FORTUNE Small Business:

Tax obligations for a new merchant

Ask FSB helps a new business owner cut through the tax clutter.

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(FORTUNE Small Business) -- Dear FSB: I am a vendor with a small shop. I rent a space at $50 a month. What are my tax obligations? I probably made under $50 profit last year. (I just got started.) For last year and the future, how do expenses and income get reported - to the city, the state and the federal government?

- Joseph Healey, Scranton, Pa.

Dear Joseph: The answer depends on whether you're operating as a corporation, partnership, sole proprietor or limited liability company (LLC).

If you're operating as a corporation, you will be required to file a federal corporate income tax return, calling for either Form 1120 or Form 1120S, according to Nina Cunningham of Liberty Tax, a nationwide income tax preparation company headquartered in Virginia Beach, Va..

Stop overpaying the IRS

As a partnership, you'll need to report your income and expenses on Form 1065.

If you're a sole proprietor or the sole member of an LLC, you'll need to file a Schedule C to report all business income and expenses, Cunningham says.

In this case, you'll also file the Schedule SE, which deals with self-employment tax, and pay the amount due, says Martin Chan, a CPA in Philadelphia. All the information will be reported on your personal 1040.

Pennsylvania will have similar forms depending again on your business entity. If you're a sole proprietor, for example, you'll need to file the state's Schedule C. Make sure that the total matches what's on your federal Schedule C, Chan says.

As for city taxes, in most cases you'll report net earnings and include a copy of the federal Schedule C.

Philadelphia-based businesses will need to also file the Business Privilege Tax and Net Profits Tax returns, Chan says.

The city of Scranton has a Mercantile License Tax that might also apply to your business, Cunningham says.

Check with your local government office for the appropriate forms. To top of page

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