tax deductions your business can take.</p>



<h3 class="wp-block-heading">What Property Is Eligible for the Section 179 Tax Deduction?</h3>



<p>The IRS allows a deduction for various types of business property, including the following:&nbsp;</p>



<ul>
<li>Buildings<br></li>



<li>Machinery and equipment<br></li>



<li>Furniture<br></li>



<li>Vehicles<br></li>



<li>Off-the-shelf computer software<br></li>



<li>Patents and copyrights (restrictions apply)&nbsp;</li>
</ul>



<p>The following property is <em>not</em> eligible:&nbsp;</p>



<ul>
<li>Land<br></li>



<li>Section 197 intangibles<br></li>



<li>Custom software</li>
</ul>



<h2 class="wp-block-heading">How Does Section 179 Work?</h2>



<p>Your business may take a Section 179 deduction on its tax return for the same year it purchases eligible property.&nbsp;</p>



<p>Your business must actively use the property at least 50% of the time. For example, a new espresso machine for your coffee shop is likely eligible, while a new espresso machine for your home kitchen is not.&nbsp;</p>



<p>Your business is not required to deduct the entire cost of the property – you may choose to take a portion (or none) of the available deduction.&nbsp;</p>



<p>Why is Section 179 beneficial?&nbsp;</p>



<p>Traditional depreciation rules require taxpayers to deduct property costs over several years. In contrast, Section 179 allows taxpayers to deduct the cost of the property right away. Your business can benefit by aligning tax deductions (and lower taxable income) with equipment purchases.</p>



<h3 class="wp-block-heading">2023 Section 179 Limits</h3>



<p>The <a class="link" href="https://www.irs.gov/publications/p946#en_US_2022_publink1000107413" target="_blank" rel="noreferrer noopener">IRS imposes annual limitations</a> on each taxpayer’s Section 179 deduction. Consider the following rules to determine your Section 179 tax deduction for the year.</p>



<h4 class="wp-block-heading">The Dollar Limit and “Phase-Out” Threshold</h4>



<p>The tax year 2023 Section 179 dollar limit, or maximum deduction, is $1,160,000. <a class="link" href="https://1800accountant.com/blog/car-small-business-tax-deduction">Sport utility vehicles</a> have a $28,900 deduction limit.</p>



<p>The Section 179 dollar limit phases out for taxpayers who purchase eligible property totaling more than $2,890,000. Purchases above the threshold reduce the maximum deduction. The Section 179 dollar limit decreases to zero once equipment purchases total $4,050,000.</p>



<p>For example, imagine your business bought new office equipment totaling $3,500,000 in 2023. The maximum Section 179 deduction would be $550,000:&nbsp;</p>



<figure class="wp-block-table"><table><tbody><tr><td>Total eligible property purchased in 2023</td><td>$3,500,000</td></tr><tr><td>Less: 2023 IRS phase-out threshold</td><td>($2,890,000)</td></tr><tr><td>Excess of eligible purchases in 2023</td><td>$610,000</td></tr><tr><td></td><td></td></tr><tr><td>2023 IRS Section 179 dollar limit&nbsp;</td><td>$1,160,000</td></tr><tr><td>Less: Excess of eligible purchases in 2023</td><td>($610,000)</td></tr><tr><td>2023 Reduced Section 179 dollar limit</td><td>$550,000</td></tr></tbody></table></figure>



<h4 class="wp-block-heading">The Section 179 Business Income Limitation</h4>



<p>After applying the Section 179 dollar limit, each taxpayer can take a Section 179 deduction to the extent of their taxable income.&nbsp;</p>



<p>If your taxable income limit prevents you from taking your entire Section 179 deduction, the IRS offers relief: You can carry the excess to the following tax year.</p>



<p>Continuing the above example, imagine your 2023 business taxable income was $400,000 without the Section 179 tax deduction. Even though your Section 179 dollar limit was $550,000, your 2023 business income limitation would be $400,000.&nbsp;</p>



<p>However, your business could carry forward the remaining $150,000.&nbsp;</p>



<p>Want to know how the phase-out threshold and business income limitation apply to your business? <a class="link" href="https://1800accountant.com/services/small-business-taxes">Check with professionals for help with tax calculations</a>.&nbsp;</p>



<h3 class="wp-block-heading">Bonus Depreciation and How It Works with Section 179</h3>



<p>Bonus depreciation, governed by <a class="link" href="https://www.law.cornell.edu/uscode/text/26/168" target="_blank" rel="noreferrer noopener">Internal Revenue Code Section 168(k)</a>, follows separate, complex rules. Generally, taxpayers may deduct 80% of the cost of eligible property placed in service during 2023.</p>



<p>How does bonus depreciation work with Section 179?&nbsp;</p>



<p>Your business should deduct Section 179 depreciation first. After calculating your Section 179 tax deduction, determine whether your remaining property is eligible for bonus depreciation. Your bonus depreciation deduction represents 80% of the remaining property cost.&nbsp;</p>



<h2 class="wp-block-heading">How to Claim the Section 179 Deduction</h2>



<p>Follow our step-by-step guide to take advantage of your Section 179 tax deduction. We also recommend referring to the detailed instructions in <a class="link" href="https://www.irs.gov/publications/p946" target="_blank" rel="noreferrer noopener">IRS Publication 946</a>.</p>



<h3 class="wp-block-heading">Step 1: Determine Which Property Qualifies for Section 179&nbsp;</h3>



<p>Gather your equipment purchase records. Consider the property you placed in service during the year and determine your eligibility for the Section 179 deduction.&nbsp;</p>



<p>Remember, your business should actively use the property at least 50% of the time.&nbsp;</p>



