Quick framing
If you run a side business, the IRS cares about two things: who legally owns the activity and how income is taxed. The simplest default is reporting income on your personal return (Schedule C), but partnerships and corporations file separate returns. Choosing the wrong form creates extra tax, missed deductions, or IRS follow‑up. This article explains how to decide, with rules, examples, filing timing, and practical recordkeeping steps.
Which forms matter for most side businesses?
- Schedule C (Report Profit or Loss from Business) — used by sole proprietors and single‑member LLCs that do not elect corporate taxation. Filed with Form 1040. See our deeper guide on Schedule C for common mistakes and line items: Schedule C (Profit or Loss from Business).
- Form 1065 (U.S. Return of Partnership Income) — used for general partnerships, multi‑member LLCs taxed as partnerships. The form issues K‑1s to partners who report their share on personal returns. See: Form 1065: U.S. Return of Partnership Income.
- Form 1120S and Form 1120 — corporate returns. An S‑corporation files 1120‑S (pass‑through, shareholders report K‑1) while a C‑corporation files 1120 (entity pays tax; potential double taxation). Many small businesses elect S‑corp taxation to reduce self‑employment tax on distributions.
- Schedule SE (Self‑Employment Tax) — if you report net earnings from self‑employment (usually via Schedule C or partnership K‑1), you generally owe Social Security and Medicare via Schedule SE. More detail: Schedule SE (Self‑Employment Tax).
(Authoritative IRS resources: IRS Small Business & Self‑Employed Tax Center (https://www.irs.gov/businesses/small-businesses-self-employed) and IRS Forms & Publications (https://www.irs.gov/forms-pubs)).
Step-by-step: How to pick the right form
- Confirm legal entity and ownership
- Sole proprietor or single‑member LLC (default taxed as sole proprietor) → Schedule C on your Form 1040.
- Multi‑member LLC or partnership → File Form 1065; partners receive Schedule K‑1.
- Corporation (LLC that elected corporate taxation or a formed corporation) → File Form 1120 (C‑corp) or Form 1120‑S (S‑corp election required via Form 2553).
- Check whether you made an election
- If an LLC filed Form 8832 or 2553 to change tax classification, follow that election. S‑corp election (Form 2553) changes reporting to 1120‑S and affects payroll and distributions.
- Estimate self‑employment tax and payroll obligations
- If you’re a sole proprietor or partner with net earnings ≥ $400, you generally owe self‑employment tax reported on Schedule SE. If you’re an S‑corp owner who materially participates, you typically take a reasonable salary and pay payroll taxes on wages (reducing SE tax on distributions).
- Confirm filing deadlines and extensions
- Partnership returns and S‑corp returns are generally due March 15 for calendar‑year taxpayers. C‑corp returns and Schedule C (with Form 1040) are due April 15. File Form 7004 to request an extension for many business returns (but extensions delay filing, not tax payment). (IRS: Forms & due dates: https://www.irs.gov/forms-pubs).
- Run sample tax math
- For side businesses, compute net income (gross receipts minus ordinary and necessary expenses). Compare tax outcomes (self‑employment tax + income tax) if taxed as sole proprietor vs. S‑corp (after reasonable salary). Use this to evaluate whether an entity election could provide net tax savings after additional compliance costs.
Practical examples (realistic, anonymized)
- Example 1 — Craft seller (sole proprietor)
- Gross receipts: $30,000; allowable expenses (materials, supplies, shipping, home office portion): $10,000 → net income $20,000. File Schedule C; pay income tax and self‑employment tax via Schedule SE. Keep receipts and mileage logs for deductions.
- Example 2 — Two‑person landscaping partnership
- Gross receipts: $50,000; deductible business expenses $30,000 → partnership net $20,000 distributed on K‑1s. Partnership files Form 1065; each partner reports their share and pays income and SE tax unless an S‑corp election is later made.
- Example 3 — LLC elects S‑corp
- Business revenue $100,000; after expenses net $60,000. Owner sets reasonable salary $40,000 (payroll taxes withheld) and takes $20,000 distribution. Owner pays payroll taxes on wages and income tax on total income; distribution not subject to SE tax (but still subject to income tax via K‑1/shareholder reporting). Savings depend on what counts as “reasonable salary.”
