- What’s the difference between a Form W-2 and a Form 1099-MISC or Form 1099-NEC?
Although these forms are called information returns, they serve different functions.
Employers use Form W-2, Wage and Tax Statement to:
- Report wages, tips, and other compensation paid to an employee.
- Report the employee’s income and social security taxes withheld and other information.
Employers furnish the Form W-2 to the employee and the Social Security Administration. The Social Security Administration shares the information with the Internal Revenue Service.
Payers use Form 1099-MISC, Miscellaneous Information or Form 1099-NEC, Nonemployee Compensation to:
- Report payments made of at least $600 in the course of a trade or business to a person who’s not an employee for services, payments to an attorney, or any amount of federal income tax withheld under the backup withholding rules (Form 1099-NEC).
- Report payments of $10 or more made in the course of a trade or business in gross royalties or broker payments in lieu of dividends or tax-exempt interest or $600 or more made in the course of a trade or business in rents or for other specified purposes (Form 1099-MISC).
- Report sales totaling $5,000 or more of consumer products to a person on a buy-sell, a deposit-commission, or other commission basis for resale (Form 1099-NEC or Form 1099-MISC).
- Report payment information to the IRS and the person or business that received the payment.
- Can a married couple operate a business as a sole proprietorship or do they need to be a partnership?
Unless a business meets the requirements listed below to be a qualified joint venture, a sole proprietorship must be solely owned by one spouse, and the other spouse can work in the business as an employee. A business jointly owned and operated by a married couple is a partnership (and should file Form 1065, U.S. Return of Partnership Income) unless the spouses qualify and elect to have the business be treated as a qualified joint venture, or they operate their business in one of the nine community property states.
A married couple who jointly own and operate a trade or business may choose for each spouse to be treated as a sole proprietor by electing to file as a qualified joint venture. Requirements for a qualified joint venture:
- The only members in the joint venture are a married couple who file a joint tax return,
- The spouses own and operate the trade or business as co-owners (and not in the name of a state law entity such as an LLC or LLP),
- Both spouses materially participate in the trade or business, or maintain a farm as a rental business without materially participating (for self-employment tax purposes) in the operation or management of the farm, and
- Both spouses must elect qualified joint venture status on Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors by dividing the items of income, gain, loss, deduction, credit, and expenses in accordance with their respective interests in such venture. Each spouse files with the Form 1040 or Form 1040-SR a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), Schedule F (Form 1040), Profit or Loss From Farming, or Form 4835, Farm Rental Income and Expenses, accordingly, and if required, a separate Schedule SE (Form 1040), Self-Employment Tax to pay self-employment tax.
For more information about the qualified joint venture rules, see Election for Married Couples Unincorporated Businesses.
Married couple businesses in community property states may sometimes qualify to be treated similarly to a sole proprietorship. For Special Rules for Spouses in Community States, see Revenue Procedure 2002-69PDF and the Instructions for Schedule C.
- I use my home for business. Can I deduct the expenses?
To deduct expenses related to the part of your home used for business, you must meet specific requirements. Even then, your deduction may be limited.
You must use part of your home:
- Exclusively on a regular basis as your principal place of business,
- Exclusively on a regular basis as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
- In the case of a separate structure which isn’t attached to your home, exclusively on a regular basis in connection with your trade or business
- On a regular basis for storage of inventory or product samples for use in your trade or business of selling products if your home is the only fixed location of the trade or business,
- For rental use, or
- As a daycare facility.
Note: You don’t have to meet the exclusive use test if you satisfy the rules that apply to storage, rental, or daycare use.
Beginning with tax year 2013, a simplified method is available to qualifying taxpayers. They can claim a prescribed rate of $5 per square foot (up to a maximum of 300 square feet) directly on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), by entering the square footage of the home and square footage of the office in the applicable boxes to indicate their election to use the simplified method. For more information, see Simplified Option for Home Office Deduction and FAQs – Simplified Method for Home Office Deduction.
Note: You may not use the simplified method for rental use of your home.
Taxpayers who don’t choose the simplified method, will continue to use Form 8829, Expenses for Business Use of Your Home to compute the expense allowable as a deduction on Schedule C (Form 1040).
If you use your home in your farming business, report your expenses on Schedule F (Form 1040). Partners report their unreimbursed partnership expenses on Schedule E (Form 1040). If you are a statutory employee (box 13 of Form W-2 checked), report your expenses using the same rules as self-employed persons on Schedule C (Form 1040).
- What expenses are tax deductible?
The IRS states that business-related expenses must be “ordinary and necessary” in order to be tax deductible. Here is a list of common types of small business tax deductions:
- Advertising and marketing
- Business insurance
- Continuing education and training
- Depreciation of assets
- Legal and professional fees
- Meals with clients or employees
- Office supplies
- Phone and internet
- Rent and/or home office
- Software, app and portal subscriptions
- Travel expenses, including meals
- Vehicle and/or mileage for business use
An accountant can help you navigate the nuances of tax law related to education, meals and vehicle expenses.
- What will trigger an IRS Audit?
Although IRS audits are infrequent, there are red flags that trigger an audit. Small businesses may experience an IRS audit for:
- Undergoing significant changes in business expenses and business income.
- Filing an incomplete tax return.
- File a tax return with errors.
- Mixing business expenses with personal expenses.
- Not making a business profit for several years.
- Not filing a tax return if a business experiences a financial loss.
- Operating a business that deals with a lot of cash.
- I just started a small business and want to know if I must pay my income taxes quarterly or at the end of the year?
You file a federal income tax return annually, but the federal income tax system is a pay-as-you-go system.
If your business is a sole proprietorship or an unincorporated single-member LLC with you as the sole owner, the income is attributable to you personally. If your business is a partnership, an unincorporated multi-member LLC, or an S corporation, the ordinary business income passes through to members and is attributable to them on their personal returns.
If you expect to owe more than the amount allowed by law at the end of the year after deducting any withholding on other income and refundable credits:
- You should make quarterly estimated tax payments or increase the withholding on other income subject to withholding.
Form 1040-ES, Estimated Tax for Individuals and related instructions will assist you in determining if you need to make estimated tax payments, their due dates and how to pay them.
When you file your income tax return each year:
Generally, all other corporations must make installment payments if they expect their estimated tax for the year to be $500 or more.