How to File Taxes for a Home‐Based Business

You must report any profit or loss from your business to the Internal Revenue Service (IRS) as well as to your state taxing authority. To file your taxes, download the necessary forms and instructions from the IRS website. Then figure out if you qualify to take a business deduction for your home office. Because the tax code is complicated, you are advised to seek out the help of an accountant if you have any questions or problems.

Part 1
Part 1 of 4:

Getting Your Tax Forms

  1. Sole proprietors file Form 1040 and Schedule C. [1] You can download both at the IRS website. Also be sure to download the instructions. [2] [3]
    • You also have to withhold self-employment tax, so you should download Schedule SE and its instructions. [4]
  2. All LLCs must file as either a sole proprietorship, corporation, or partnership. The federal tax code has classified some LLCs as corporations. However, most LLCs may elect a classification by filing Form 8832. [5] Generally, you will need the following forms to pay federal taxes as an LLC: [6]
    • If you are a single member LLC, then file Form 1040 and Schedule C like a sole proprietor.
    • If you are a partnership, then file a Form 1065 partnership tax return.
    • If you file as a corporation, then file Form 1120, which is the corporation income tax return.
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  3. Corporations must fill out either Form 1120 or Form 1120-A, U.S. Corporation Income Tax Return. [7] You can download either form and its instructions at the IRS website. [8]
    • Corporations may also be liable for employment taxes: Social Security, Medicare, and unemployment tax. You will need to download the appropriate forms and their instructions, which are available at the IRS website. [9]
  4. As a partnership, you will have to file Form 1065, U.S. Return of Partnership Income. You can download this form and its instructions from the IRS website. [10]
    • You may also have to pay employment taxes. Employment taxes include Social Security, Medicare, and Federal unemployment taxes.
    • You will need to download Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, Form 941, Employer’s Quarterly Federal Tax Return or Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees. Also download their instructions.
  5. You will also have to pay state taxes. You should contact your state’s Department of Revenue (or equivalent office) and get the applicable forms for your state.
    • Make note of the deadline for filing your state business taxes, which might not be the same deadline as filing your federal taxes.
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Part 2
Part 2 of 4:

Calculating Your Home Office Deduction

  1. You cannot take a home office deduction simply because you work in your home. Instead, you must meet other criteria. Read IRS publication 587 to check if you qualify. [11] Generally, the following must be true to qualify:
    • You must use the home office regularly and exclusively for business. For example, your kitchen table wouldn’t qualify as a “home office” because you also eat in the kitchen. However, if you use an extra room as your office, then you can typically take a home office deduction. [12]
    • The home office must be your principal place of business. This means that you use the home office “substantially” and “regularly” as your base of operations.
  2. There are two different ways to calculate the home office deduction. You can calculate using the “simplified” method or by calculating “actual expenses” (which his also called the “regular” method).
    • Under the simplified method, you multiply the square feet used by $5. You can only claim up to 300 square feet. [13] Accordingly, if your home office is 200 square feet, then you can claim $1,000 as a deduction.
    • Under the regular (“actual expenses”) method, you can deduct mortgage interest, insurance, repairs, utilities, and depreciation. Generally, the amount you can claim will be based on the percentage of your home devoted to the business. [14]
  3. Complete this form if you are using the “actual expenses” method for calculating your home office deduction. You can download the form and instructions from the IRS website. [15] The form will ask for the following information: [16]
    • area of home used for business
    • total area of home
    • mortgage interest
    • real estate taxes
    • insurance
    • rent
    • repairs and maintenance
    • utilities
    • depreciation of your home
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Part 3
Part 3 of 4:

Completing Your Tax Forms

  1. You will also complete this schedule if you are a single-member LLC that elects to file as a sole proprietorship. You will use this form to calculate your business profit or loss, which you will then report on your Form 1040. Generally, Schedule C will ask for the following information: [17]
    • Social Security Number
    • employer identification number (if applicable)
    • gross receipts or sales
    • returns and allowances
    • cost of goods sold
    • gross profit and gross income
    • deductions for business expenses
    • net profit or loss
  2. You will report your corporate income on this form. You can also claim deductions. If you’ve never completed it before, then read your instructions and go line by line, making sure that you understand whether you need to report something. Generally, the form will ask for the following: [18]
    • employer identification number
    • date of incorporation
    • total assets
    • gross receipts or sales
    • returns and allowances
    • cost of goods sold
    • gross profits
    • dividends and interest
    • deductions
    • taxable income
  3. A partnership does not pay income tax. However, it must nevertheless file an annual information return. [19] You can do this on Form 1065. Read the instructions and enter all applicable information. The form will ask for the following: [20]
    • employer identification number
    • total assets
    • date your business started
    • business code number
    • contact information for the partnership, including name and location
    • gross receipts or sales
    • returns and allowances
    • costs of goods sold
    • gross profit
    • total income
    • deductions
  4. Use this form to calculate how much unemployment tax you must pay. You may have to complete this form if you are a corporation or partnership, or if you are an LLC that elects to file as a corporation or a partnership. The form asks for the following information: [21]
    • employer identification number
    • name and trade name
    • address
    • the state or states where you had to pay state unemployment tax
    • total payments to all employees
    • payments exempt from federal unemployment tax
    • total payments made in excess of $7,000 to each employee
    • adjustments
    • unemployment tax liability for each quarter of the year
    • name of a third-party designee (such as a tax preparer)
  5. You use this form to report how much income, Social Security, and/or Medicare tax you withheld from your employees’ paychecks. You may have to complete this form if you file as a corporation or partnership, or if you are an LLC that elects to file as a corporation or partnership. The form will ask for the following information: [22]
    • employer identification number
    • name and trade name
    • address
    • tax period
    • number of employees who received compensation
    • wages, tips, and other compensation
    • amount of federal income tax withheld from the compensation
    • any adjustments
    • total taxes after adjustments
  6. Gather all of your schedules and forms and put them in order. Also make a photocopy of the entire bundle for your records. You should read the instructions for information on where to mail your return. Typically, the address will depend on where you are located.
    • If you owe tax, then don’t forget payment. There are many different ways to pay. For example, you can pay by using a check/money order, paying online, or paying over the phone. Read the instructions, which will tell you how to pay.
    • If you write a check or money order, make it payable to “U.S. Treasury.” [23]
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Part 4
Part 4 of 4:

