Terms You Should Know: Taxes and Forms

This post is inspired by misinformation. It's the rare non-Wednesday post that shouldn't have to be scheduled. I recently recall a post on FB where the poster was adamant that W-4s go to subcontractors and W-2s are something an employee fills out before starting a job. Both of these are incorrect, and most of you know that. But I took the time to reflect when I first started learning this stuff. I knew about W-4s at my first job as an employee and do recall receiving that first W-2 that following January. But I didn't know about 1099s or W-9s for subs. I definitely didn't know about all the different tax forms out there like 940s and 941s. And then there are the state forms, and it can be too much. 

The purpose of this post is to list out the different types of forms out there, and while many of these may never apply to you if you're a solo cleaner, it's good information to have at the ready so you remain in the know (and in the good graces of the taxman (or tax lady). This is a companion post to one that talks about other business terms (e.g. corporation, LLC, business licenses, permits, DBAs, etc.).

Employee Forms

For clarity to avoid confusion, an employee works for you under your employ. An employee is not a subcontractor. Never call a subcontractor an "employee". It can get you in trouble. You direct employees how  and when to work. You can provide benefits. You need to provide their supplies and equipment. Subcontractors (aka independent contractors) are not employees. They are their own business entity. They do not work for you and if you provide supplies, train them, or direct how to work, you can end up in some legal or tax trouble. Check out this post on Employees vs Subs. Oh, and as I list out the forms do not assume that this is all that needs to be filled out. There could be more state-based requirements. I also recommend having them fill out an employment agreement. These forms are kinda like minimum flair. 

W-4 Employee's Withholding Certificate (IRS)

All employees must fill out this form prior to starting within your company. The purposes of this IRS form is to tell you, as the employer, how much withholding taxes you are to withhold from their paycheck. This form does not get sent to the IRS. It's for your own records and you use the info on this form your employee filled out to direct your payroll processing company how much to withhold. You can find copies of the form here or ask your payroll service.

I-9 Employment Eligibility Verification (DHS/USCIS)

This form is mandatory for all employees working at your company. It requires all employees to fill this out and to provide supporting documents (ie license, passport, social security card, etc.) to establish eligibility to work in the US. I didn't learn this until many years later but when this form is filled out, you are to take a copy and keep it separate w/ any supporting documents, from the rest of your HR files. So if there were ever a workplace visit by immigration, they can see that separately. Your payroll service will help you with this or you can find a copy here. BTW, don't forget to countersign these documents; it's required!

State Withholding Tax Forms

Most states require income taxes and they have their own tax form equivalent. For example, in Virginia, we have the VA-4. In DC, we have the D-4, and in Maryland, we have the MD-507. The employee fills out the equivalent withholding tax form based on their residency. Rather than bore you with all <50 (plus DC) state withholding certificates, you need to check your state's laws. Here's a handy reference guide issued by the IRS.

Employer Forms for Employees

These federal forms have to be filled out by the employer and either filed with the government or handed back to the employee for their records. 

W-2 Wage and Tax Statement (IRS)

W2s are the form you, as the employer, gives to an employee after the end of the tax year, and usually is due by the end of January. This gives the employee a summary to help them do their federal, and state taxes where applicable. Copies have to be filed electronically to the IRS. Your payroll service will provide you with these forms. 

W-3 Transmittal of Wage and Tax Statements (IRS)

The IRS needs a summary of your employee's W-2s and a W-3 is how it's done. Copies are also sent to the Social Security Administration for Social Security and Medicare taxes. Your payroll service will fill this form out for you. 

Form 941: Employers QUARTERLY Federal Tax Return (IRS)

If you have employees, you have to submit this every quarter. If you rely on the calendar year for your reporting, then these are due at the end of the following month (April, July, October, and January). Basically this is a summary of all of your wages and employee tax deposits you've made for that quarter and includes your employees' withholding paid and your employees' share and your share FICA Taxes (social security and Medicare). Your payroll company should be doing this for you. 

Form 940: Employer's Annual Federal Unemployment (FUTA) Tax Return (IRS)

As employers, we have to pay for federal unemployment taxes on behalf of our employees. We have to file this form separately and it's based on wages for the year and the tax is capped on the first $7000 of each employee's wage. Form 940 captures that information and has to be submitted in January for the previous tax year. Your payroll service will do this form for you.

State Unemployment Tax Forms

Your state requires you to pay a state unemployment rate for each of your employees and typically there's a cap of wages that become the basis for your unemployment tax. Each state assigns their own rates and limits. And like with state withholding forms above somewhere, all of these forms are different. Your payroll company will do this for you.

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Subcontractor Forms

Like with the Employees section, know the difference between subs and employees. Very important to know and understand.

