CHAPTER 30
Filing Tax Returns and Paying Taxes
- Income Tax Deadlines and Extensions
- Online Filing of Business Income Tax Returns
- Estimated Taxes
- Making Tax Payments
- Filing Other Business Returns
- Using Tax Professionals
It's one of the facts of a business owner's life to file returns and pay taxes. The filing deadlines and tax payment rules for businesses and their owners may be different from those for individuals. Making sure you comply with filing and payment requirements is essential for avoiding unnecessary penalties and interest.
For more information about the electronic federal tax payment system, see IRS Publication 966, Electronic Federal Tax Payment System.
Income Tax Deadlines and Extensions
The date by which your business return must be filed depends on your type of entity and tax year. The information in Table 30.1 applies for 2016 returns to businesses reporting on a calendar-year basis.
Table 30.1 Filing Deadlines
Type of Entity |
Income Tax Return |
Return Due Date |
Sole proprietorship |
Schedule C (or C-EZ) of Form 1040 |
April 15 |
Partnership |
Form 1065 |
March 15 |
Limited liability company |
Form 1065 |
March 15 |
S corporation |
Form 1120S |
March 15 |
C corporation |
Form 1120 |
April 15 |
Partnerships, limited liability companies, and S corporations must also furnish owners with a Schedule K-1 by the due date.
For corporations on a fiscal year ending other than June 30, the due date is 3½ months after the close of their fiscal year. For example, a C corporation on a fiscal year ending on July 31 has a filing deadline of November 15. For C corporations with a fiscal year ending June 30, the filing due date is September 15.
For all other entities on a fiscal year, the due date is 3½ months after the close of their fiscal year. For example, a limited liability company reporting on a fiscal year ending September 30 has a filing deadline of January 15 of the following year.
If any due date falls on a Saturday, Sunday, or legal holiday, the due date becomes the next business day. For example, the deadline for individuals to file their 2016 income tax return is April 18, 2017 (April 15 is on a Saturday).
Filing Methods
Small business owners can choose to file paper returns or file electronically; certain large entities must file electronically (explained later in this chapter). The filing method does not affect the filing deadline.
Filing Extensions
If, for any reason, you are unable to file on time, you can avoid penalties by requesting an automatic 6-month filing extension (5 months for partnership returns). The request must be made no later than the due date of the return (see Table 30.1). The form used to request the extension and the extended due date for 2016 returns depends on your type of entity, as shown in Table 30.2 (for calendar-year businesses). For fiscal year entities, the extended due date is 6 months after the filing deadline. However, a C corporation with a fiscal year ending June 30 has a 5-month extension through 2025; thereafter, it becomes 6 months.
Table 30.2 Filing Extensions for 2016 Returns
Form to Request |
||
Type of Entity |
Filing Extension |
Extended Due Date |
Sole proprietorship |
Form 4868 |
October 15 |
Partnership |
Form 7004 |
September 15 |
Limited liability company |
Form 7004 |
September 15 |
S corporation |
Form 7004 |
September 15 |
C corporation |
Form 7004 |
September 15* |
a*October 15 beginning after 2025.
There are no extensions available beyond the extended due date, regardless of the reasons involved; returns filed after the extended due date are usually subject to penalty. The only exception to the rule against having more time to file is a blanket extension granted by the IRS to taxpayers located in certain areas affected by extreme disasters. Find news about this on an IRS landing page entitled “Tax Relief in Disaster Situations” at www.irs.gov/uac/Tax-Relief-in-Disaster-Situations.
Late Filing Penalties
If you fail to file your return on time—by the due date or the extended due date if you obtain a filing extension—you will be subject to a late filing penalty. Late filing penalties, and how to get the IRS to waive them, are discussed in Appendix B.
