Business Tax Compliance Requirements

Business compliance is separate from individual compliance

A business owner can be personally compliant while the business is not—and vice versa.

The IRS tracks each taxpayer identification number (TIN) separately. Your personal Social Security Number and your business Employer Identification Number (EIN) are distinct accounts with distinct filing requirements and distinct compliance determinations.

This means:

• You may have filed all personal returns and owe nothing individually, but your business may have unfiled returns or unpaid taxes
• Your business may be current on all filings, but you may have personal compliance issues from flow-through income
• If you own multiple businesses, each EIN is evaluated independently

When evaluating compliance, you must consider all entities—personal and business—together. Incomplete compliance in any entity affects overall tax standing.

How the IRS determines business compliance

The IRS determines business compliance based on what exists in its records for the business EIN:

• Income tax returns filed — Form 1120, 1120-S, 1065, or Schedule C depending on entity type
• Employment tax returns filed — Form 941 (quarterly) and Form 940 (annual) if the business has employees
• Information returns filed — W-2s, W-3, 1099s, and other required reporting
• Taxes paid or under arrangement — All assessed taxes paid, or valid payment plan in place and current
• Payroll tax deposits made — Employment taxes deposited on schedule (semi-weekly or monthly)

Filing requirements by entity type

Each business structure has different federal filing requirements. The entity type determines which returns must be filed, when they're due, and how income flows to owners.

Sole proprietorships

A sole proprietorship is not a separate tax entity. Business income and expenses are reported on Schedule C attached to the owner's personal Form 1040.

Filing requirements:

• Schedule C (Profit or Loss from Business) with Form 1040
• Schedule SE (Self-Employment Tax) if net self-employment income exceeds $400
• Form 1040-ES (Estimated Tax) if expected tax liability exceeds $1,000
• If you have employees: Form 941, Form 940, W-2s, and payroll tax deposits

Compliance note: Because sole proprietorship income is reported on the personal return, business and personal compliance are intertwined. An unfiled Schedule C means an incomplete personal return.

Partnerships

Partnerships are pass-through entities. The partnership files an information return, but income flows through to partners who report it on their individual returns.

Filing requirements:

• Form 1065 (U.S. Return of Partnership Income) — due March 15 for calendar-year partnerships
• Schedule K-1 issued to each partner showing their share of income, deductions, and credits
• If the partnership has employees: Form 941, Form 940, W-2s, and payroll tax deposits

Compliance note: Partnership compliance requires both the Form 1065 and all K-1s to be filed. Partners must then report K-1 income on their personal returns. Late-filed partnership returns trigger penalties of $220 per partner per month (2024).

S Corporations

S Corporations are pass-through entities that provide limited liability. The corporation files an information return, and income flows through to shareholders.

Filing requirements:

• Form 1120-S (U.S. Income Tax Return for an S Corporation) — due March 15 for calendar-year corporations
• Schedule K-1 issued to each shareholder
• Form 941 (quarterly) for employment taxes
• Form 940 (annual) for federal unemployment tax
• W-2s for shareholder-employees and all other employees
• Payroll tax deposits on schedule

Compliance note: S Corporations must pay reasonable compensation to shareholder-employees. This creates employment tax obligations. An S Corp that fails to file employment tax returns faces both corporate penalties and potential Trust Fund Recovery Penalty against responsible persons.

C Corporations

C Corporations are separate tax entities. The corporation pays tax on its income, and shareholders pay tax on dividends received (double taxation).

Filing requirements:

• Form 1120 (U.S. Corporation Income Tax Return) — due April 15 for calendar-year corporations
• Estimated tax payments if expected tax exceeds $500
• Form 941 (quarterly) for employment taxes
• Form 940 (annual) for federal unemployment tax
• W-2s for all employees
• 1099s for payments to contractors
• Payroll tax deposits on schedule

Compliance note: C Corporation compliance is entirely separate from shareholder compliance. However, if the corporation fails to pay employment taxes, responsible persons face personal liability.

Employment tax requirements

Any business with employees has employment tax obligations regardless of entity type. These are among the most aggressively enforced tax requirements.

Required filings:

• Form 941 — Quarterly return reporting wages paid, income tax withheld, and Social Security/Medicare taxes
• Form 940 — Annual return for Federal Unemployment Tax (FUTA)
• Form W-2 — Annual wage statement to each employee (due January 31)
• Form W-3 — Transmittal of W-2s to Social Security Administration

Deposit requirements:

• Semi-weekly depositors: Must deposit employment taxes by Wednesday (for wages paid Wednesday-Friday) or Friday (for wages paid Saturday-Tuesday)
• Monthly depositors: Must deposit by the 15th of the following month

Failure to deposit employment taxes on schedule results in penalties ranging from 2% to 15% of the underpayment, depending on how late the deposit is made.

Information return requirements

Businesses must report payments made to others:

• Form 1099-NEC — Nonemployee compensation of $600 or more (due January 31)
• Form 1099-MISC — Rents, royalties, prizes, and other payments
• Form 1099-INT — Interest payments of $10 or more
• Form 1099-DIV — Dividend payments

Failure to file required information returns results in penalties of $60 to $310 per return (2024), depending on how late they are filed.

When business issues become personal liability

In most cases, business tax debt remains with the business entity. However, employment taxes are different.

The employee portion of Social Security/Medicare taxes and all withheld income taxes are held "in trust" by the employer. If the business fails to pay these trust fund taxes, the IRS can assess the Trust Fund Recovery Penalty (TFRP) against any "responsible person" who "willfully" failed to pay.

Responsible persons typically include:

• Business owners and shareholders
• Officers and directors
• Managers with financial control
• Anyone who could have directed payment of the taxes but chose to pay other creditors instead

The TFRP equals 100% of the unpaid trust fund taxes. It is assessed against the individual personally, not the business, and survives bankruptcy.

Learn more about the Trust Fund Recovery Penalty →

Examples of business compliance and non-compliance

Example 1: Personal compliant, business not compliant

Example 2: Business compliant, personal not compliant

Example 3: Employment tax failure