Form W-9: Request for Taxpayer Identification Number and Certification (IRS)

If you hire a subcontractor (aka subs or Independent Contractors) you must have them fill out a W-9. This form captures their names, address, EIN or SSN, and entity type so that you can report a 1099 to them after the end of the year (see immediately below). This form is not submitted to the IRS. You keep the document and use it to help do those 1099s. The copy of the W-9 can be found here. 

Form 1099-NEC: Nonemployee Compensation (IRS)

Form 1099-NEC is used to report monies paid out to your subcontractors. It's paid out based on information provided on form W-9 (see section above). There are links online but these have to be filed electronically I believe and you can do so through the IRS, through a 3rd party (e.g. companies like Adams forms offer these at your local office supply store) or even through some payroll services. If I recall correctly, Gusto offered the ability to pay and file for subs. 

Form SS-4: Application for an Employer Identification Number (IRS)

If you ever want to hire employees, you need an EIN, or Employer Identification Number. You'll hire employees and you'll have their social security numbers attached to your business. So instead of using your SSN all the time, you'll use a EIN instead. In fact some applications, like applying for an LLC, or even hiring an employee, you must have an EIN. It's free. It's easy. You can do so online through here. They do close the application process during evening hours and on the weekends, so keep that in mind. You can also apply using a paper application found here. 

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Other Forms

Form W-7: Application for IRS Individual Taxpayer Identification Number (IRS)

There's always a possibility that you may want to hire an employee but they are recent immigrant to this country. They're legally allowed to work but their application for a social security number can't be finalized yet. You know...it's the government. They take their sweet time sometimes. A temporary alternative is to have them apply for an Individual Tax ID Number (ITIN or just TIN). This gives a social security-looking number that allows them to use when filing for taxes. Payroll companies will give you grief. After all, you can't withhold social security taxes without a social security number, but sometimes that can be worked out with the payroll company. A copy of the W-7 can be found here. 

Business Owner Information Report (FinCEN)

The Business Owner Information Report is the latest paperwork requirement. There's a blog post on this topic found here. Essentially it's a new reporting requirement that tracks business owners to their respective business names, and largely eliminates shell companies. It's a required for LLCs, corporations, but not sole-props. You have to file within the first 30 days of registering your business as that entity in your state. As of this blog post there are legal challenges to this new law but do your own research if still required.

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Income Tax Forms for Sole-Proprietors through Corporations:

Form 1040: US Individual Income Tax Return (IRS)

Yea, you've seen this one before. By every April 15, or thereabouts, you have to have this submitted or file an extension. This is what you fill out if you're a business owner filing individually as a sole-prop or LLC. There are different schedules that go with the 1040. Most don't apply to you. But as a business owner, Schedule C applies (see below).

Schedule C: Profit or Loss From Business (IRS)

This is Schedule C. When you do your 1040 personal return, and you have a sole-prop or single member LLC, you need to fill this form out. Basically you list out your revenue and offset that revenue with allowable deductions. What's left over is a profit (or loss) and that profit gets listed within one of the line items in your 1040 tax form. All of this gets submitted when you file your return.

Form 1065: US Return of Partnership Income (IRS)

If you have a partnership and you are registered as such as a partnership with your state or a multi-member LLC, and you are not a corporation, then you need to file this return. Your income is factored in as well as the expenses, and that passes through to you on a K-1 (described below). You then use that to file your personal taxes on the 1040. But Form 1065 reports those taxes as the partnership. It's its own return.

Schedule K-1: Partner's Share of Income, Deductions, Credits, etc. (IRS)

Continuing with the partnership, this is the schedule used to report your share of the business as a partnership. You need this to do your personal taxes. 

Form 1120: US Corporation Income Tax Return (IRS)

If you are a C-Corporation, this form is for you. As a C-corp, your business files a separate return (like Partnerships above). You are an employee of that corporation as the owner. You have to pay yourself a reasonable salary. You're not allowed to do owners draws. You can deduct everything like you can with a Sole-Prop, LLC, or partnership, and whatever is left over is taxed at a corporate tax rate. But each year you have to file this return as a C-Corp.

Form 1120-S: US Income Tax Return for an S-Corporation (IRS)

There are different types of corporations. The most common are S-Corporations. As an owner of a S-Corp, you are both a shareholder who can be paid dividends and an employee. You can elect to be a pass-through entity where the income passes through to you and reported on a K-1, like in the above, in lieu of paying corporate taxes. Partnerships and multi-member LLCs can elect to be taxed as an S-Corp on Form 2553, outlined below.

Form 2553: Election by a Small Business Corporation (IRS)

Form 2553 is what you use to elect to be taxed as a S-corporation. All members of your LLC or Corporation have to agree (yes, even single-member LLCs qualify) and you too can elect to be taxed as a S-Corp. This offers some tax advantages within some states. Talk to your accountant.

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This is a dry and boring topic. But this info is helpful so you can be in the know. Trust your accountant or bookkeeper but independently verify what they're doing and you can make wiser and better informed decisions for your business.