Online Filing of Business Income Tax Returns
Today the vast majority of tax returns for individual business owners as well as their business entities are filed e-filed with the IRS and with state tax or revenue departments. While e-filing is not mandatory (other than for large corporations), there are compelling reasons to submit returns in this way:
Faster refunds. Those who are owed a refund can expect to receive it in about half the time that it would take had the return been filed the traditional way in paper form. With electronic filing of returns and direct deposit of refunds, you can receive a refund in as little as 7 days.
Accuracy. There is a less than 1% error rate with electronically filed returns (compared with a more-than-20% error rate for paper returns). This is because the IRS reviews the return before accepting it. The IRS acknowledges acceptance of a return within 48 hours of submission. This acknowledgment is your proof of filing and assurance that the IRS has your return information.
Convenience. You can use your personal computer to file your return 7 days a week, 24 hours a day. If you lack the software to e-file, you can use an authorized IRS e-file provider (for a modest fee). In 37 states, you can file your federal and state returns simultaneously. If you owe taxes, you can file early and postpone payment until the return's due date. (Payment can be made by authorizing an automatic withdrawal [direct debit] from a savings or checking account through IRS Direct Pay, an electronic transfer through EFTPS.gov, payment by credit or debit card [American Express, Discover, MasterCard or Visa], or by mailing a check payable to the United States Treasury along with Form 1040-V, Payment Voucher, to your service center.)
Preparers required to e-file. Paid tax return preparers are required to e-file client returns if they expect to file 11 or more Forms 1040, 1040A, 1040EZ, and 1041, so if you use a paid preparer, your return likely will be e-filed.
If you e-file, then you do not have to attach any information returns that would otherwise be required. For example, if you are a sole proprietor but your spouse is an employee with a W-2 form, that form need not be sent to the IRS if you file your return electronically.
State income taxes. Check whether you can file any required state income tax returns electronically. For individuals, e-filing both federal and state returns for many states can be done with a single click.
Electronic Signatures
To e-file, the signature of an electronically-filed return is handled through a self-select personal identification number (PIN). This is a self-created 5-number code that is used in conjunction with your prior year's adjusted gross income, total tax, and date of birth to verify that the return being filed is your own. You do not have to register your PIN number, nor even notify the IRS. But if you are a sole proprietor filing a joint return, both you and your spouse need a PIN.
Deemed Filing Date
An electronically filed return is deemed timely if it is transmitted on or before the due date and an acknowledgment of processing by the IRS is issued.
Sole Proprietorships
You can e-file your income tax return if you are a sole proprietor filing a Schedule C, C-EZ, or F. Virtually all the forms and schedules you need can be filed electronically.
Partnerships and LLCs
Form 1065 may be filed electronically. Other than large partnerships (those with 100 or more partners), there is no requirement to use e-file. But the same benefits of e-filing for individuals applies to partnership returns. According to the 2015 IRS Data Book, more than 3 million partnership returns were filed electronically.
S Corporations
S corporations with total assets over $10 million and 250 or more returns filed annually (including income tax, excise tax, information—W-2 and otherwise—and employment tax returns) must file Form 1120S electronically. Smaller S corporations can opt to e-file. According to the 2015 IRS Data Book, more than 3.7 million S corporations filed their returns electronically. Whether e-file is used, if the corporation owes any income tax, it must deposit it electronically if it is otherwise required to use EFTPS as explained later in this chapter.
S corporation shareholders can, however, file their personal tax returns electronically, even if the corporation files by mail (and vice versa). Thus, they can obtain the benefit of e-filing on their share of business items.
C Corporations
The return can be filed under the 1120/1120S e-file program. C corporations with total assets over $10 million and 250 or more returns filed annually (including income tax, excise tax, information—W-2 and otherwise—and employment tax returns) must file Form 1120 electronically. According to the 2015 IRS Data Book, more than 1.2 million C corporations filed their returns electronically. Whether e-file is used, you must still deposit corporate income taxes electronically if you are required to use EFTPS as explained later in this chapter.