<h3 class="wp-block-heading">Step 2: Figure Your Section 179 Dollar Limit</h3>



<p>Did you purchase less than $2,890,000 of eligible property in 2023? If so, you’re entitled to the entire Section 179 deduction, depending on your taxable income. Refer to the phase-out threshold if your purchases exceed the limit.&nbsp;</p>



<p>Follow the separate limitations that apply to sport utility vehicles.&nbsp;</p>



<h3 class="wp-block-heading">Step 3: Calculate Your Business Income Limitation</h3>



<p>Your Section 179 depreciation is limited to your taxable income without the deduction. Determine your taxable income to figure out the maximum deduction you can take.&nbsp;</p>



<h3 class="wp-block-heading">Step 4: Complete IRS Form 4562, Part I</h3>



<p><a class="link" href="https://www.irs.gov/pub/irs-pdf/f4562.pdf" target="_blank" rel="noreferrer noopener">IRS Form 4562</a> reports the depreciation expense deducted on your tax return. Fill out Form 4562, Part I, to elect the Section 179 tax deduction. Complete each line to compute your business deduction. </p>



<p>Refer to the <a class="link" href="https://www.irs.gov/instructions/i4562" target="_blank" rel="noreferrer noopener">Form 4562 instructions</a> as you complete the form. </p>



<p>Need help? <a class="link" href="https://1800accountant.com/services/small-business-taxes">Consult tax professionals</a> who can guide you through Section 179 calculations and compliance.&nbsp;</p>



<h2 class="wp-block-heading">Impact of Section 179 on Business Planning</h2>



<p>The Section 179 tax deduction can be valuable when planning business purchases.&nbsp;</p>



<p>If your business is preparing for large equipment purchases, you might wish to delay some purchases until the following tax year. You may be able to ensure greater deductions by keeping your purchases below the phase-out threshold each year.&nbsp;</p>



<p>Additionally, the Section 179 deduction might not benefit a taxpayer with a low business income limitation. The taxpayer could forego the Section 179 deduction and instead follow traditional depreciation rules.&nbsp;</p>



<p>Is your business planning an acquisition or large property purchases? Review our <a class="link" href="https://1800accountant.com/blog/small-business-tax-deductions-checklist">tax deduction checklist</a> and <a class="link" href="https://1800accountant.com/services/small-business-taxes">consult with professionals</a> to maximize your Section 179 deduction.&nbsp;</p>



<h2 class="wp-block-heading">Partner with Business Tax Professionals</h2>



<p>Want to take advantage of the Section 179 tax deduction?&nbsp;</p>



<p>Follow the steps in this article as you calculate your deduction and complete your tax return. <a class="link" href="https://1800accountant.com/services/small-business-taxes">Don’t forget to consult small business tax professionals with questions about tricky rules</a>.&nbsp;</p>



<p>Partner with 1-800Accountant tax professionals, who can help you understand how the rules apply to your business. You shouldn’t have to work through the Section 179 nuances alone.&nbsp;</p>



<p>1-800Accountant can help you calculate depreciation and maximize your deductions.&nbsp;</p>

Taxes can be a headache, especially when you’re unsure of the technical rules.&nbsp; Section 179 allows taxpayers to take an immediate tax deduction for property placed in service during the year instead of deducting the cost over several years.&nbsp; This article will explain the Section 179 rules and help you understand how to take advantage [&hellip;]

section-179-everything-to-know_blog-header

Section 179: Everything You Need to Know

<p>Independent contractors, freelancers, sole proprietors, self-employed individuals, and gig workers.</p>



<p>No matter what you call it, earning an income from something other than a full-time job is booming in the United States. According to <a class="link" href="https://www.statista.com/statistics/921593/gig-economy-number-of-freelancers-us/" target="_blank" rel="noreferrer noopener">statistia.com</a>, 73.3 million Americans call themselves freelancers, up from 57.3 million in 2017.</p>



<p>While freelancing offers significant benefits not available for full-time employees, such as&nbsp; greater schedule flexibility, working for yourself also comes with new responsibilities. One of the most eye-opening responsibilities for new (and current) freelancers is being completely responsible for your tax situation.</p>



<p>The first place you should start when trying to understand taxes for independent contractors, freelancers, and gig workers is learning about the tax forms you'll need, including Internal Revenue Service (IRS) Form 1099-NEC.</p>



<h2 class="wp-block-heading">What is a 1099-NEC Form?</h2>



<p>If you work as a contractor or freelancer, you’ll likely receive a 1099-NEC form come tax time. This 1099-NEC form shows the total amount of money you received from this business in the 2023 tax year.</p>



<p>Form 1099-NEC is one of three different types of 1099 tax forms you’re likely to see as a contractor or freelancer:</p>



<ul>
<li><strong>IRS Form 1099-NEC</strong></li>
</ul>



<p>NEC is an acronym for “nonemployee compensation,” which is exactly what it sounds like. If you receive more than $600 in compensation from a business but aren’t an employee, you’ll receive a 1099-NEC showing how much you made during that calendar year.</p>



<ul>
<li><strong>IRS Form 1099-MISC</strong></li>
</ul>



<p>MISC stands for “miscellaneous.” Think of a <a class="link" href="https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/what-is-the-irs-form-1099-nec-and-form-1099-misc.aspx" target="_blank" rel="noreferrer noopener">1099-MISC</a> as a hodgepodge of all the other types of income you could receive from a business or an organization: rental income, prizes or awards, medical or health care payments, crop insurance proceeds, and certain legal proceeds such as settlements are all reported on a 1099-MISC. If you receive over $600 in any of these miscellaneous categories, you should receive a 1099-MISC.</p>



