Small Business Tax Info & FAQs

Review the IRS chart below to determine whether you are required to file a federal income tax return. Remember, you may want to consider filing even if you are not required to do so. Why? Because you may be entitled to receive a refund due to tax credits such as the Earned Income Tax Credit.

2019 Filing Chart Requirement (for most taxpayers)

For more information, see Table 1 in IRS Publication 501 (Dependents, Standard Deduction, and Filing Information).

The 2018 Tax Cuts and Jobs Act overhauled the Internal Revenue Code and set forth the following seven tax brackets for ordinary income: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The U.S. follows a progressive tax system, which means a taxpayer's tax rate increases as his or her income increases.

For tax year 2021, the top ordinary income tax rate remains 37% for single taxpayers with incomes greater than $518,400 ($622,050 for married couples filing jointly). The other rates are:

Single Filers

Married, Filing Jointly

Marginal Rates

The term "marginal tax rate" refers to the rate you pay at each level (or bracket) of income. Increments of your income are taxed at different rates. For example, if you're a single taxpayer with taxable income of $90,000 in 2019, then the first $9,875 you made is taxed at the 10% rate, the income between $9,876 and $40,124 is taxed at 12%, the income between $40,125 and $85,524 is taxed at 22%, and the remaining income between $85,525 and $90,000 is taxed at 24%. Thus, even though a portion of your income is subject to the higher 24% marginal tax bracket, your effective tax rate is approximately 17.5%.

Marginal vs. Effective Tax Rate

The marginal tax rate is the statutory rate, as listed above, while the effective tax rate (which will generally be lower) is the actual rate you pay on your taxable income after accounting for deductions and certain tax credits. Check out TaxAct's 2019 Tax Bracket Calculator to quickly determine your marginal and effective tax rates.

Capital gains are the profits received from the sale of certain investment assets (e.g., stocks, land, a business). There are two types of capital gains: long-term and short-term.

Long-term capital gains occur when you make a profit from the sale or transfer of an asset that you've held for more than a year. The profits are taxable, but at a very preferential rate---see the chart below for the 2020 capital gain tax rates for single filers and those who are married filing jointly.

Single Filers

Married, Filing Jointly

Short-term capital gains occur when you sell or transfer an asset that you have held for one year or less. Short-term capital gains are taxed at ordinary income rates, so no preferential tax treatment applies.

Key Takeaway: It can be extremely beneficial from a tax standpoint to invest in assets and hold them for at least a year and one day before selling or disposing of them to take advantage of the long-term capital gains tax rates.

According to the IRS, you must keep records such as receipts, canceled checks, and other documents (W-2s, 1099s, invoices, etc.) that support an item of income, a deduction, or a credit appearing on a tax return for as long as those records may become material in the administration of any provision of the Internal Revenue Code. Basically, you are required to keep all records that support the amounts reported on your tax return until the time limitations for that return expires (usually 3 years).

Generally, records must be kept for at least 3 years, but there are certain situations that require they be kept for longer.

Also, if you need information from a previously filed tax return, you may either:

1. Request a copy of your tax transcript by submitting a Form 4506-T (Request for Trascript of Tax Return); or

2. Create an account on IRS.gov to view a history of your account transcipts (visit https://www.irs.gov/payments/view-your-tax-account).

For more information, see MyTaxRights's Recordkeeping topic and IRS Topic No. 305 (Recordkeeping).

It is important to file your tax return on time even if you are unable to fully pay your tax debt because the IRS assesses penalties for late filing.

First, determine how much you can pay. Second, choose the payment option that best fits your situation. Common payment scenarios are listed below.

(A) If you can pay the full amount immediately:

You can pay with an electronic funds transfer or with a credit or debit card, or with a check by mailing it to the address listed on your bill or bringing it to your local IRS office.

(B) If you cannot pay the full amount immediately, but can pay it within 120 days:

If you cannot pay in full immediately, the IRS offers additional time (up to 120 days) to pay in full. It is not a formal payment option, so there is no application and no fee, but interest and any penalties continue to accrue until the tax debt is paid in full. For information about this option, call the IRS toll-free at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses).

