Working with a professional employer organization (PEO) can bring numerous advantages to a business owner. PEO’s can remove the burden of back-end administrative tasks from the business owner’s plate — including payroll administration and reporting — which are major stressors that PEOs can help minimize. Therefore, it’s important to ensure there is clarity during tax season as to the responsibilities of the PEO and the business itself.
Below we provide clarification and a break down of which items your PEO partner is responsible for and what items fall under the business owner as it relates to tax preparation and reporting during tax season.
During tax season, it’s typical to produce federal Forms 941 and 940. Form 941 is a withholding tax form and broken down by quarter, summarizing the quarter’s employer withholding amounts. There would be four Form 941s total for one tax year. Form 940 is a summary of all the Form 941s, and businesses only need to produce one 940 for the year. If your business is not using PEO services, you will need to produce these forms for your business’s tax returns. However, if your business utilizes a PEO, rather than a general payroll processor, these reports will no longer exist for your business and you will not be responsible to produce them. These payroll tax forms are now filed under the PEO’s accounts and federal ID from the first pay date you process with the PEO and onward, which means these forms are no longer reported under your business name and federal ID number, and thus, relieves you of the responsibility. If your accountant or tax preparer requests these forms, be sure to explain the PEO’s responsibility as it pertains to Forms 941/940.
Form W-3 is another tax report required when preparing tax returns. Form W-3 is the summary of all the Form W-2s produced for your employees. However, if using PEO services, all W-2s are produced under the PEO’s account and federal ID—just like the Forms 940/941. If a Form W-3 is requested by your accountant or tax preparer, be sure to let them know these reports are a similar situation to the federal withholding forms, and that your PEO produces and files these reports with the IRS as well.
Your PEO is able to provide reports that will provide the information your tax preparer will need—the only difference that it may reflect is the format. If the previously mentioned forms are being requested, check with your PEO to see what they can provide for you that will display the exact information you are seeking.
While the PEO is responsible for producing and filing all withholding tax reports and Forms W-2/W-3, the business is still responsible for items during tax season outside of the PEO responsibilities.
Your business is responsible for filing your business sales tax and corporate income tax. In preparation for your tax returns, be sure to access your records of all income your business experienced in the previous year. This will include income from daily operations, as well as any investment or ancillary income (revenue from goods or services that are not a company’s main product or service). The sources of your income can be obtained from gross receipts from sales or services, sales records for the year, returns and allowances, business checking and savings accounts, or any other source of income, such as rental income or federal and state tax credits.
If your business produces, purchases, or sells merchandise, you should be recording inventory at the beginning and end of each tax year and will need to provide this information when preparing your business tax filings. For the cost of goods sold, be sure to prepare your inventory in dollar amount at the beginning of the year, any inventory purchases, and your inventory in dollar amount at the end of the year. Business expenses need to be accounted for in your tax returns as well. Business expenses could range anywhere from advertising expenses, business insurance, rent expense, and employee benefits, to professional fees and equipment, such as computers and phones used for business purposes.
All C Corporations (C-Corps) and limited liability companies (LLCs) that are taxed as C-Corps, must file their corporate income tax on Form 1120. LLCs that are treated as partnerships must file a Form 1065 and S-Corporations (S-Corps) will file Form 1120S. An S-Corp is a corporation that has 100 or less shareholders and has the benefit of being taxed as a partnership, so this requires a different tax form for the IRS. You can always verify with your accountant or tax preparer which form is the correct one your business must file.
Working with a PEO brings many advantages. A major benefit is the reporting and filing of all payroll withholding reports. QBS offers PEO services to minimize the stress of payroll tax liability during tax season. If your business is not currently utilizing a PEO, QBS offers tax preparation services in addition to HR, payroll administration, and workers’ compensation. Whatever your business needs, QBS has the innovative solutions to make running your business less stressful and more enjoyable.