<ul>
<li><strong>IRS Form 1099-K</strong></li>
</ul>



<p>A 1099-K shows the payments you receive from third-party payment platforms such as PayPal, Venmo, and credit card companies. Prior to 2023, you would only receive a 1099-K if you were paid more than $20,000 AND had a total of 200 or more transactions from one of the payment processors. Starting this year, this $20,000 threshold has been lowered to $600, while the transaction requirement has been eliminated. So, if you accept any form of electronic payment, there’s a good chance you’ll receive at least one 1099-K when it comes time to file your return for the 2023 tax year.</p>



<p><em>A reminder about the $600 threshold:</em> Just because you don’t receive a Form 1099-NEC doesn’t mean you don’t have to include this income on your federal income tax return! Blank forms may be found on the IRS website.</p>



<p>You’re required to report ALL income you receive, from whatever source derived, on your tax return.</p>



<h2 class="wp-block-heading">1099-NEC form: Background</h2>



<p>As mentioned in this article’s introduction, you’re now responsible for your entire tax universe as a freelancer, Form 1099-NEC included. But what does this exactly mean?</p>



<p>To answer this question, let’s start by reviewing the tax situation for a full-time or part-time employee, and <a class="link" href="https://1800accountant.com/blog/1099-vs-w2">then we’ll compare it to the tax situation for a freelancer</a>.</p>



<h3 class="wp-block-heading"><strong>Tax Situation for an Employee</strong></h3>



<p>An employee never has to make a payment to the IRS to pay taxes.</p>



<p>Each time an employee receives a paycheck, the employer withholds a certain amount of money representing the income tax, Social Security tax, Medicare tax, and state &amp; local taxes (if applicable) for that employee.</p>



<p>Having withheld the employee’s taxes from their paycheck, the employer - not the employee - sends this money to the IRS on behalf of the employee.</p>



<h3 class="wp-block-heading"><strong>Filing a tax return for an employee</strong></h3>



<p>Every January, an employee receives a Form W-2 from their employer showing the total amount of all the paychecks received during the previous year. The employee fills out their tax return using information from their Form W-2 and other tax documents.</p>



<p>After filing their tax return, an employee - in theory - shouldn’t owe the IRS any additional money, nor should they receive a refund. The amount of money withheld from the employee’s paycheck should be equal - or pretty close - to the actual amount of taxes owed for that year.</p>



<p>Now, let’s compare what an employee goes through with their taxes to what a freelancer must deal with.</p>



<h2 class="wp-block-heading">1099-NEC form: Tax Situation for a Freelancer</h2>



<p>There are many moving parts to a freelancer’s tax situation. Here are the most important areas you should know about:</p>



<h3 class="wp-block-heading"><strong>Estimated tax payments</strong></h3>



<p>A freelancer must calculate the estimated tax owed to the IRS four times per year. The filing deadline may vary from year to year. Here are the due dates for these estimated tax payments:</p>



<ul>
<li><strong>April 15 -</strong> Due date to pay taxes on taxable income earned in January, February and March</li>



<li><strong>June 15 -</strong> Payment due date for April and May estimated taxes</li>



<li><strong>September 15 -</strong> Payment due date for June, July, and August estimated taxes</li>



<li><strong>January 15 -</strong> Payment due date for September, October, November, and December estimated taxes</li>



<li><strong><em>NOTE:</em></strong><em> If a due date falls on a weekend or a holiday, your payment is considered on time if it is made no later than the next business day.</em></li>
</ul>



<h3 class="wp-block-heading"><strong>Common types of taxes paid</strong></h3>



<p>The estimated tax payments a freelance taxpayer must make cover four main types of taxes:</p>



<ul>
<li><strong>Income tax.</strong> An income tax of up to 37% is due on your taxable profit.</li>



<li><strong>Social Security tax.</strong> A tax of 12.4% is due on your first $160,200 of taxable profit in 2023.</li>



<li><strong>Medicare tax.</strong> A tax of 2.9% is due on all your taxable profits.</li>



<li><strong>State and local taxes.</strong> Don’t forget about state and local taxes, if applicable. Many states follow the federal estimated tax payment due dates, but do double-check to confirm your specific payment deadlines.</li>
</ul>



<h3 class="wp-block-heading"><strong>Other types of taxes</strong></h3>



<p>If your income is high enough, you’ll owe an additional 0.9% Medicare surtax and a 3.8% tax on certain investment income. If you sell an asset at a gain, you’ll owe a capital gains tax of up to 25%.<br><br>Payments may be made in person, by mail, or electronically.</p>



<h2 class="wp-block-heading">How a freelancer can stay out of tax trouble</h2>



<p>With so many types of taxes and deadlines to meet, <a class="link" href="https://1800accountant.com/blog/5-tax-issues-that-cause-irs-trouble-for-1099-workers">it may seem a bit overwhelming</a> to understand your responsibilities as a taxpayer. If you follow these 3 tips, though, you’ll be in great shape.</p>



<ol>
<li><strong>Set aside money every week to pay taxes.</strong> Hopefully, you budget for everything else you spend on…taxes should be no different. Consider setting aside a flat percentage of every payment you receive, for example, 20% or 30%, to cover all the taxes you must pay.</li>



<li><strong>Know your deadlines.</strong> Now that you’re setting aside money on a regular basis to pay your taxes, make sure you don’t miss the payment deadlines. Consider putting your tax payment due dates on your calendar for the next 12 months. If you’re late with a payment, you may be required to pay penalties and interest in addition to the tax you owe.</li>



<li><strong>Ask for help.</strong> Remember that you’re never alone if keeping up with your taxes starts to become overwhelming. Asking for help is just an email or phone call away.</li>
</ol>



<h2 class="wp-block-heading">Work With the Small Business CPA Experts to File Form 1099-NEC</h2>