(C) If you want to make monthly payments to pay off your tax debt:

You can ask for an Installment Agreement, which is a fixed monthly payment. This is a formal agreement with the IRS, and involves an application process and fees. For more information on IRS Installment Agreements, visit the IRS's Additional Information on Payment Plans page.

(D) If you are unable to pay off the full tax debt:

An Offer in Compromise allows you to pay less than the full amount you owe.

For the IRS to consider an Offer in Compromise, you must apply, and must generally pay certain fees and a portion of the debt. You must then file tax returns and make payments on time for five years after the IRS accepts your offer.

(E) If you are unable to make any sort of payment:

The IRS understands there may be times when you cannot pay a tax debt due to your current financial situation. If the IRS agrees that you cannot pay your taxes and pay your reasonable living expenses, it may place your account in a status called Currently Not Collectible. The IRS will not try to collect payment from you while your account is in Currently Not Collectible status, but the debt does not go away, and penalties and interest continue to grow.

Estimated tax payments refer to the process by which certain indiviudals and businesses periodically pay their share of taxes on the income they receive or earn.

Taxpayers are generally required to pay taxes on their income as its received or earned. For most employees, these taxes are paid automatically through what is known as tax withholding---the process by which an employer withholds a prefixed amount from an employee's wages to cover the employee's payroll tax obligations (e.g., income tax, social security tax, and Medicare tax). However, if you are self-employed or an independent contractor, then you will generally need to make estimated tax payments to the IRS because you are not subject to employee tax withholding. Sole proprietors, partners, and S corporation shareholders may also need to make estimated tax payments.

Who is Required to make Estimated Tax Payments?

Taxpayers generally must make estimated tax payments throughout the year if they expect to owe $1,000 or more in taxes when they file their next tax return. Corporations generally must make these payments throughout the year if they expect to owe $500 or more on their next tax return.

Estimated Tax Payment Schedule

Estimated tax payments are due at four different periods throughout the year:

• April 15th (for the period January 1st - March 31st);

• July 15th (for the period April 1st - May 31st);

• October 15th (for the period June 1st - August 31st); and

• January 15th (for the period September 1st - December 31st).

Note, If you do not pay enough tax by the due date of each payment period, you may be charged a penalty even if you are due a refund when you file your income tax return.

For more information on estimated tax payments, including how to make the payments, see MyTaxRights's article entitled Some taxpayers may be required to make estimated tax payments.

You can use the IRS Withholding Calculator to help determine the right amount of tax that should be withheld from your paycheck. The amount of income tax your employer withholds from your regular pay depends on the following two things:

1. The amount you earn; and

2. The information you give your employer on IRS Form W–4 (Employee’s Withholding Allowance Certificate).

If your employer is not withholding the proper amount to cover your annual tax obligation, you may need to complete a new IRS Form W–4 to change the amount being withheld.

Federal law requires that an employer issue a Form W-2 to each of its employees no later than January 31st. If you have not received a Form W-2 by January 31st, the IRS advises that you first contact your employer to try to resolve the issue. If your attempts to resolve the issue have not worked by the end of February, consider contacting the IRS to initiate a Form W-2 complaint. You can call the IRS toll free at (800) 829-1040 or make an appointment to visit an IRS Taxpayer Assistance Center (TAC).

For mor information, see the IRS's FAQ page on this topic.

A. Dependent Children

To claim a child as a dependent, all of the seven qualifying child dependency tests below must be satisfied.

1. Dependent Taxpayer Test:

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2. Joint Return Test:

   • The child must not be filing a joint return for the year (unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid).

3. Citizen or Resident Test:

   • The child must be a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico (there is an exception for certain adopted children).

4. Relationship Test:

   • The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.

5. Age Test:

   • The child must be either: (a) under age 19 at the end of the year and younger than you (or your spouse if filing jointly); (b) under age 24 at the end of the year, a student, and younger than you (or your spouse if filing jointly); or (c) any age if permanently and totally disabled.