Estimated Taxes
Estimated taxes are not separate tax obligations; they are a method of paying throughout the year what you expect to owe when you ultimately file your return. Estimated taxes are paid by individuals (including owners of partnerships, limited liability companies, and S corporations on their share of business income) and C corporations. If you do not pay enough estimated taxes (plus withholding taxes on wages and certain other payments), you may be subject to penalties.
Individuals
Estimated taxes cover:
Regular income tax (including income taxes on your share of business income)
Alternative minimum tax for high-income taxpayers (see Chapter 28)
Self-employment tax (discussed earlier in this chapter)
Additional Medicare taxes on earned income and net investment income
Employment taxes on a household employee
You must pay estimated taxes if you expect tax liability for the year to be at least $1,000 and you do not meet a safe harbor test (or file your return and pay the tax in full by January 31). The safe harbor test means that your withholdings and tax credits (e.g., applying an excess payment from last year toward this year's taxes) are less than the smaller of:
90% of the tax shown to be on this year's return (66% for farmers and commercial fishermen), or
100% of the tax shown on last year's return (110% if your adjusted gross income last year is more than $150,000, or $75,000 if married filing separately).
There is a special estimated tax rule for farmers and commercial fishermen. No estimated tax penalties are owed if the income tax return is filed and any taxes paid by February 28. If you don't file by this date, then any estimated tax penalties will be figured only from one payment date—January 15.
Use the Estimated Tax Worksheet (Figure 30.1) to figure what you must pay in order to avoid penalties for 2016 (if you still have time to make an installment for 2016). An updated version should be used for 2017 estimated taxes.
Figure 30.1 Estimated Tax Worksheet
Estimated taxes are due on April 15, June 15, September 15, and January 15 of the following year (the due date is extended to the next business day if any payment date falls on a Saturday, Sunday, or legal holiday).
Estimated taxes can be paid in several ways: by check made payable to the U.S. Treasury, along with Form 1040-ES, by charging the payment to a major credit card, by transferring funds from your bank account through the IRS's Direct Pay!, or by transferring funds using EFTPS.gov.
If you do not pay enough through estimated taxes, figure your penalty on Form 2210 (Form 2210-F for farmers and commercial fishermen).
Corporations
S corporations usually are not separate taxpayers and therefore need not be concerned with estimated taxes (shareholders pay estimated taxes). C corporations are separate taxpayers and must meet estimated tax payment obligations to avoid penalties.
Corporations are required to prepay current tax liability by making estimated tax payments during the year if the tax liability is $500 or more. Estimated tax for corporations covers the regular corporate income tax, alternative minimum tax, and the tax on gross transportation income of foreign corporations from U.S. sources.
Estimated tax is figured on Form 1120-W, Corporation Estimated Tax. This form is not filed with the IRS. Instead, payments are made through deposits at federal depositories or through electronic transfers (whichever method is required or selected). The payment slip accompanying the deposit or transfer can be checked off to indicate that it is for estimated tax purposes.
Corporations must pay 25% of the ``required annual payment'' in each of 4 installments. For a corporation other than a ``large corporation,'' the required payment is either 100% of the tax shown on the current year's return or 100% of the tax on the preceding year's return. However, there are other methods that can be used to satisfy payment requirements while avoiding penalties. For calendar-year corporations, these are due April 15, June 15, September 15, and December 15.
Estimated tax strategies
It can be challenging for individuals and businesses to have the funds on hand to pay estimated taxes on time. It is advisable to set aside funds on a regular basis for this purpose. For example, say a sole proprietor with fee income is in the 25% tax bracket. It might make sense to deposit 10% to 20% of fee income (taking into account the fact that deductions reduce the income that's taxable) into a separate bank account for estimated taxes so that it is available for making timely estimated tax payments.