<p>Whether you need to fill out and file Form 1099-NEC, file taxes, obtain an EIN (your business's taxpayer identification number), or prepare a tax return, the CPA experts at 1-800Accountant, America's leading virtual accounting firm for small businesses, can help.<br><br>We offer services with affordable pricing for most independent contractors, freelancers, and all other types of gig and self-employed workers. Schedule a short consultation to learn how we can help with your accounting and tax needs so you can focus on your work!</p>

Independent contractors, freelancers, sole proprietors, self-employed individuals, and gig workers. No matter what you call it, earning an income from something other than a full-time job is booming in the United States. According to statistia.com, 73.3 million Americans call themselves freelancers, up from 57.3 million in 2017. While freelancing offers significant benefits not available for [&hellip;]

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Freelancing and Form 1099-NEC: Everything You Need to Know

<p>When you’re ready to incorporate your small business, you’ll need to choose whether to form an S corp or a C corp.&nbsp;</p><p>Is S corporation or C corporation the best business structure for your company? Each <a class="link" href="https://1800accountant.com/blog/6-tricks-to-choosing-the-best-entity-for-your-small-business">entity type</a> has unique benefits, and the S corp vs. C corp decision can have complex implications. We’ll help you understand each structure’s characteristics.&nbsp;&nbsp;</p><p>This article will compare the S corp vs. C corp business structures. You’ll learn the key differences and implications of choosing the best entity type for your business.&nbsp;</p><h2 class="wp-block-heading">Understanding Corporate Structures</h2><p>Before learning the differences between S corp and C corp, you should understand the basics of the <a class="link" href="https://1800accountant.com/blog/what-is-a-c-corporation" target="_self">corporate structure</a>.&nbsp;</p><p>A corporation is a legal entity separate from its business owners, also known as shareholders.&nbsp;</p><p>One significant benefit of the corporate structure? Corporations offer limited liability protection, which means shareholders cannot be held responsible for corporate debts or liabilities. Business owners gain protection from corporate claims.&nbsp;</p><p>To form a corporation, the business owner must file articles of incorporation with the secretary of state.&nbsp;</p><p>Incorporation documents establish a registered agent, adopt bylaws, and select the board of directors. After incorporation, the company should hold annual board meetings.</p><p>Every corporation must file annual reports and <a class="link" href="https://1800accountant.com/blog/corporate-tax-rates">tax returns</a> to maintain compliance.&nbsp;</p><h3 class="wp-block-heading">What Is an S Corp?&nbsp;</h3><p>The <a class="link" href="https://1800accountant.com/blog/business-entity-s-corp">S corporation structure</a> follows Internal Revenue Code Subchapter S rules. After incorporation, owners can elect S corp status by filing <a class="link" href="https://www.irs.gov/pub/irs-pdf/f2553.pdf" target="_blank" rel="noreferrer noopener">IRS Form 2553</a> (we’ll explain more about the election later).</p><p>S corporations are pass-through entities for income tax purposes, which means S corps do not pay corporate income tax on their earnings. S corps must distribute income and deductions to their shareholders annually.&nbsp;</p><p>Each shareholder receives a prorated distribution determined by their ownership percentage. Shareholders pay tax on their share of business income and deductions.&nbsp;</p><p>Business owners find the S corp business structure attractive because pass-through entities avoid double taxation.&nbsp;</p><p>However, S corps must follow specific eligibility rules or risk terminating their S corporation election. <a class="link" href="https://www.irs.gov/pub/irs-prior/p589--1995.pdf" target="_blank" rel="noreferrer noopener">S corp requirements</a> include the following:&nbsp;</p><ul><li>S corps cannot have more than 100 shareholders or more than one class of stock.</li><li>Shareholders cannot be corporations, partnerships, or nonresident aliens.&nbsp;</li><li>S corps must generate less than 25% of their gross receipts from passive investment income.&nbsp;</li><li>S corporations must maintain records of each shareholder’s basis.&nbsp;</li></ul><p>S corp rules can be complex. We recommend <a class="link" href="https://1800accountant.com/services/entity-formation">consulting with accounting professionals</a> who specialize in entity formations.</p><h3 class="wp-block-heading">What Is a C Corp?</h3><p><a class="link" href="https://1800accountant.com/blog/form-c-corp">C corporations</a> follow Subchapter C of the Internal Revenue Code. All newly incorporated businesses default to the C corp structure.&nbsp;</p><p>C corporations can raise capital by adding unlimited shareholders, who contribute cash in exchange for business ownership. Shareholders can include individuals, partnerships, corporations, or other entities. Additionally, C Corps can issue multiple classes of stock.&nbsp;</p><p>C corps aren’t required to distribute earnings to shareholders, so C corp business owners aren’t guaranteed annual dividends. C corps may choose to reinvest earnings and fund business growth.</p><p>The major downside to the C corp structure? Double taxation.&nbsp;</p><p>Double taxation means the C corporation and its shareholders pay tax on the business’s income. First, the C corp pays tax on its net income. Second, the C corp’s shareholders pay tax on corporate dividends.&nbsp;</p><p>Regardless, many business owners find that the benefits of the C corp’s flexibility outweigh the cost of double taxation.</p><p>Need help determining whether the C corp business structure is right for your business? Our <a class="link" href="https://1800accountant.com/services/entity-formation">entity formation professionals</a> can support you.&nbsp;</p><h2 class="wp-block-heading">S Corp vs. C Corp: The Key Differences</h2><p>As we’ve covered, S corporations and C corporations share many characteristics. The following table summarizes the key differences between S corp and C corp structures.&nbsp;</p><figure><table><tbody><tr><td><strong>S Corporation vs. C Corporation</strong><strong> Differences</strong></td><td><strong>S Corporation</strong></td><td><strong>C Corporation</strong></td></tr><tr><td><strong>Formation</strong></td><td>File articles of incorporation with the secretary of state.&nbsp;File IRS Form 2553 to elect S corp status.</td><td>File articles of incorporation with the secretary of state.</td></tr><tr><td><strong>Federal Tax Treatment</strong></td><td>S corps avoid double taxation.&nbsp;</td><td>C corps are subject to double taxation.&nbsp;</td></tr><tr><td><strong>State Tax Treatment</strong></td><td>S corp treatment varies by state.</td><td>C corps file state income tax returns.