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Schedule C Tax Tips – What Payroll Tax Forms Should You File?

If you own a sole proprietorship and have employees, what payroll-related tax forms are you required to file? This article will answer that question.

First things first. Let's check to make sure you really have employees. Take a look at Schedule C, Line 26, Wages. If there's an amount on that line, then you are reporting wages and/or salaries as a business expense, and that usually means your business has employees.

Now take a look at Schedule C, Line 11, Contract labor. This is where you report non-employee compensation for independent contractors. In other words, if you paid other sole proprietors to perform services for your business, you did not pay them as employees but as independent contractors. You didn't withhold any income tax, social security tax or medicare tax from their compensation.

It is perfectly legal for any sole proprietor to have employees only, independent contractors only, or a combination of both. The point here is that if you have employees, you should be reporting their wages/salaries on Schedule C, Line 26.

Also note that employee wages for a sole proprietorship never includes payments made to the owner of the sole proprietorship. Whenever you take money out of the business for yourself, that is simply considered a withdrawal of profit, and for tax purposes is never treated as a deductible business expense. Your profit distributions are not reported on Schedule C as wages or as anything else, for that matter.

So assuming you did have bona fide employees, and you paid them as such and did all the appropriate withholding calculations, what payroll tax forms should you have used? Here they are:

1. Form 941, Employers Quarterly Federal Tax Return.

This form must be filed for each calendar quarter by the end of the month following the end of the quarter. So the due dates are April 30 (1st Quarter), July 31 (2nd Quarter), October 31 (3rd Quarter) and January 31 (4th Quarter). The purpose of this form is to report each quarter's total wages, federal income tax employee withholdings, social security tax/medicare tax employee withholdings, and social security tax/medicare tax employer expense.

2. Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return

This form is filed at the end of the year and is due January 31 of the following year. The purpose of this form is to report the employer's federal unemployment tax, which is 0.8% of the first $7,000 of wages paid to each employee each year.

3. Form W-2 / Form W-3

These forms are also filed annually. The purpose of Form W-2 is to report each employee's gross wage, tax withholdings and other payroll-related information. A copy of the W-2 must be sent to each employee by January 31. A copy of all W-2's must be sent to the Social Security Administration by February 28, along with Form W-3, which provides summary totals for the various amounts reported on the individual W-2's.

Each state also has it's own employment-related payroll tax forms, so check with your state's departments of revenue and unemployment tax for details.

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