However, when figuring estimated taxes, it is not advisable to overpay so that you are making an interest-free loan to the government. In the current low-interest environment, it is probably better to err on the side of underpaying so that you have the use of your money now and do not have to wait until you file a return to recoup an overpayment.
If you find that you have overpaid estimated taxes, you can recover the money by:
Filing your tax return as quickly as possible to receive a refund.
Applying your overpayment to next year's taxes, thus reducing your out-of-pocket payments for estimated taxes for next year. Just indicate this choice on your tax return to apply some or all of the overpayment to next year's taxes. Usually, this will allow you to skip one or two estimated tax payments (depending on the size of your overpayment and your projections for next year's taxes).
Making Tax Payments
There are several ways to pay taxes: By check, by transferring payment using the Electronic Federal Tax Payment System (EFTPS), by charging payment to a major credit card, and by using IRS Direct Pay.
Paying by Check
Most small business owners can pay their tax bill via check made payable to the United States Treasury. Remember that the bulk of the taxes should have been paid through estimated taxes; the check that accompanies the return should be modest.
Corporations cannot pay their income taxes by writing a check to accompany their tax return. They must pay amounts owed by depositing them with an authorized depository (explained below) or by transferring funds through EFTPS.
Paying through EFTPS
Some businesses must deposit their taxes through the Electronic Federal Tax Payment System (EFTPS) while others may choose to do so. According to information from several years ago (no updated information is available), EFTPS processes over 100 million transactions per year, totaling nearly $2 trillion, with an error rate of 0.18%. Under this payment method you authorize the transfer of funds from your bank account by using your telephone or personal computer. This payment method can be used whether or not returns are filed electronically and enables you to designate up to 120 days in advance the amount of payment to be made and the time of payment. As long as the transfer is initiated at least one business day before the due date of the deposit, the electronic fund transfer is considered timely. If you use an outside payroll service that uses EFPTS to deposit your taxes, you automatically receive an EFTPS Inquiry PIN. Use this to check that your payroll provider is timely depositing the taxes on your behalf.
Required Use of EFTPS
Nearly all federal tax deposits are now made electronically. The use of federal tax coupons allowing deposits to certain banks can no longer be used; all deposits (with some exceptions) must be made using EFTPS.
Payment can be made with the tax return and is not required to be deposited electronically if employment taxes are less than $2,500 per pay period.
You can enroll online at www.eftps.gov. If you prefer to submit a paper application, file Form 9779, EFTPS Business Enrollment Form, with the EFTPS Enrollment Processing Center (it can take several weeks to process a paper application).
Voluntary Use of EFTPS
Even if you are not required to use EFTPS, you may wish to do so—for convenience. You initiate payment so you remain in control of your funds until you want them disbursed to the government. You receive an acknowledgment number as a record of your payment.
You may voluntarily participate in EFTPS. To obtain more information on EFTPS or to enroll in the system, call (800) 555-4477 or (800) 945-8400. If you enroll, you can use the Internet or receive free Windows-based software for use on your PC. You also receive a PIN to use when making payments.
You can update existing passwords (to make them more secure) at “My Profile” at www.eftps.gov.
Credit Card Charges
Businesses can pay taxes via credit card (American Express, Discover, MasterCard, or Visa) in some, but not all, instances. Balances owed with respect to employment tax returns (Forms 940, 941, and 944) can be charged to a credit card. However, federal tax deposits cannot be made by credit card.
Taxes owed on income tax returns of sole proprietors and owners of pass-through entities on Form 1040 can also be charged to a credit card.
As of now, taxes owed on Form 1120 or Form 1120S (in those limited situations where an S corporation owes tax) cannot be charged to a credit card. This could change in the future.
There are only 3 credit card processors authorized by the IRS to process tax payments:
1040 Pay at www.pay1040.com/
Official Payments at www.officialpayments.com/index.jsp
PayUSAtax at www.payusatax.com/
These companies charge a convenience fee (currently up to 2.25% of the amount charged); the IRS does not impose any additional cost for charging taxes.