</td></tr><tr><td><strong>Federal Income Tax Form</strong></td><td>IRS Form 1120S</td><td>IRS Form 1120</td></tr><tr><td><strong>Ownership</strong></td><td>Shareholders can include individuals, trusts, and estates.&nbsp;Shareholders cannot include corporations, partnerships, or nonresident aliens.</td><td>C corp shareholders can include any individual or entity type.</td></tr><tr><td><strong>Shareholder Restrictions</strong></td><td>S corps cannot have more than 100 shareholders.S corps cannot issue more than one class of stock.&nbsp;</td><td>C corps can have unlimited shareholders and multiple classes of stock.&nbsp;</td></tr><tr><td><strong>Profit Distribution</strong></td><td>S Corps must distribute income and deductions to each shareholder annually.&nbsp;</td><td>C corps may distribute dividends to shareholders and/or reinvest corporate earnings.</td></tr></tbody></table></figure><h2 class="wp-block-heading">Tax Implications of Choosing S Corp vs. C Corp</h2><p>Let’s consider a (simplified) example illustrating S corporation vs. C corporation tax impacts.&nbsp;</p><p>Compare two corporations: QRS Company is an S corp, and ABC Company is a C corp. The companies share the following facts:&nbsp;</p><ul><li>Each corporation has two owners, and each owner holds 50% ownership.<br /></li><li>During 2023, the corporations each earned $1,000,000 and reported taxable income of $500,000.<br /></li><li>Each shareholder was subject to a combined federal and state income tax rate of 40% on corporate distributions.&nbsp;</li></ul><h3 class="wp-block-heading">S Corp Tax Implications Example</h3><p>QRS Company met all S corp requirements and did not pay federal or state income tax.&nbsp;</p><p>QRS Company distributed all profits to its shareholders, so each owner received $250,000. Each owner paid taxes of $100,000 on their distributions.</p><p>The shareholders each kept $150,000 after taxes.&nbsp;</p><h3 class="wp-block-heading">C Corp Tax Implications Example&nbsp;</h3><p>ABC Company paid $105,000 of federal income tax at a <a class="link" href="https://1800accountant.com/blog/corporate-tax-rates">21% tax rate</a>. Assuming a 7% state income tax rate, ABC Company paid $35,000 of state income tax.&nbsp;</p><p>The company distributed its after-tax income of $360,000 as dividends, so each shareholder received $180,000. Each owner paid $72,000 of taxes on dividends.&nbsp;&nbsp;</p><p>The shareholders each kept $60,000 after taxes.&nbsp;</p><h3 class="wp-block-heading">S Corp vs. C Corp: Summary of Tax Implications&nbsp;</h3><p>The following table compares the above example’s S corp vs. C corp tax implications.&nbsp;</p><figure><table><tbody><tr><td><strong>Corporate Tax Implications</strong></td><td><strong>S Corp</strong></td><td><strong>C Corp</strong></td></tr><tr><td>Taxable income</td><td>$500,000</td><td>$500,000</td></tr><tr><td>Federal income tax&nbsp;</td><td>$0</td><td>$105,000</td></tr><tr><td>State income tax&nbsp;</td><td>$0</td><td>$35,000</td></tr><tr><td>Dividend distributions (total)</td><td>$500,000</td><td>$360,000</td></tr><tr><td></td><td></td><td></td></tr><tr><td><strong>Shareholder Tax Implications (per owner)</strong></td><td><strong>S Corp</strong></td><td><strong>C Corp</strong></td></tr><tr><td>Distributions to each owner</td><td>$250,000</td><td>$180,000</td></tr><tr><td>Federal and state income taxes (40% total)</td><td>$100,000</td><td>$72,000</td></tr><tr><td>After-tax income</td><td>$150,000</td><td>$108,000</td></tr><tr><td></td><td></td><td></td></tr><tr><td><strong>Total Taxes Paid</strong></td><td><strong>S Corp</strong></td><td><strong>C Corp</strong></td></tr><tr><td>Corporate taxes paid</td><td>$0</td><td>$140,000</td></tr><tr><td>Shareholder taxes paid (total for two owners)</td><td>$200,000</td><td>$144,000</td></tr><tr><td>Total taxes paid</td><td>$200,000</td><td>$284,000</td></tr></tbody></table></figure><p>As you can see, the S corp and its shareholders enjoyed a lower total tax bill because S corps aren’t subject to double taxation. Further, the S corp shareholders kept more after-tax income than the C corp shareholders.&nbsp;</p><p>The above example illustrates potential tax implications with a simplified fact pattern, but your S corporation vs. C corporation decision should include non-tax considerations.&nbsp;</p><p>If you’re interested in S corp status for your company, we recommend <a class="link" href="https://1800accountant.com/services/small-business-taxes">consulting tax professionals</a> who can help you consider the economic and administrative impacts.</p><h2 class="wp-block-heading">How to Change from C Corp to S Corp (Or vice Versa)</h2><h3 class="wp-block-heading">Filing an S Corp Election</h3><p>As we mentioned, C corp status is the default for new corporations. You can make an S corp election by filing <a class="link" href="https://www.irs.gov/pub/irs-pdf/f2553.pdf" target="_blank" rel="noreferrer noopener">IRS Form 2553</a>, Election by a Small Business Corporation.&nbsp;</p><p>Before you file, confirm your business meets the S corp requirements and prepare to provide information about each shareholder.&nbsp;</p><p>Review the <a class="link" href="https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations" target="_blank" rel="noreferrer noopener">S corporation eligibility criteria</a> and consult your tax professional if needed.&nbsp;</p><p>After you receive the IRS’s approval, you may need to notify state and local taxing agencies of your S corp status. We can help you determine which <a class="link" href="https://1800accountant.com/services/small-business-taxes">notifications and disclosures</a> you should file.&nbsp;</p><h3 class="wp-block-heading">Terminating an S Corp Election</h3><p>If you wish to end your S corp status and revert to a C corp, you can file a <a class="link" href="https://www.irs.gov/forms-pubs/revoking-a-subchapter-s-election" target="_blank" rel="noreferrer noopener">statement of revocation</a> with the IRS.</p><p>The statement should include your company’s information, shareholder details, and shareholder signatures. Be sure to review the full requirements and due dates before filing.&nbsp;</p><h2 class="wp-block-heading">Partner with Experts Who Understand What’s Best for Your Specific Situation</h2><p>How do you know whether the S corp vs. C corp business structure is best for your company?&nbsp;</p><p>Ultimately, your decision requires weighing each entity type’s benefits and drawbacks.&nbsp;</p><p>Consider your company’s plans for raising capital and your shareholders’ tolerance for double taxation. Think through the requirements of each corporate structure – do you have the bandwidth to maintain compliance?</p><p>Partner with 1-800Accountant for your <a class="link" href="https://1800accountant.com/services/entity-formation">business structure decision</a>. Our tax professionals can help you understand the complex implications for your business. We’ll support your entity formation and assist with your <a class="link" href="https://1800accountant.com/services/small-business-taxes">business compliance</a>.&nbsp;</p>

