How to report your income to the IRS

Reporting all your income is important both for the sake of corporate returns and an individual income tax return. When you or your tax professional submits a final federal tax return, it will be a combination of the hard work you would have done in the background. And most of it is around keeping documentation on both your sales and expenses. Nevertheless, above keeping documentation and updating all tax documents, there is also the question of ‘how do you report your income’? As you attempt to answer this question, always bear in mind the type of business you operate.

How does a sole proprietor report income?

I understand that many people believe that registering a sole proprietorship is the easiest way to own a business. But did you know that this type of business is more vulnerable to IRS audits? In 2020, it was found that sole proprietors with $1 million or more in income had an audit frequency rate of 4.4%. More so, sole proprietors with $100,000 to $199,000 in gross receipts had an audit frequency rate of 2.1%. These rates were way higher than those of S-corporations and Partnerships and multi-member LLCs, which had an audit frequency of 0.3% and 0.4%, respectively.

With that being said, how does reporting income look like for a sole proprietor? First of all, all income must be captured in an orderly manner. This, you do by tracking all expenses and income using proper bookkeeping methods. Your accounting, too, must be professionally done by a qualified accountant. If you don’t have one, you can talk to us. We are one of the best accounting firms in Maryland. We also help businesses and individuals file taxes all over the country, thanks to technology. All you got to do is talk to us.

Well, here is how you should report your income if you are running a sole proprietorship. You don’t have a W-2 or wage form, so don’t even think about filing that one. The fact that you don’t have a W-2 form means that no one is withholding any income from you. But it is your responsibility to figure out your taxes. That alone has led to many like you being complacent and making mistakes by not reporting their earnings. Yet, you need to report self-employment income on Schedule C (Form 1040) to report income or loss. If your self-employment income, minus expenses, is at least $400, you need to figure out your self-employment tax on Schedule SE.

Reporting income for salary earners

It’s not a secret that most taxpayers are salary earners. And I find that many of them fail to report their income, resulting in trouble with the IRS. But by following the tips below, you won’t make a wrong step, whether using electronic filing to file your taxes or through a tax professional like myself.

When you are employed, the employer withholds a certain amount of taxes on your salary. You are the one who determines this by sending the employer a W-4 form stating how much you want to be withheld. The trick here is to know that choosing a smaller amount will result in you owing more taxes come the end of the tax season. Therefore, it’s wise to let them withhold the right amount. Nevertheless, when the employer withholds tax for the year, they should give you a W-2 form by January 31, for the previous tax year ending on December 31. This is the form that reports your wages and withheld taxes. You must use it to submit to the IRS. If you make mistakes on it, you will be heading for disaster.

Reporting income for corporates, LLCs, and partnerships

We already mentioned the part where clean bookkeeping and accounting sets a strong base for reporting income. As such, we will delve straight into how companies report income. Suppose you run a partnership, report your income and expenses on Form 1065, U.S. Return of Partnership Income. As for corporations, they report their income and expenses, and calculate their tax on Form 1120, U.S. Corporation Income Tax Return. LLCs are formed under State statutes. Therefore, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC owner’s tax return (a disregarded entity). And, if it is treated as a partnership, know that a partnership does not pay income tax because of the pass-through entity classification. But members do pay taxes on their share of income.

Having said all this, you must understand the complexity that arises with taxes. To win in this confusing battle to fulfill the IRS’ demands, hire a tax professional. You can talk to me in that regard. Call my office today and book an appointment with me; I will be waiting to assist you.

People have also asked this

     1. How to Report income?

Reporting income differs with the type of business you register. Consult a tax professional for explanations about how to report income in your business.

     2. What income do I report for tax dependents?

If your dependents are not 65 or older or blind and have earned income more than $12,400, they must file their own return.

     3. How do I report self-employment income?

Self-employment income is reported on a Schedule C (Form 1040) for income or losses. To determine your self-employment tax, you use Schedule SE.

     4. What things must you report to social security?

You may report the change of address or the change of living conditions to the social security. You may also report the death of your spouse, dependent, or anyone living in your home. More so, report a change in earned and unearned income, including a change in wages or net earnings from self-employment. This includes your spouse’s income if you are married and living together and parents’ income if applying for a child.

     5. How is income verified?

The IRS verifies your income by comparing your claimed income against your IRS W-2 Form, any 1099s, and other tax documents received from businesses under your Social Security number.

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