IRS Direct Pay
You can transfer funds from your checking or savings account using this online payment method. There is no registration or fees required. Go to www.irs.gov/Payments/Direct-Pay for details.
Late Payment Penalties
If you fail to pay the taxes due on time, you can be subject to late payment penalties and interest on the outstanding amount. Taxes must be paid in full by the due date of the return to avoid penalties and interest. Obtaining an extension of time to file the return does not give you more time to pay your taxes.
The penalty is 0.5% of the tax due, per month, with a maximum of 25%. In addition, interest is charged at the IRS interest rate, which adjusts quarterly. For news releases of IRS quarterly interest rates, go to www.irs.gov and search “news releases”, and fact sheet archives.
The penalty may be waived if you can show that lateness was due to reasonable cause and not to willful neglect. You can also ask the IRS to waive the penalty under its first-time penalty abate (FTA) program. To qualify, you must not have been delinquent in tax deposits in the prior three years and are otherwise in compliance with filing and payment requirements.
Filing Other Business Returns
There are other tax returns that may have to be filed in addition to income tax returns. At present, employment tax returns are not required to be filed online. Certain information returns must be filed online by certain taxpayers—others who are not required to do so may choose to file online.
Employment Tax Returns
Employment tax returns may be filed electronically. These include:
Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return
Form 941, Employer's Quarterly Federal Tax Return
Form 944, Employer's Annual Federal Tax Return
Employment tax returns are filed only by businesses that have employees. However, they must be filed even if no wages are paid. For example, an S corporation with one employee (the sole shareholder) that pays wages of $30,000 must file Form 941 for all quarters even though all of these wages are paid in the final quarter of the year. You can e-file employment tax returns through a third-party transmitter using the 940, 941, and 944 On-Line Filing Program. Or you can authorize a reporting agent to prepare, sign, and e-file for you. Find out more about your e-file options for employment tax returns from the IRS at www.irs.gov/uac/Employment-Taxes---Electronic-Filing-and-Payment-Options.
Looking for a company to transmit your employment tax returns for your company? You can find a list of IRS-approved e-file Business Providers at www.irs.gov / Tax-Professionals /e-File-Providers-&-Partners /Approved-IRS-e-file-for-Business-Providers.
Due Date of Employment Tax Return
Whether filing electronically or on paper, employment tax returns must be filed by the date in Table 30.3. The annual returns are due by the end of the first month following the close of the quarter or tax year, depending on which period is applicable.
Table 30.3 Filing Deadlines for Employment Tax Returns
Type of Return |
Filing Period |
Return Due Date |
Form 940 |
Annual |
January 31 |
Form 941 |
Quarterly |
April 30, July 31, October 31, January 31 |
Form 944 |
Annual |
January 31 |
Amending Employment Tax Returns
If an employer makes a mistake on an employment tax return, the mistake should be corrected. To correct:
Form 940: File amended Form 940 (check the box on the return indicating that it is an amended return).
Form 941: File Form 941X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund.
Form 944: File Form 945X, Adjusted Employer's ANNUAL Federal Tax Return or Claim for Refund.
Filing an amended return in some cases may require an adjustment or refund claim to correct the amount of employment taxes previously claimed. This may also mean repaying or reimbursing employees for excess FICA taxes withheld and obtaining their written statement that they will not make a claim for refund or credit of these taxes.
From time to time, law changes may necessitate the filing of an amended return. For example, when the Protecting Americans from Tax Hikes Act of 2015 reinstated parity for transportation fringe benefits retroactively for 2015, employers may have found that they misreported monthly transit passes and vanpooling benefits. In this case, however, the IRS provided a simplified method so that employers did not have to amend each previous quarter (see Notice 2016-6).
Information Returns
You may choose to submit certain information returns to the IRS electronically even though you must provide paper returns to your employees or others. You must file electronically if you file 250 or more information returns (Form 1042-S, 1098, 1099, 5498, 8027, or W-G).