These examples show why work‑paper calculations and a short cost/benefit analysis are important before changing elections.
Common mistakes that create audit risk or extra tax
- Filing Schedule C when the activity meets partnership or corporate definitions (e.g., multi‑owner business) — leads to amended returns and penalties.
- Ignoring self‑employment tax: some owners under‑estimate Schedule SE obligations.
- Misclassifying employees as contractors: payroll liabilities and penalties follow if the IRS reclassifies workers.
- Not separating personal and business finances: weak records make deductions harder to substantiate.
Recordkeeping checklist (practical, year‑round)
- Separate business bank account and credit card.
- Digital copies of receipts and invoices, organized by category.
- Mileage log or automatic GPS tracker for business vehicle use (or clear method for actual expenses or standard mileage rate).
- Payroll records if you pay employees or yourself as an employee (for S‑corp owners).
- Copies of K‑1s, 1099‑NEC/1099‑MISC forms received and issued.
When to consider changing your tax form or entity
- Business profit grows enough that payroll tax planning could save more than the extra cost of payroll and tax preparation (often when net earnings exceed roughly $40k–$60k, depending on industry and location). Run a projection before electing S‑corp status.
- You add partners or bring on investors — this usually requires partnership or corporate filings.
- Liability protection matters more than tax simplicity — an LLC or corporation can separate personal assets from business risk (consult an attorney).
Filing calendar & estimated taxes
- Estimated tax payments (Form 1040‑ES) are generally required if you expect to owe $1,000+ after withholding. Self‑employed taxpayers typically pay quarterly estimated taxes to cover income and self‑employment tax.
- Use Form 7004 to request extra time to file many business returns (partnership, S‑corp, C‑corp), but taxes owed are still due by the original deadline.
How a tax professional helps (real value)
In my practice working with hundreds of side‑business owners, the most valuable work we do is (1) project tax outcomes under different entity choices, (2) document and separate deductible expenses so clients don’t leave money on the table, and (3) implement payroll for S‑corp owners so salaries are defensible. A short engagement to model two years of taxes often covers the cost of the consultation with tax savings and reduced audit risk.
Where to find official forms and instructions
- IRS Small Business & Self‑Employed Tax Center: https://www.irs.gov/businesses/small-businesses-self-employed
- IRS Forms & Publications (search for Schedule C, Form 1065, 1120, 1120‑S, Schedule SE, Form 7004): https://www.irs.gov/forms-pubs
Related FinHelp guides
- Schedule C on FinHelp — practical tips and common errors: Schedule C (Profit or Loss from Business).
- Partnership filing and allocation rules: Form 1065: U.S. Return of Partnership Income.
- Self‑employment tax basics and how to calculate it: Schedule SE (Self‑Employment Tax).
Quick decision checklist
- Single owner, no corporate election → Schedule C + Schedule SE.
- Two or more owners, no corporate election → Form 1065 + K‑1s.
- Corporation or LLC elected as corporation → Form 1120 (C) or 1120‑S (S‑corp after Form 2553 election).
- Unsure? Gather 12 months of P&L, run a projected tax comparison, and consult a CPA.
Frequently asked technical issues (short answers)
- Q: Can you switch from Schedule C to S‑corp mid‑year?
- A: S‑corp election (Form 2553) generally applies starting the tax year specified; speak with a tax pro to assess timing and payroll setup. (IRS: Form 2553 guidance).
- Q: Do partnerships pay income tax?
- A: Partnerships file Form 1065 but generally do not pay income tax at the entity level; profits pass through to partners who pay tax individually.
Professional disclaimer
This article is educational and does not replace advice from a qualified tax professional. Tax situations vary; always consult a CPA or enrolled agent for personalized guidance.
If you’d like, I can produce a simple downloadable worksheet (profit & loss template and tax projection) tailored to a Schedule C vs. S‑corp comparison for your revenue and expense figures.
