Seven Tips for P&L Tax Forms

The IRS offers advice for small businesses on how to properly fill out Schedule C documents.
Sarah JohnsonApril 25, 2008

About one in seven federal tax returns includes a Schedule C, the form that shows the profit or loss of a single-owner business. Having seen more than enough mistakes, the Internal Revenue Service is planning to educate filers, particularly small-business owners who have never filled out the forms, on how to do it properly.

“One of the biggest challenges faced by people starting out in business is understanding and meeting their tax-filing requirements,” says Kathy Petronchak, commissioner of the IRS’s small business and self-employed operating division. “It’s a new, different, and potentially overwhelming experience for them.”

The IRS plans to hold a conference call on May 21 aimed at small-business owners and organizations, tax professionals, industry associations, and government entities that have dealt or will deal with Schedule C. More than 21 million of the forms were filed in 2006, which accounted for more than $269 billion in aggregate net profits.

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The IRS also offers the following tips so that businesses can avoid an unexpected visit by the tax man:

• Properly classify workers as either employees or independent workers based on the definitions under law (“employees” are considered to be under the company’s control and have various taxes withheld from their paychecks, whereas companies generally do not have to withhold taxes from “independent contractors”).

• Deposit federal employment taxes (known as trust fund taxes) into a financial institution, according to the appropriate schedule. These include withheld federal income tax, Social Security and Medicare taxes, and federal unemployment tax.

• Start making estimated quarterly payments to cover the business owner’s income tax and Social Security self-employment tax liability.

• Keep good records to protect personal and financial investments and to make tax filing easier. Records for employment taxes should be kept for at least four years.

• Consider filing and paying the taxes electronically.

• Protect financial and tax records to make sure the business can continue operating in case of a disastrous event.

• Last, be aware of scams for avoiding tax payments that seem too good to be true. These schemes include hiding income in offshore bank accounts, falling for fake E-mails that seem to come from the IRS but are really from thieves hoping to acquire confidential information, and creating a shell company for the purpose of underreporting income and not filing necessary tax returns.

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