When you’re ready to incorporate your small business, you’ll need to choose whether to form an S corp or a C corp.&nbsp; Is S corporation or C corporation the best business structure for your company? Each entity type has unique benefits, and the S corp vs. C corp decision can have complex implications. We’ll help [&hellip;]

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S Corp vs. C Corp: Key Differences and How to Choose the Best Structure

<p>You’re finally ready to dive into your passion and create an organization for your cause.&nbsp;</p><p>Do you dream of supporting an underrepresented group, improving social welfare, or starting a sports club? After you decide on a goal, you should determine whether a non-profit or a not-for-profit organization is best for your mission.&nbsp;</p><p>You may wonder: What is the difference between non-profit vs. not-for-profit? This article will compare the two organization types. You’ll learn the key considerations and how to choose the organization type for your cause.</p><h2>Understanding Non-Profit Organizations</h2><h3>What Is a Non-Profit?&nbsp;</h3><p>A <a class="link" href="https://1800accountant.com/blog/non-profit-business-entities" target="_self">non-profit organization</a> is a business established for a specific public benefit.&nbsp;</p><p>Your non-profit’s purpose could be <a class="link" href="https://1800accountant.com/blog/4-types-of-non-profit-organizations">charitable, religious, or educational</a>. For example, many hospitals, churches, and public universities are non-profit organizations.&nbsp;</p><p>Despite its name, a non-profit organization may generate profits.&nbsp;</p><p>However, the entity’s earnings must funnel back to the non-profit to support its business activities. Non-profit organizations may not distribute profits to their members, directors, or officers.&nbsp;</p><p>The non-profit supports a social cause, so donations and business receipts should benefit the cause.</p><p>1-800Accountant can help you <a class="link" href="https://1800accountant.com/services/entity-formation">determine whether your organization is eligible</a> for non-profit status.&nbsp;</p><h3>Benefits of Non-Profit Organizations</h3><h4>Tax-Exempt Status</h4><p>Non-profit organizations enjoy several tax benefits.&nbsp;</p><p>Non-profits often qualify for <a class="link" href="https://www.irs.gov/charities-non-profits/applying-for-tax-exempt-status" target="_blank" rel="noreferrer noopener">exemption from federal income tax</a>, known as 501(c)(3) status. Non-profit organizations may also gain exemption from state and local taxes such as income, sales, and property tax. (If your non-profit hires employees, your organization is still responsible for payroll taxes.)</p><p>Further, donors can take tax deductions for charitable contributions to 501(c)(3) non-profit organizations. The IRS incentivizes donations to social causes by allowing tax benefits for people who support your mission.&nbsp;</p><p>To obtain 501(c)(3) status, the organization must form a legal entity separate from its owners. Eligible entity types include corporations, trusts, or associations.&nbsp;</p><p>Before applying for tax-exempt status, review the <a class="link" href="https://www.irs.gov/charities-non-profits/before-applying-for-tax-exempt-status" target="_blank" rel="noreferrer noopener">IRS application process</a> and <a class="link" href="https://www.irs.gov/pub/irs-pdf/p557.pdf" target="_blank" rel="noreferrer noopener">filing requirements</a>.&nbsp;</p><p>You can check your organization’s eligibility with the <a class="link" href="https://www.irs.gov/charities-non-profits/application-process" target="_blank" rel="noreferrer noopener">IRS tax-exemption eligibility questions</a>. The IRS also provides links to <a class="link" href="https://www.irs.gov/charities-non-profits/state-links" target="_blank" rel="noreferrer noopener">state websites containing resources</a> for tax-exempt organizations.&nbsp;</p><p>We know the terminology can get confusing. <a class="link" href="https://1800accountant.com/services/entity-formation">Let us support you</a> through your application process.&nbsp;</p><h4>Eligibility for Public and Private Grants</h4><p>Many public and private programs set aside annual funding to support charitable causes. Your non-profit can apply for grants to support your organizational purpose.&nbsp;</p><p>Many <a class="link" href="https://www.grants.gov/web/grants/learn-grants/grant-making-agencies.html" target="_blank" rel="noreferrer noopener">federal agencies</a> award grants to non-profit organizations. Eligible causes include educational access and heritage protection. You can <a class="link" href="https://www.grants.gov/web/grants/search-grants.html" target="_blank" rel="noreferrer noopener">search for available grants</a> and review the eligibility requirements.</p><h4>Lower Postal Rates</h4><p>Non-profit organizations may qualify for reduced postage prices from the US Postal Service. Educational, religious, and other organizations can <a class="link" href="https://faq.usps.com/s/article/What-is-Nonprofit-Mail" target="_blank" rel="noreferrer noopener">apply for non-profit postage rates</a>.&nbsp;</p><h4>Limited Liability Protection</h4><p>As mentioned, non-profits must organize as corporations, trusts, or associations. Each entity type is legally separate from its owners. Non-profit owners gain limited liability protection from potential claims against the organization.&nbsp;</p><h3>Disadvantages of Non-Profit Organizations</h3><h4>Public Scrutiny</h4><p>Non-profits must publicize their annual income statements and balance sheets.