1040 Form Basics for Small Business Owners

What is a 1040 Form

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Filing federal taxes can be confusing. Even the most financially savvy among us may have difficulty keeping track of the many forms and calculations required. Luckily, we’re here to answer a few of your most pressing questions about the main tax filing documents: 1040 forms.

What is a 1040 Form?

1040 forms are the primary Federal filing documents used to determine your tax amount from a given year. These forms:

  • determine your taxable income
  • claim credits and deductions
  • calculate your tax return or bill amount

What is a 1040 Form

This form works hand-in-hand with the W2 form sent by your employer or the 1099 forms used for self-employment. This W2 or these 1099s tell how much you’ve earned over the past year and the amount that was withheld. You can then use that information to fill out a 1040 form to file your taxes.

Your small businesses may use 1040 forms if you are self-employed, have a sole proprietorship, operate a single-member LLC, receive farm income, or are a partner in a partnership.

How Do You Fill Out a 1040 Form?

To fill out a 1040, begin by filling out your personal information. This section includes your filing status, such as single, married filing jointly, or married filing separately, and how many dependents you have.

If you are filing for a small business, you must attach a schedule C to your 1040. This is a two-page add-on document that lists all claimable expenses. Independent contractors and small business owners who made more than $400 should also fill out schedule SE which calculates self-employment taxes. Some businesses are even required to pay quarterly estimated taxes if their withholdings do not cover the taxes they owe. In this case, those companies would file 1040 ES forms.

Next, calculate your Adjusted Gross Income (AGI) which you will report on line 11. To find your AGI, report your Gross Total income, then subtract any allowable adjustments. These adjustments are also often referred to as above-the-line deductions. Then, the IRS will use your AGI to determine how much you owe in taxes.

Once you know your AGI, you may consider other deductions. This gives you two options. You can itemize your deductions or accept the standard deduction. The standard deduction is the basic amount the government will allow you to deduct based on your filing status.Meanwhile, itemized deductions allow your small business to deduct expenses you incurred in areas like:

  • Start-up and organizational costs
  • Inventory
  • Utilities
  • Insurance
  • Property rent
  • Office supplies and furniture
  • Software subscriptions
  • Advertising and marketing
  • Business travel and entertainment
  • Interest on a small business loan
  • Employee benefits, salaries, and gifts
  • Legal and professional fees

If you itemize your deductions, keep your receipts and other documentation that proves you incurred these expenses. You will need these documents if you are audited.

Once you’ve calculated your itemized deductions, compare that number to the standard deduction. Choose the higher of the two to maximize your tax savings. Then, subtract this number from your AGI. The result is either your tax return or the amount of taxes you owe.

Small businesses must pay close attention to line 9 on their 1040. This allows them to claim additional business deductions if they have qualified business income, Publicly Traded Partnership (PTP) income, or Real Estate Investment Trust (REIT) dividends. If one of these applies to you, you can deduct:

  • Deductible tax on self-employment income
  • Self-employed health insurance premiums
  • Qualified retirement plan contributions

Who Fills Out a 1040 Form?

Typically, you have two options for filling out a 1040. You can do it yourself or hire a tax preparer.

Only three professions are qualified to prepare taxes:

  • enrolled IRS agents
  • certified public accountants (CPA)
  • tax lawyers

Rates to prepare your taxes can vary based on the complexity of the job. Basic preparation could start at about $100. However, these rates may rise as your added assets cause your taxes to become more complex. Hiring a professional to help you will likely improve your accuracy, lower your taxes owed, and grant you higher tax returns.

Ultimately, you can file a 1040 by yourself using either:

  • A paper form
  • Tax preparation software
  • IRS online portal.

If you are one of the few who understands tax law completely, you can request that a paper 1040 form be mailed to you. You can also print one from the IRS website or fill them out digitally on the site. This method requires complex calculations that take a lot of patience and time, so be prepared to spend around 20 hours completing the forms.

On the other hand, tax preparation software can walk you step-by-step through your tax preparation, calculate your AGI, and compare your standard and itemized deductions to give you the highest discount possible. These programs range from only $25 to $100.

For the 2020 tax season, you had to make $72,000 a year or less to qualify to utilize the IRS portal, but this number changes each year. The easiest way to file a 1040 for free is to find an online IRS partner company from the Free File Alliance and choose their free filing option. Then, fill in information about yourself and whether you qualify for the earned income tax credit (EITC). The system will then give you a list of free offers. These offers apply to specific businesses’ needs, so don’t choose one at random. Instead, look over each one to find the best fit for your circumstances.

How Do You Submit a 1040 Form?

How you submit a 1040 form depends on how you prepared it. Free online tax preparers, paid preparers, and tax software all offer quick and easy online filing options.

However, you can also fill these forms in manually and mail them in to your state’s  IRS address. Whatever method you choose, remember that your 1040 is due April 15 and must be postmarked by that date.

What are the Variants of a 1040 Form?

Several versions of the 1040 form can be used to accommodate different circumstances, though the overall format stays much the same. These include:

  • 1040: standard form used by most taxpayers
  • 1040 SR: for taxpayers aged 65 and older
  • 1040 NR: used by non-U.S. residents who receive income in the U.S.
  • 1040 X: used to amend previous tax returns
  • 1040 A: a shorter, less detailed version of the standard 1040
  • 1040 ES: small business quarterly tax return for paying estimated taxes

Small business taxes can appear daunting, but knowing how to use a 1040 form will simplify the process.

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Michael Guta Michael Guta is the Assistant Editor at Small Business Trends and currently manages its East African editorial team. Michael brings with him many years of content experience in the digital ecosystem covering a wide range of industries. He holds a B.S. in Information Communication Technology, with an emphasis in Technology Management.

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