Should I File My Business and Personal Taxes Together?

Whether business and personal taxes are filed together depends on your business’s legal structure. Different business structures are treated distinctly by tax authorities, influencing how income and expenses are reported.

Understanding How Business Structures are Taxed

The tax treatment of a business entity is a fundamental concept that dictates how its income and losses are handled. Businesses generally fall into one of two broad categories for tax purposes: pass-through entities or separate entities. This distinction determines whether the business’s financial results are taxed at the business level or directly on the owners’ personal tax returns.

Many small businesses operate as “pass-through” entities, which include sole proprietorships, partnerships, and S corporations. For these structures, business income and losses are not taxed at the entity level. Instead, they “pass through” directly to the owners’ personal tax returns, where they are reported and taxed at the individual’s applicable income tax rates. This approach avoids the issue of profits being taxed twice, once at the business level and again when distributed to owners.

Conversely, C corporations are treated as separate legal and tax entities. This means the corporation itself pays corporate income tax on its profits. If the corporation then distributes these profits to its owners as dividends, the owners are taxed again on that income on their personal tax returns, a concept often referred to as “double taxation.” The federal corporate tax rate is a flat 21%.

Limited Liability Companies (LLCs) offer flexibility in their tax classification. An LLC is considered a “disregarded entity” for tax purposes. Depending on the number of owners and elections made with the Internal Revenue Service (IRS), an LLC can be taxed as a sole proprietorship, a partnership, an S corporation, or a C corporation. This flexibility allows LLC owners to choose the tax treatment that best aligns with their business goals.

Determining Your Current Business Structure for Tax Purposes

Identifying your existing business structure is the first step in understanding your tax filing obligations. Your business structure is typically established when you begin operations or through formal registration processes. This classification dictates how your business income and expenses are treated by tax authorities.

A sole proprietorship is the default structure for an individual operating a business without formal registration. This includes freelancers, independent contractors, or anyone running a business by themselves without creating a separate legal entity. If you are the sole owner of an unincorporated business, you are generally considered a sole proprietor for tax purposes.

A partnership exists when two or more individuals or entities co-own a business and have not elected to be taxed as a corporation. This is the default tax classification for a multi-member business that is not formally incorporated. Partnerships are formed by agreement among the owners, which often outlines their respective shares of profits and losses.

A Limited Liability Company (LLC) is a legal entity created at the state level. While an LLC provides liability protection, its tax classification is flexible and depends on its ownership structure and any elections made with the IRS. A single-member LLC is typically taxed by default as a sole proprietorship. Conversely, a multi-member LLC is taxed by default as a partnership. However, an LLC can elect to be taxed as an S corporation or a C corporation.

An S corporation is a tax classification that requires a specific election with the IRS. Businesses, including corporations or LLCs, must file Form 2553 to be taxed under Subchapter S. This election allows qualifying businesses to benefit from pass-through taxation while retaining the legal protections of a corporation.

A C corporation is the standard or default tax classification for most incorporated businesses unless an S corporation election is made. When a business incorporates, it is generally treated as a C corporation for tax purposes. This structure is common for larger businesses or those seeking to raise capital through stock offerings.

How Each Business Structure Files Taxes

The method for filing taxes directly relates to the business structure, determining whether business income and expenses are reported on a separate business return or integrated into the owner’s personal tax return.

For sole proprietorships and single-member LLCs taxed as sole proprietorships, business income and expenses are reported on Schedule C. This schedule is attached to the owner’s personal income tax return, Form 1040. Owners of these entities are also responsible for self-employment taxes, covering Social Security and Medicare, which are reported on Schedule SE and filed with their Form 1040.

Partnerships and multi-member LLCs taxed as partnerships file an informational return, Form 1065. This form reports the partnership’s income, deductions, and other financial data but does not calculate or pay tax at the entity level. Each partner receives a Schedule K-1 from the partnership. Partners use this information to report their share of the business’s income or losses on their personal Form 1040. While the business files a separate informational return, the income ultimately flows through to the owners’ personal tax returns.

S corporations operate as pass-through entities, generally not paying federal corporate income tax. An S corporation files its own informational tax return, Form 1120-S. Similar to partnerships, the S corporation issues a Schedule K-1 to each shareholder. Shareholders use their Schedule K-1 to report their proportionate share of the corporation’s income, losses, deductions, and credits on their personal Form 1040.

C corporations are distinct in their tax filing requirements, treated as separate legal entities from their owners for tax purposes. The corporation files its own corporate income tax return using Form 1120 and pays taxes on its profits at the corporate level. This filing is entirely separate from the owner’s personal tax return. Owners of a C corporation report any salaries they receive from the corporation as wages on their personal Form 1040. If the corporation distributes dividends, owners report these dividends on their personal tax returns.