&nbsp;</p><p>Organizations can face scrutiny over amounts spent on salaries or administrative costs. The public could question how the spending directly supports the non-profit’s mission.&nbsp;&nbsp;</p><h4>Restrictions on Political Activities</h4><p>Non-profits can maintain social stances but cannot participate in certain political activities.&nbsp;</p><p>For example, non-profit organizations <a class="link" href="https://www.irs.gov/charities-non-profits/charitable-organizations/the-restriction-of-political-campaign-intervention-by-section-501c3-tax-exempt-organizations" target="_blank" rel="noreferrer noopener">cannot publicly support or oppose political candidates</a>. Non-profits must not donate to political parties or campaigns.&nbsp;&nbsp;&nbsp;</p><h4>Compliance Requirements</h4><p><a class="link" href="https://1800accountant.com/blog/nonprofit-taxes">Non-profit organizations must comply</a> with IRS annual reporting requirements. State and local authorities may impose additional compliance rules.&nbsp;</p><p>The <a class="link" href="https://www.irs.gov/charities-non-profits/annual-filing-and-forms" target="_blank" rel="noreferrer noopener">IRS requires the following</a> annual filings:</p><ul><li><strong>Form 990 Series informational returns</strong>, which include the organization’s annual financial statements.</li><li><strong>Employment tax forms</strong> report employment taxes for organizations with employees.</li><li><strong>Unrelated business income tax forms</strong> report revenue from activities unrelated to the non-profit purpose.&nbsp;</li></ul><p>Review your state and local tax authority websites for additional reporting requirements. We can help you <a class="link" href="https://1800accountant.com/services/small-business-taxes">maintain non-profit compliance</a>.</p><h3>Examples of Non-Profit Organizations</h3><p>Non-profit organizations may include churches, public schools, hospitals, research organizations, and museums.&nbsp;</p><p>You may be familiar with some of the following non-profit organizations:</p><ul><li>American Heart Association</li><li>American Red Cross</li><li>ASPCA</li><li>Goodwill Industries</li><li>Habitat for Humanity</li><li>United Way</li></ul><h2>Understanding Not-for-Profit Organizations</h2><h3>What Is a Not-for-Profit?&nbsp;</h3><p>A not-for-profit organization is a group that supports a specific mission.</p><p>Not-for-profit organizations aren’t required to benefit the public. For example, not-for-profits can include sports clubs, business affiliations, and social organizations.&nbsp;</p><p>Like non-profit organizations, not-for-profit organizations must not distribute profits to members, owners, or directors. Earnings must further the not-for-profit’s purpose.&nbsp;</p><h3>Benefits of Not-for-Profit Organizations</h3><h4>Flexibility in Organizational Goals</h4><p>Your not-for-profit organization can choose one of many activities to support, including recreation, business, and other community-based interests. The not-for-profit owners can choose a goal that aligns with their interests.&nbsp;</p><h4>Tax Advantages</h4><p>Like non-profits, not-for-profit organizations may be eligible for exemption from federal income tax.&nbsp;</p><p>Your not-for-profit may not be eligible for 501(c)(3) status, but the IRS provides income tax exemptions for <a class="link" href="https://www.irs.gov/charities-non-profits/other-tax-exempt-organizations" target="_blank" rel="noreferrer noopener">numerous organizations</a>. For example, certain business leagues may qualify for federal income tax exemption under Internal Revenue Code Section 501(c)(7).&nbsp;</p><p>We recommend reviewing the <a class="link" href="https://www.irs.gov/charities-non-profits/other-non-profits/requirements-for-exemption" target="_blank" rel="noreferrer noopener">list of requirements for tax exemption</a> to understand whether your not-for-profit should apply.&nbsp;</p><p>Consult <a class="link" href="https://1800accountant.com/services/small-business-taxes">small business professionals</a> who can walk you through the rules.&nbsp;</p><h4>Access to Grants and Other Funding Sources</h4><p>Not-for-profit organizations have many of the same funding opportunities as non-profit organizations.&nbsp;</p><p>Depending on your not-for-profit’s mission, your organization can apply for public and private grants to help keep the business running. Welfare organizations often qualify for more opportunities than social clubs and sports leagues.&nbsp;</p><h3>Disadvantages of Not-for-Profit Organizations</h3><h4>Public Scrutiny</h4><p>Like non-profits, not-for-profits can face public scrutiny over spending decisions. The public could question whether spending supports the not-for-profit’s goals.</p><h4>Limited Tax Deductibility for Donors</h4><p>Donors can only take tax deductions for charitable contributions to 501(c)(3) tax-exempt organizations. If your not-for-profit does not qualify for 501(c)(3) status, your donors cannot deduct their contributions to your organization.&nbsp;</p><p>For example, local employee associations may qualify for tax-exempt status under 501(c)(4) but could not offer tax deductibility for donors.&nbsp;</p><p>You can <a class="link" href="https://www.irs.gov/charities-non-profits/common-tax-law-restrictions-on-activities-of-exempt-organizations" target="_blank" rel="noreferrer noopener">review the restrictions on tax-exempt organizations</a> to understand the rules that apply to your not-for-profit.&nbsp;</p><h4>Compliance Requirements</h4><p>Like non-profit organizations, not-for-profits must file annual financial statements and informational returns.