6. Residency Test:

   • The child must have lived with you for more than half of the year (there are exceptions for temporary absences, children who were born or died during the year, children of divorced or separated parents (or parents who live apart), and kidnapped children).

7. Support Test:

   • The child must not have provided more than half of his or her own support for the year.

B. Dependent Relatives

To claim a relative as a dependent, all of the qualifying relative dependency tests must be satisfied.

1. Dependent Taxpayer Test:

   • You cannot claim any dependents if you (or your spouse if filing jointly) could be claimed as a dependent by another taxpayer.

2. Joint Return Test:

   • The person must not be filing a joint return for the year (unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid).

3. Citizen or Resident Test:

   • The person must be a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico (there is an exception for certain adopted children).

4. Not a Qualifying Child Test:

   • The person cannot be your qualifying child or the qualifying child of any other taxpayer.

5. Member of Household or Relationship Test:

   • The person must be either (a) your child (to include a legally adopted child), stepchild, foster child, or a descendant of any of them (for example, your grandchild); (b) your brother, sister, half-brother, half-sister, stepbrother, or stepsister; (c) your father, mother, grandparent, or other direct ancestor (but not foster parent); (d) your stepfather or stepmother; (e) a son or daughter of your brother or sister; (f) a son or daughter of your half-brother or half-sister; (g) a brother or sister of your father or mother; or (h) your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Otherwise, the person must live with you all year as a member of your household (subject to certain exceptions) and your relationship must not violate local law.

6. Gross Income Test:

   • The person's gross income for the year must be less than $4,200 (there is an exception if the person is disabled and has income from a sheltered workshop).

7. Support Test:

   • You must provide more than half of the person's total support for the year (there are exceptions for multiple support agreements, children of divorced or separated parents (or parents who live apart), and kidnapped children).

When preparing your federal income tax return, you generally are required to report all of your income (known as "gross income") for the applicable tax year on lines 1 through 7 of your Form 1040 (U.S. Individual Income Tax Return). The Internal Revenue Code defines gross income as all income from whatever source derived, including (but not limited to) the following items:

• Compensation for services, including fees, commissions, fringe benefits, and similar items;

• Gross income derived from business;

• Gains derived from dealings in property;

• Interest;

• Rents;

• Royalties;

• Dividends;

• Annuities;

• Income from life insurance and endowment contracts;

• Pensions;

• Income from discharge of indebtedness;

• Distributive share of partnership gross income;

• Income in respect of a decedent; and

• Income from an interest in an estate or trust.

For more information, see the following resource:

• IRS Publication 525 (Taxable and Nontaxable Income)

Constructively-received income

Generally, any income that is available to you is subject to tax regardless of whether the income is actually in your possession. Income is considered "constructively-received" when an amount is credited to your account or made available to you without restriction. You do not need to have possession of it. If you authorize someone as your agent to receive income for you, you are considered to have received it when your agent receives it. Income is not considered constructively-received if your access to it is subject to substantial restrictions or limitations.

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Assignment of income

An assignment of income occurs when you agree (through a contract) that a third-party can receive income for you. If you assign all or part of your income to a third-party, you must include the assigned amount as part of your gross income when the third-party receives it. For example, if you and your employer agree that part of your salary is to be paid directly to your former spouse, then you must include that amount in your income when your former spouse receives it.

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Prepaid income

Prepaid income, such as compensation for future services, is generally included as part of your gross income in the year you receive it. However, if you use an accrual method of accounting, you can defer prepaid income you receive for services to be performed before the end of the next tax year. In this case, you include the payment as part of your gross income as you earn it by performing the services.

Yes.

Generally, income received from any source is taxable. Thus, tips received by taxpayers are considered income and subject to federal income tax. Some taxpayers mistakenly believe they are not required to report their cash tips to the IRS, which can lead to a lot of trouble during tax time.

For more information on the tip income reporting requirements, see MyTaxRights's article entitled Taxpayers must report tip income to the IRS, including cash tips and the IRS's Tip Recordkeeping & Reporting page.

