Federal Tax Obligations for Small Business Owners
Running a small business means dealing with multiple federal tax obligations. Missing any of them can result in penalties, interest charges, and unwanted IRS attention. This guide breaks down every federal tax you need to know about and when each one is due.
Income Tax
Every business must file an annual income tax return. The form you use depends on your business structure:
- Sole proprietorships: File Schedule C (Form 1040) with your personal return
- Partnerships: File Form 1065 (informational return) and issue Schedule K-1 to each partner
- S Corporations: File Form 1120-S and issue Schedule K-1 to shareholders
- C Corporations: File Form 1120 and pay corporate income tax directly
Pass-through entities (sole proprietorships, partnerships, S corps) do not pay income tax at the entity level. Instead, the income flows through to the owners' personal returns.
Self-Employment Tax
If you are a sole proprietor or partner, you owe self-employment tax on your net earnings. This covers Social Security and Medicare taxes that would otherwise be withheld by an employer. The current rate is 15.3% on net earnings up to the Social Security wage base (this threshold adjusts annually — check IRS.gov for the current year's limit), plus 2.9% Medicare tax on earnings above that amount.
S corporation shareholders who work in the business pay themselves a reasonable salary, and employment taxes are withheld from that salary instead.
Employment Taxes
If you have employees, you are responsible for:
- Federal income tax withholding: Based on each employee's W-4
- Social Security and Medicare taxes (FICA): You withhold the employee's share (7.65%) and pay a matching 7.65%
- Federal Unemployment Tax (FUTA): You pay 6% on the first $7,000 of each employee's wages, reduced by a credit of up to 5.4% for state unemployment taxes paid
Employment taxes are deposited on a semi-weekly or monthly schedule depending on your total tax liability. File Form 941 quarterly to report these taxes.
Excise Taxes
Certain industries must pay federal excise taxes. These apply to businesses that manufacture or sell specific products (fuel, tobacco, alcohol, firearms) or operate certain types of equipment (heavy trucks, indoor tanning). File Form 720 quarterly if excise taxes apply to your business.
Key Filing Deadlines
| Business Type | Form | Due Date | |---|---|---| | Sole Proprietorship | Schedule C (1040) | April 15 | | Partnership | Form 1065 | March 15 | | S Corporation | Form 1120-S | March 15 | | C Corporation | Form 1120 | April 15 | | Quarterly Payroll | Form 941 | End of month after quarter | | Annual FUTA | Form 940 | January 31 |
Penalties for Late Filing and Payment
The failure-to-file penalty is typically 5% of unpaid taxes per month, up to 25%. The failure-to-pay penalty is 0.5% per month. These stack, and interest accrues on top of both.
Filing an extension gives you more time to file, but it does not extend your time to pay. Estimate and pay what you owe by the original due date to avoid penalties.
Getting Started
Pull your business structure documents. Identify which forms apply to you. Set up a tax calendar with every deadline. If you have employees, make sure your payroll system handles federal deposits correctly.
The IRS Small Business and Self-Employed Tax Center is the authoritative starting point for understanding your obligations. Do not rely on generic advice when your specific business structure determines exactly what you owe.