With the challenging year we all had in 2020, you may be a little confused about this year’s business taxes—when your business taxes are due, how to file your business taxes, etc. Because the country is still in recovery mode, the Internal Revenue Service (IRS) has changed several business tax deadlines and extended the tax deadline for certain taxpayers to May 17, 2021, for both payments and filing returns.
But wait! Don’t breathe a sigh of relief yet! The May 17 tax extension does not apply to everyone. The extension only applies to individuals filing Forms 1040 and 1040-SR. It does not affect deadlines for corporate, partnership, or nonprofit tax returns, or payment of estimated taxes. For all other entities, the tax deadlines remain as they were in a normal tax year.
Do these dates still seem confusing? Let’s get back to the business of growing your company. Here are four COVID-19 considerations for your business taxes.
1. Business Taxes by Entity
Legal structure is everything when it comes to filing business taxes. Your legal entity dictates the forms you use, how your business is taxed, and the withholdings you must submit.
Sole proprietors don’t have any legal separation from their businesses and therefore file their personal income on a Schedule C (IRS Form 1040) “Profit or Loss From Business.” Typically due by April 15, for 2021, this deadline has been delayed until May 17, with an extended deadline of October 15, 2021. If the business owner expects to pay $1,000 or more in business taxes in one calendar year, the IRS expects the sole proprietor to pay quarterly estimated taxes. And those deadlines did not change. Quarterly tax deadlines remain as:
Payment period: January 1, 2021 to March 31, 2021, tax deadline = April 15, 2021
Payment period: April 1, 2021 to May 31, 2021, tax deadline = June 15, 2021
Payment period: June 1, 2021 to August 31, 2021, tax deadline = September 15, 2021
Payment period: September 1, 2021 to December 31, 2021, tax deadline = January 18, 2022
Partnerships also have no legal separation from the business, and business tax obligations are passed equally through to the partners (unless the partnership agreement specifies otherwise). Partnerships use IRS Form 1065 (known as the U.S. Return of Partnership) to file the partnership’s profits and losses. Also, a partnership must file a Schedule K of Form 1065 (to categorize the partnership’s income), and each partner receives a Schedule K-1 to turn in with their personal taxes. The partnership filing deadline was March 15, 2021, with an extended deadline of September 15, 2021.
Limited Liability Companies (LLCs) are taxed like partnerships with the same tax forms and deadlines (Form 1065 and Schedule K and K-1). LLCs can choose to be taxed as a C Corp or an S Corp; however, all member-owners must agree.
C Corporations are legally separate from the business owners and consequently file separate tax returns. C Corp owners are employees of the corporation and must receive a W-2 from the corporation. The C Corps tax deadline is April 15, 2021, and they file IRS Form 1120 (U.S. Corporation Income Tax Return). The business can file for an extension which makes the deadline October 15, 2021. Corporations make estimated tax payments if they expect their estimated tax to be $500 or more. C Corps use Form 1120-W to make estimated tax payments.
The S Corp is an optional legal election extended to LLCs and C Corps so the businesses can be taxed as a partnership, preventing the corporation’s double taxation. In the S Corp, business income is passed through to the owners and then claimed on their personal tax returns. S Corps use IRS Form 1120-S, and the tax deadline was March 15, 2021, with an extended deadline of September 15, 2021.
2. More Deadlines
To quickly recap, this year the regular business tax deadline for 1040 and 1040-SR filers is May 17, 2021. For corporations and LLCs, the filing deadline remains April 15, 2021 (or if you file for an extension, October 15, 2021). For partnerships and S Corps, the tax deadline was March 15, 2021, or if you file for an extension, September 15, 2021. Importantly, if you owe taxes and don’t file for an extension, you may be subject to penalties.
The IRS allows businesses three years from the tax deadline to submit a return and claim a refund. If you completely fail to submit a return, the IRS can file a substitute form for you, but you won’t receive the tax credits and deductions you are allowed. Also, failure to file can affect your business’s ability to apply for business loans.
For tax years 2019 and earlier, it is too late to e-file. You must download the paper forms required and submit them by mail.
3. Employer Taxes
Whether you have one employee, a staff of 50, or more, your small business tax responsibilities include withholding and paying employment taxes to federal and state tax agencies. While federal payroll tax rates are the same no matter where your business is located, state employment taxes depend on the state income tax rates where the employee lives or does most of their work.
Employers are required to obtain an Employer Identification Number or EIN. An EIN (or Federal Tax ID number) identifies your business to the IRS and helps the agency track business transactions and tax records. You are also required to verify all employees are legally eligible to work in the United States by completing the U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. Employees then fill out IRS Form W-4 for tax withholding.
As an employer, you are required to withhold, deposit, report, and pay FICA employment taxes—FICA taxes include income tax, Social Security tax, Medicare tax. Federal Unemployment Tax (FUTA) is paid separately. 2020 employer tax rates:
Social Security: 6.2% for both employers and employees
Medicare tax: 1.45% for both employers and employees (Employers withhold an extra 0.9% of Medicare tax when an employee’s wage exceeds $200,000 ($250,000 for married couples filing jointly).
Federal Unemployment Tax or FUTA: 6% is only paid by employers.
Employers pay and report FICA payroll taxes when employees get paid; FUTA taxes are paid quarterly. State payroll taxes vary by state, but most include income taxes and unemployment taxes.
4. COVID-19 Tax Changes
The CARES Act and subsequent relief packages provided business owners with the following changes which may or may not affect their business tax returns:
Economic Injury Disaster Loan (EIDL). EIDL Advance grants received in 2020 are not considered taxable income.
Paycheck Protection Program (PPP). Paycheck Protection Program (PPP). If your PPP loan is partially or fully forgiven, the forgiven amount won’t count as part of your business’s gross income, which means you won’t have to pay taxes on it. Even if your PPP loan is not forgiven, you will not have to pay federal taxes on the funds you received. Some states have chosen to treat PPP funds differently for state taxes, whether or not the loan is forgivable, so check with your accountant on your state’s position. To be forgivable, 60% of the funds must be used for payroll and 40% for other forgivable expenses such as rent, mortgage interest, utilities, some technologies, property damage expenses due to civil unrest, and personal protection equipment (PPE).
Employee Retention Credit (ERC, or Employee Retention Tax Credit/ERTC). Companies that had to fully or partially close business operations during any quarter of 2020 or experienced a significant decline in gross receipts due to the pandemic are allowed to claim an Employee Retention Credit. In addition, the ERC has been extended to include the operational period between December 31, 2020, through June 30, 2021. Employers can claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages during the extended six months.
Payroll Tax Deferment. Employers who took the tax deferment on Social Security tax from March 27, 2020, through December 31, 2020, need to pay half of the deferred amount by December 31, 2021. The remaining taxes must be paid by December 31, 2022.
Families First Coronavirus Response Act (FFCRA). Companies that offered family leave to workers affected by the coronavirus are eligible for tax credits for 100% of sick-leave pay, family-leave pay, and qualified healthcare plan expenses.
Expansion of Charitable Gift Deductions. C Corps are allowed a higher limit for cash donations in 2020—25% in 2020.
Much of this is quite complex, and there are more tax considerations than usual to deal with this year. Also, the regulations are all still subject to change, so it’s a good idea to consult with your accountant to make sure nothing slips between the cracks.
Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.