Yes. Taxpayers should be aware of the following common penalties.

Failure-to-File Tax Return

The IRS may impose an addition to tax penalty against a taxpayer for the failure to file a required tax return, unless the taxpayer can show that the failure was due to reasonable cause and not willful neglect. The initial penalty amount is 5% of the tax liability shown on the return plus an additional 5% for each month the failure to file continues, up to a total penalty amount of 25% of the tax liability. 26 U.S.C. § 6651(a)(1). The 5% monthly penalty amount is reduced by the amount of the failure-to-pay penalty amount (0.5%) for any month that both penalties apply simultaneously; thus, the maximum penalty amount when these two penalties apply cannot exceed 5% per month.

Failure-to-Pay Tax

The IRS may impose an addition to tax penalty against a taxpayer for the failure to pay the amount shown on a tax return, unless the taxpayer can show that the failure was due to reasonable cause and not willful neglect. The initial penalty amount is 0.5% of the tax liability shown on the return plus an additional 0.5% for each month the failure to pay continues, up to a total penalty amount of 25% of the tax liability. 26 U.S.C. § 6651(a)(2).

Failure-to-Pay Estimated Income Tax

The IRS may impose an addition to tax penalty against a taxpayer for the failure to pay estimated income tax. 26 U.S.C. 6654(a). The penalty is determined by applying the applicable interest rate (known as the “underpayment rate”) to the tax amount that should have been paid (known as the “underpayment of estimated tax”) for the duration of the underpayment period. The applicable interest rate is determined on a quarterly basis and can be found in 26 U.S.C. § 6621. Note, though, the penalty does not apply if a taxpayer: (1) retired after reaching age 62, or became disabled, in the taxable year or the preceding taxable year; and (2) the underpayment was due to reasonable cause and not willful neglect. See 26 U.S.C. 6654(e)(3)(B).

Subject to certain limited exceptions, the following types or categories of income are generally not taxable for most recipients:

• Life insurance proceeds

• IRA and pension rollovers

• Child support payments

• Inheritances

• Gifts

• Workers compensation

• Disability payments, but only if you paid the premiums on the policy. If your employer paid the policy, then the disability payments are taxable. If you paid part of the policy, then only part of the disability payments you paid are nontaxable.

• Court damages or settlements for personal physical injuries or physical sickness. However, punitive payments are taxable.

• Health and accident benefits

• Federal income tax refunds

• State income tax refunds (if you took the standard deduction the prior year)

• Most scholarships, fellowships, and Pell grants

• Foster care payments (certain restrictions for individuals over age 18 in foster care)

• Up to $250,000 of gain on the sale of your personal residence (up to $500,000 for joint filers). However, the gain might be taxable if you lived in the residence less than two years or if the residence has ever been used as a rental property or home office

• Roth IRA qualified distributions

• Welfare payments

• Supplemental Security Income (SSI)

• Social security benefits (including SSDI) are either nontaxable or partially taxable. For more information, see MyTaxRights.org's article "Reminder: Social Security benefits may be taxable."

• Cancellation of debt because of bankruptcy or insolvency.

• Veterans Administration disability benefits

• Black lung benefits

• Cash rebates

• Insurance proceeds for theft or damage to your property

• Utility rebates

• Long-term care insurance benefits

• Certain military allowances

• Peace Corps living allowances

• Reimbursement for medical care

• Certain individual care provider income

• Disaster relief payments

• COVID-19 Economic Impact Payments

The IRS requires all taxpayers to report on their tax return any virtual currency (aka cryptocurrency) received, sold, sent, exchanged or otherwise acquired during 2021. Taxpayers are not required to report virtual currency transactions that merely involved holding virtual currency in a wallet or an account, or the transfer of virtual currency from one wallet or account to another that is owned or controlled by the same taxpayer.

Note, income paid in virtual currency or earned by buying, selling, or mining virtual currency is considered taxable income and must be reported to the IRS.