Getting Help

  1. If you have questions, then you should meet with an accountant or other qualified tax professional. It is best to file your taxes right the first time, so address any confusion by scheduling an appointment.
    • You can find an accountant by looking in your phone book or asking another business if they would recommend their accountant.
    • You can also get referrals by contacting your state’s Society of Certified Public Accountants. [24] Many state societies offer a referral service.
  2. The Volunteer Income Tax Assistance (VITA) program provides free tax help to people with disabilities or limited English speaking ability, as well as to those who make $54,000 or less. You can meet with an IRS-certified volunteer who can provide filing assistance.
    • You can find a VITA near you by calling 800-906-9887. [25]
    • VITA helps only individuals, not business, so you should only contact them if you are a sole proprietor, or if you need help with your individual tax return. VITA will not help with a Schedule C if there is a business loss. [26]
  3. Gather all of your financial records and your tax forms and take them to the accountant. He or she will ask you basic questions to understand your situation. You should also think seriously about hiring the accountant to complete your taxes and file them for you.
    • Don’t wait until the last minute. Accountants usually suffer a crunch during tax season. If possible, reach out for help well in advance of the filing deadline.
  4. There are many software programs on the market that can help you with filing your business taxes. You should research prices and capability online. For example, some software will help with filing your state returns whereas other software might not. Among the more popular software programs are: [27]
    • Turbo Tax
    • H&R Block
    • Jackson Hewitt Online
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      Tips

      • Pay attention to deadlines. Although individuals must file their tax returns by April 15, some corporations have to file by March 15. You should download your forms and instructions soon after the start of the new year and figure out your filing date.
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      References

      1. ↑ https://www.sba.gov/starting-business/choose-your-business-structure/sole-proprietorship
      2. ↑ https://www.irs.gov/uac/about-form-1040
      3. ↑ https://www.irs.gov/uac/schedule-c-form-1040-profit-or-loss-from-business
      4. ↑ https://www.irs.gov/uac/about-schedule-se-form-1040
      5. ↑ https://www.irs.gov/uac/form-8832-entity-classification-election
      6. ↑ https://www.sba.gov/starting-business/choose-your-business-structure/limited-liability-company
      7. ↑ https://www.sba.gov/starting-business/choose-your-business-structure/corporation
      8. ↑ https://www.irs.gov/forms-pubs
      9. ↑ https://www.irs.gov/businesses/small-businesses-self-employed/corporations
      1. ↑ https://www.irs.gov/businesses/small-businesses-self-employed/partnerships
      2. ↑ https://www.irs.gov/pub/irs-pdf/p587.pdf
      3. ↑ https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction
      4. ↑ https://www.irs.gov/pub/irs-pdf/p587.pdf
      5. ↑ https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction
      6. ↑ https://www.irs.gov/uac/form-8829-expenses-for-business-use-of-your-home
      7. ↑ https://www.irs.gov/pub/irs-pdf/f8829.pdf
      8. ↑ https://www.irs.gov/pub/irs-pdf/f1040sc.pdf
      9. ↑ https://www.irs.gov/pub/irs-pdf/f1120.pdf
      10. ↑ https://www.sba.gov/starting-business/choose-your-business-structure/partnership
      11. ↑ https://www.irs.gov/pub/irs-pdf/f1065.pdf
      12. ↑ https://www.irs.gov/pub/irs-pdf/f940.pdf
      13. ↑ https://www.irs.gov/pub/irs-pdf/f941.pdf
      14. ↑ https://www.irs.gov/individuals/pay-by-check-or-money-order
      15. ↑ https://www.entrepreneur.com/article/217784
      16. ↑ https://www.irs.gov/individuals/free-tax-return-preparation-for-you-by-volunteers
      17. ↑ https://www.irs.gov/pub/irs-pdf/p3676bsp.pdf
      18. ↑ http://www.reviews.com/online-tax-software/small-business/

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