&nbsp;</p><p>Tax-exempt organizations should follow the <a class="link" href="https://www.irs.gov/charities-non-profits/annual-filing-and-forms" target="_blank" rel="noreferrer noopener">IRS annual reporting requirements</a> or risk losing tax advantages. Your not-for-profit should follow federal, state, and local compliance requirements.&nbsp;</p><p><a class="link" href="https://1800accountant.com/services/small-business-taxes">Consult with a tax professional</a> to understand which forms to submit.&nbsp;</p><h3>Examples of Not-for-Profit Organizations</h3><p>Not-for-profit organizations may include athletic leagues, business affiliations, and social welfare organizations.&nbsp;</p><p>The following not-for-profit examples illustrate a range of organizational purposes:&nbsp;</p><ul><li>American Federation of Teachers</li><li>American Legion</li><li>Greater Rochester Chamber of Commerce</li><li>Jules Weber Foundation</li><li>Laborers' International Union of North America</li><li>Noyac Golf Club</li></ul><h2>Non-Profit vs. Not-for-Profit Organizations: Key Similarities and Differences</h2><h3>Key Similarities</h3><p>Non-profit organizations and not-for-profit organizations share several characteristics.</p><p>Similarities between non-profit vs. not-for-profit include the following:&nbsp;</p><ul><li><strong>Use of profits</strong>: Both non-profit and not-for-profit organizations must not distribute profits to owners, members, or directors.</li><li><strong>Public scrutiny</strong>: Both organizations face potential financial scrutiny and should ensure spending aligns with their stated purpose.</li><li><strong>Eligibility for private and public funding</strong>: Non-profit and not-for-profit organizations can apply for grants and private funding.</li><li><strong>Stringent compliance requirements</strong>: Tax-exempt organizations must file annual informational returns and comply with compliance requirements.&nbsp;</li></ul><h3>Key Differences&nbsp;</h3><p>What are the differences between non-profits and not-for-profits? The following characteristics differ between non-profit vs. not-for-profit:&nbsp;</p><ul><li><strong>Organizational goals</strong>: While non-profit organizations must support the public benefit, not-for-profit organizations may exist to further their owners’ interests.</li><li><strong>Deductibility of charitable contributions:</strong> Donations to non-profit organizations are generally tax-deductible for the donor, but not all contributions to not-for-profit organizations qualify for deductibility.</li><li><strong>Tax-exempt status</strong>: 501(c)(3) tax-exempt status applies to specific activities, and many not-for-profit organizations cannot qualify for the same tax advantages that non-profits can obtain.&nbsp;</li></ul><h2>How to Choose: Non-Profit vs. Not-for-Profit</h2><p>Now you know the key characteristics of non-profits vs. not-for-profits. How do you choose the best organization type?</p><p>Consider your goals and imagine your mission’s beneficiaries. For example, think through the following key considerations:&nbsp;</p><ul><li><strong>Organizational purpose</strong>: Non-profit organizations must benefit the public, while not-for-profit organizations can align with owners’ interests.</li><li><strong>Fundraising needs</strong>: Non-profit organizations can solicit donations by providing tax deductions for donors. In contrast, not-for-profit organizations might not secure large private donations.</li><li><strong>Compliance requirements</strong>: Non-profit organizations typically follow stricter reporting requirements than not-for-profits, depending on their tax-exempt status.&nbsp;</li></ul><p>Don’t hesitate to consult <a class="link" href="https://1800accountant.com/services/entity-formation">entity formation professionals</a> for help with your situation.&nbsp;</p><h2>Partner with Small Business Experts to Understand Non-Profits</h2><p>Now you understand the non-profit vs. not-for-profit differences, and you’re one step closer to choosing the best organization to support your cause.&nbsp;</p><p>As you navigate the complexities of your decision, consider your goals, beneficiaries, and fundraising needs. Be sure to seek guidance from legal and accounting experts.&nbsp;</p><p>1-800Accountant professionals can help you understand the entity formation intricacies. <a class="link" href="https://1800accountant.com/services/entity-formation">Consult entity formation experts</a> for support in pursuing your mission.</p>

You’re finally ready to dive into your passion and create an organization for your cause.&nbsp; Do you dream of supporting an underrepresented group, improving social welfare, or starting a sports club? After you decide on a goal, you should determine whether a non-profit or a not-for-profit organization is best for your mission.&nbsp; You may wonder: [&hellip;]

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Non-Profit vs. Not-for-Profit: Key Considerations and How to Choose the Best Organization Type

Owning and operating a small business can be a gratifying experience. You&#8217;re your own boss, and you call the shots! But you also take on numerous responsibilities, including the calculation and timely submission of small business quarterly taxes. This ongoing responsibility may seem intimidating, but once addressed, it will help support your business&#8217;s long-term tax [&hellip;]

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Why Small Businesses Should Pay Attention to Quarterly Tax Payments

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