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Whether you’re a person or a business, you have to file your taxes. Depending on your business structure, your business tax return may be intertwined with your personal taxes.
Business taxes versus personal taxes: What’s the difference?
Just like people, your business owes taxes on the income it generates. How your company pays that tax depends on its structure.
The short answer: Pass-through entity owners file their personal and business taxes together, and C corporations file separately from their shareholders. There’s more to it, though.
Most business types are considered pass-through entities where business income is taxed on the owners’ personal returns. The business isn’t considered a separate taxpayer, so you and your business appear as one taxpayer before the IRS.
Some pass-through entities file information returns, which detail the company’s earnings to the IRS. It’s more of an FYI than anything since the company isn’t taxed directly. Pass-through entities’ earnings get taxed on the owners’ personal returns and are subject to their individual tax rates.
The C corporation structure is the only type the IRS views as a separate taxpayer from owners. C corporations pay an entity-level tax before passing on earnings to shareholders through dividends.
Can I file personal and business taxes separately?
Whether you can file personal and business taxes separately depends on how you registered your business before the IRS.
Sole proprietorship
As a sole proprietor, the only tax return you file is your Form 1040 -- with a handful of schedules attached, of course. Sole proprietorships, the most common business type, are also called disregarded entities because they don’t file a tax return separate from their owners.
Independent contractors, freelancers, and single-member LLCs are taxed as sole proprietors by default. Sole proprietors report business revenue and deductible business expenses on Form 1040 Schedule C.
Partnership
Like sole proprietorships, partnerships are pass-through entities. What’s different is partnerships file a separate tax return, but it’s not for taxpaying purposes.
Partnerships file Form 1065 to relay revenue and business tax deductions information to the IRS. A partnership’s earnings are allocated among the partners, who report and pay tax on their portion of partnership profits.
Partnerships distribute a Form K-1 to each partner listing his or her portion of partnership earnings to report on personal tax forms. Partners use earnings information on the Form K-1 to fill out Form 1040 Schedule E.
Form 1065 is called an information return because partnerships don’t use the form to pay income tax. Because partnerships file an information return, they’re not disregarded entities.
S corporation
Another pass-through entity type, S corporations pay taxes through their owners, who are called shareholders.
S corporations file information return Form 1120-S to report earnings. Just like partners in a partnership, shareholders receive a K-1 with their portion of company profits. Shareholders pay their portion of K-1 earnings on Form 1040 Schedule E.
While it appears that S corps and partnerships enjoy the same tax treatment, there’s a significant difference: S corp shareholders who participate in management may be considered employees.
S corp shareholder-employees must receive a reasonable salary before getting paid in distributions. That means a shareholder-employee receives both a Form W-2 -- the employee wages statement -- and a Form K-1 and must pay taxes on both types of earnings.
C corporation
C corporations break from the pack because they’re not pass-through entities. C corporations file Form 1120 where they both report and pay income tax. The IRS considers C corporations separate taxpaying entities.
Unlike the other business structures, C corporations pay a 21% entity-level tax on taxable earnings before passing on income to their shareholders through dividends. C corps distribute Form 1099-DIV to shareholders to report dividend income on their personal taxes.
Shareholders who participate in management are also considered employees, meaning they earn W-2 wages. Shareholders report and pay tax on both W-2 and 1099-DIV earnings through their personal returns.
Limited liability company
Limited liability companies (LLCs) are the chameleon of business structures because they can be taxed like sole proprietorships, partnerships, S corporations, or C corporations. How your LLC files taxes depends on its taxation status.
By default, an LLC with one owner -- called a single-member LLC -- is a disregarded entity and is taxed as a sole proprietorship. LLCs with more than one owner are automatically taxed as partnerships.
An LLC -- whether it has one owner or hundreds -- may elect C corporation or S corporation taxation. Not every LLC can become a C or S corporation, but these elections change how you file your taxes.
Business and personal taxes frequently asked questions
How do I keep my business and personal taxes separate?
As a business owner, it’s as hard to separate your business and personal taxes. It’s just as hard to keep your personal and business lives apart.
C corporations are the only business type where your company’s earnings don’t flow through to your personal tax return. Still, most small businesses shouldn’t become C corps because the structure creates double taxation so shareholders may be taxed twice on the same earnings. C corporations must also have a board of directors and follow a host of other legal requirements.
Can I use self-employment tax software to file my C corp taxes?
All business types other than C corps can use self-employment tax software when filing their taxes. Most companies that create tax software have solutions for both structures, but you’ll need to have two types of software to complete your business and personal tax returns.
How do I tax my LLC as a C or S corp?
LLCs are taxed as sole proprietorships or partnerships by default. To elect a change to C corporation taxation, file Form 8832. LLCs seeking S corp treatment need to file Form 2253.
Are my business and personal taxes due at the same time?
Your business and personal taxes aren’t always due at the same time. While your personal taxes are always due -- well, except for 2020 -- on April 15, your business tax return follows a different schedule.
Business returns are generally due on the 15th day three months after the end of your fiscal year. For instance, calendar-year businesses file taxes by March 15.
Most small businesses should file their personal and business tax returns together. Self-employment tax software will help with both your business and personal tax returns.
