While the 1040 is one of the most common tax forms — if you ask almost any tax-paying American, you’ll likely see at least a glimmer of recognition — it’s also deceptively complex. In fact, the Internal Revenue Service’s Form 1040 instructions document is over 100 pages.
Those complex Form 1040 instructions can be an especially large headache for small business owners and the self-employed. When tax-time rolls around, it can be frustrating, overwhelming, and time-consuming.
The goal for most is to get in, get out, and move on as quickly as possible. However, slowing down before you start the process of filing taxes for your business can save you both time and money. In the long run, that preparation can put you in a good position for next year’s tax season and ensure you have enough in your savings account for that looming tax payment.
To guide you through what might seem like an inescapable labyrinth of accountant jargon, let’s take a plain language approach to how the 1040 form is structured, what Schedules you might need, and how to file.
Who needs to use Form 1040?
First, you’ll need to make sure you can use the IRS Form 1040 to file taxes on behalf of your business. The 1040, also known as the US Individual Income Tax Return, is a two-page document for taxpayers to determine, report, and file their income. It’s also here that taxpayers calculate their deductions, and ultimately figure how much they owe in state and federal income taxes.
“Individual” is an important keyword when it comes to the 1040. The 1040 is familiar to many taxpayers because it’s used by W-2 employees to file their individual income taxes, but it can also be used to file business taxes for certain small businesses.
You report your business income and expenses using Form 1040 if you’re self-employed, you’re a small business owner who runs your company as a sole proprietorship, your company is structured as a single-member LLC, or you’re a partner in a partnership. In each of these cases, you need to report your business income on a Schedule C attachment to your personal income tax return, also known as Form 1040.
However, if your company is structured as an S corporation or a C corporation, or you choose to treat your LLC as a corporation, then you’ll need to prepare a separate corporate tax return using IRS Form 1120.
How Form 1040 is structured
If you’ve determined that your small business can use Form 1040 to file its taxes, you now need to understand how information is organized on the form itself. This will give you a better sense of how the data from your business records impacts your tax calculation.
In the end, you will use Form 1040 to collect your personal and professional earnings and expenses, and calculate your tax liability. That tax liability could be negative, in which case the IRS owes you a tax refund. Or, if the number is positive, it will tell you how much you owe the government.
The Form 1040 is a two-page document. Luckily, the first page is straightforward and serves as a means to collect personal data about you, the taxpayer. For example, on this page you will provide your Social Security Number, the number of dependents in your household, and information about your spouse if applicable.
Both the taxpayer and the tax preparer — for instance, your accountant — must sign the tax return on page one.
Page two is where the 1040 starts to get complicated. On this page, you’ll need to input all the data required to calculate your tax liability. That means numbers. Many of the lines on page two need to be filled with dollar amounts that you will report on supporting Schedules, which are explained below. Other lines report information from documents you receive, such as the gross wages reported on your W-2 form.
The information on page two is listed in a specific order to help you more easily calculate your state and federal tax liability. The order is as follows:
- Income: Lines 1-5 list all of your income sources, such as wages reported on your W-2 and income from self-employment. These lines also require you to enter how much you earned during the prior year through other income sources, e.g., from interest, investment dividends, withdrawals from Individual Retirement Accounts (IRAs) and other pension accounts, and Social Security benefits. You report your total income on line 6 and post your adjusted gross income (AGI) on line 7.
- Standard or itemized deduction: Next, the taxpayer deducts the standard deduction in line 8 ($12,000 if you’re filing as a single taxpayer and $24,000 if your filing status is married filing jointly). If your itemized deductions exceed your standard deduction, use the larger itemized amount instead.
- Qualified business income deduction: Line 9 of your 1040 is extremely important if you’re planning to use the 1040 to file taxes for your business. You can use line 9 to claim additional tax deductions if you have qualified business income, Real Estate Investment Trust (REIT) dividends, or income from Publicly Traded Partnerships (PTPs). In your case, you’ll likely want to focus on business expenses you can deduct — thereby lowering your tax liability. According to the IRS 1040 instructions, these expenses can include items like deductible tax on self-employment income, self-employed health insurance premiums, and contributions to qualified retirement plans.