You do not have to be concerned about the security of the information you submit in this manner. The IRS has set up FIRE (Filing Information Returns Electronically) to protect the confidentiality of the data you submit. To learn more about FIRE, go to www.irs.gov/tax-professionals/e-file-providers-partners/filing-information-returns-electronically-fire or call the Martinsburg Computer Center at (304) 263-8700.
You can provide information returns to payment recipients electronically if they consent to receive them in this manner. So, for example, if you paid an independent contractor $1,200 in 2016 and want to send the Form 1099-MISC to her electronically, you must obtain her consent to do so.
Employee Benefit Returns
Forms in the 5500 series must now be filed electronically with the Department of Labor (not with the IRS). (There is an exception for small plans.) For information about EFAST (ERISA Filing Acceptance System) and EFAST e-filing employee benefit returns, see www.efast.dol.gov/welcome.html.
Due Date of Electronically Filed Information Returns
In the past, transmittals for certain types of information returns (e.g., W-2s, 1099s) had an extended filing deadline for electronic submissions. For 2016 returns filed in the 2017 filing season, transmittals for Forms W-2 and 1099-MISC are due to the Social Security Administration, and the IRS, respectively, on January 31, 2017 (the same date that the forms are furnished to employees and independent contractors), whether filing on paper or electronically. All other Forms 1099 are due February 28, but March 31 if filed electronically. Of course, if the due date falls on Saturday, Sunday, or a legal holiday, the due date of an electronically filed return is extended to the next business day.
Excise Tax Returns
Under the ExSTARS (Excise Summary Terminal Activity Reporting System), terminal operators and bulk fuel carriers can file their monthly information returns (Fuel Transaction Reports) electronically instead of using paper returns.
Using Tax Professionals
Most small business owners use tax professionals to prepare their tax returns. Tax professionals may provide additional services, including advice on specific tax questions and help with year-round tax planning. Professionals must meet the standards of their professions and comply with IRS rules. There are five types of tax professionals:
Attorneys are licensed by their states and comply with continuing education requirements to retain their license. They have unlimited practice rights before the IRS.
Certified public accountants (CPAs) are accountants who have passed the Uniform CPA Examination and complete continuing education courses. They have unlimited practice rights before the IRS.
Enrolled agents must meet IRS-set standards. These include passing a comprehensive IRS exam and completing continuing education courses. They have unlimited practice rights before the IRS.
Annual filing season program participants are those who do not fall within any of the above categories but participate in a voluntary IRS program in which they take a certain number of hours of continuing education. They can represent only clients whose returns they prepared.
Unenrolled agents are not attorneys, CPAs, or enrolled agents but they do obtain required Preparer Tax Identification Numbers (PTINs).
There are also enrolled actuaries and enrolled retirement plan agents. These individuals are not general tax return preparers but provide specialized services to businesses.
All paid preparers must obtain or renew a PTIN each year. PTIN holders are listed in an IRS Directory of Preparers at http://irs.treasury.gov/rpo/rpo.jsf. The directory lists the preparer's credentials and can be searched by zip code.
Only four states set required standards for tax professionals who are not Attorneys, CPAs, or enrolled agents: California, Maryland, New York, and Oregon.
Working with a Tax Professional
As a business owner, taxes are a year-round matter that deserves your attention so you can make tax-wise business decisions. Working with a tax pro can be helpful to:
Discover strategies that can save you money (e.g., opting for certain inventory methods; electing safe harbors to simplify write-offs for items you buy in addition to materials and supplies).
Learn about tax law changes during the year that you can act upon immediately.
Engage in mid-year and year-end tax planning.
Find out what you have to pay for the services you receive. You may obtain a package of services for a lump sum or pay an hourly rate as services are provided. Rates vary considerably across the country and with the expertise of the professional.