- Taxable income: In line 10 you’ll find your taxable income. This is your Adjusted Gross Income (which you report on line 7) minus any deductions you reported on lines 8 and 9. The result equals your taxable income.
- Tax calculation, credits: Your taxable income is then used to calculate your tax liability, and the applicable tax rate is based on a set of tables. Tax credits, such as the child tax credit listed on line 12, can help reduce your tax liability.
- Tax withholdings, payments: Once you know your tax liability, you then deduct any taxes withheld, such as salary withholdings listed on your W-2, which you’ll find on line 16. After subtracting withholdings, you’ll either have a tax refund or a tax amount due.
The same information from page two of your 1040 can also be presented as three simple formulas:
1. Taxable income = income – standard or itemized deduction
2. Tax = taxable income x tax rate
3. Tax liability = Tax – Credits – Withholdings
Understanding this flow will help you see the impact of each item you post to your tax return.
Determine the 1040 Schedules you need
Taxpayers who have simple returns — those who work as employees with W-2 income and who use the standard deduction — only need to file Form 1040. Unfortunately, as a small business owner, your situation is likely more complicated. If that’s the case, you may also need to file an additional Schedule along with your Form 1040. There are six supplemental Schedules that you can append to your 1040, listed as follows:
- Schedule A: Itemized tax deductions you’ll enter on page two of Form 1040.
- Schedule B: Interest and dividend income — these amounts are posted to the income section on Form 1040.
- Schedule C: Line 7 of Schedule C is where sole proprietors can report their business revenue, expenses, and profit (or loss).
- Schedule D: For asset sales that generate capital gains or losses — posted to Schedule 1 (additional information below).
- Schedule F: Line 9 of Schedule F can be used to report the amount of gross income from a farming business.
Schedules 1 and 4 were new for 2018 and were created to clarify the tax filing process.
- Schedule 1: If you have additional income from capital gains or unemployment compensation, you must file Schedule 1. This form also includes several common tax deductions, including the student-loan interest deduction.
- Schedule 4: Many self-employed people must file Schedule 4, which lists self-employment taxes.
How to file
Now that you know what’s on Form 1040, and what — if any — additional Schedules you’ll need to fill out, the question remains: How do I file my taxes? Luckily, this part is much less complicated than actually filling out your 1040, as the IRS now provides two different ways to file your taxes: electronic or manual (via mail).
The electronic filing option is by far the more popular of the two choices with the IRS reporting that nearly 90% of people now use tax software for electronic filing. Many people choose to go this route because of its convenience — no hurried trips to the post office — and speed. When you e-file, the IRS will issue your tax refund more quickly, and you can speed up the process even more if you choose to have the return directly deposited into your checking or savings account.
However, if you plan on filling out your tax forms manually, you can access all IRS forms, instructions, and publications on IRS.gov. The address for mailing your tax return is listed in the Form 1040 instructions. The downside of this option is that it can take much longer to process your return.
No matter which way you choose to file, your personal tax return — and the payment for any tax liability — is due on April 15th. If your tax situation is complex, you can request a six-month extension for more time to file, but you still have to pay your tax liability by April 15th to avoid interest charges.
Form 1040 instructions: plain language to save time
If you’re not interested in reading all of the IRS-authored instructions on how to fill out your Form 1040, there are tools that can help simplify the process for you. You may want to consider using tax software to complete your return and ask a tax accountant to review it for accuracy.
Whether you choose to fill out your 1040 on your own, use software, consult an accountant, or do a combination of the three, it’s always a good idea to have a basic understanding of the form itself. By investing time now, you’ll have a better understanding of how your tax return works, and you’ll be better prepared to file next year’s return.