When you’re self-employed, determining the right tax form to file can be a challenging decision. Among the most common forms are Form 1040 and Form 1065, but which one should you use? The answer depends on the structure of your business and how it is taxed. Form 1040 is typically used for individuals filing their personal income tax returns, while Form 1065 is specifically for partnerships. Understanding the key differences between these two forms will help ensure that your taxes are filed correctly and that you maximize any available deductions and credits.
In this detailed guide, we’ll explore when to use Form 1040 versus Form 1065, how each form impacts your tax situation, and what it means for your self-employment status. We’ll also explain how working with tax professionals like PEAK Business Consultancy Services (PEAK BCS) can help you navigate these forms, ensuring that your tax filings are accurate and compliant. Learn more about our services here.
What is Form 1040?
Form 1040 is the standard tax form used by individuals to file their income tax returns with the IRS. It is used by self-employed individuals, employees, retirees, and anyone else who needs to report income and deductions to the IRS. The form allows taxpayers to report all types of income, including wages, interest, dividends, and income from self-employment or freelancing.
For self-employed individuals, Form 1040 serves as the foundation for reporting income, and it must be filed annually with the IRS. The form allows individuals to claim deductions such as business expenses, home office deductions, and health insurance premiums, which are essential for reducing your taxable income and lowering your tax liability.
When to Use Form 1040
Form 1040 is used by self-employed individuals who operate as sole proprietors or freelancers. If you are the sole owner of your business and you do not have a partner, you will use Form 1040 to report your income and deductions from self-employment. Form 1040 also allows you to report income from other sources, such as investment income, rental income, or retirement benefits.
Key sections on Form 1040 for self-employed individuals include:
- Schedule C: This section is used to report your business income and expenses if you are a sole proprietor or freelancer.
- Schedule SE: This schedule is used to calculate self-employment taxes (Social Security and Medicare taxes) that are owed on your net self-employment income.
- Other Schedules: Additional schedules such as Schedule A (for itemized deductions) or Schedule E (for rental income) may also be required based on your income sources.
What is Form 1065?
Form 1065 is used by partnerships to report income, deductions, gains, losses, and other financial information to the IRS. If you are a partner in a business, whether it’s a limited liability company (LLC) taxed as a partnership or another type of partnership, you will file Form 1065. The partnership itself does not pay income taxes; instead, the profits and losses “pass through” to the individual partners, who then report them on their personal tax returns (Form 1040).
Form 1065 is not filed by the individual partners themselves, but it is the responsibility of the partnership to file the form. Each partner will receive a Schedule K-1 from the partnership, which outlines their share of the income, deductions, and other items. Partners then use this information to report their share of the partnership’s income on their individual Form 1040 tax return.
When to Use Form 1065
If you operate your business as a partnership (with one or more partners), you will need to file Form 1065 for the business. This includes LLCs taxed as partnerships and general partnerships. However, if your business is a sole proprietorship, you will not file Form 1065—Form 1040 will be the appropriate form for your personal tax filing.
Partnerships are considered pass-through entities, meaning they do not pay income taxes at the entity level. Instead, the income is passed through to the individual partners, and each partner is responsible for paying taxes on their share of the partnership’s income. Form 1065 provides the IRS with the necessary information about the partnership’s financial activities, while individual partners report their share of income on their personal tax returns.
Key Differences Between Form 1040 and Form 1065
1. Type of Business Structure
Form 1040 is used by individuals, including self-employed sole proprietors, freelancers, and independent contractors. It is meant for individuals who operate businesses on their own, with no partners involved.
Form 1065, on the other hand, is used by businesses that are structured as partnerships. A partnership may include multiple individuals who share in the profits and losses of the business, and each partner has a stake in the income generated by the partnership.
2. Reporting of Income and Deductions
With Form 1040, self-employed individuals report income and expenses directly on the form using Schedule C (Profit or Loss from Business). Self-employed individuals are subject to self-employment taxes, which are reported on Schedule SE.
For partnerships filing Form 1065, the partnership itself reports income, deductions, and other financial information on the form. Partners receive a Schedule K-1, which shows their share of the business’s income, losses, and deductions. Partners then use this information to report their share of income on their Form 1040 personal tax returns.
3. Filing Responsibility
With Form 1040, the individual taxpayer is responsible for filing their own return. If the taxpayer is self-employed, they will also file Schedule C to report business income and expenses and Schedule SE to report self-employment taxes.
Form 1065 is filed by the partnership itself, not the individual partners. The partnership is responsible for ensuring that the return is filed accurately and on time. Partners, however, must each file their own individual Form 1040, using the information provided on their Schedule K-1 to report their share of the partnership’s income or losses.
How Self-Employed Individuals Should Choose Between Form 1040 and Form 1065
The decision between filing Form 1040 or Form 1065 depends on the structure of your business. If you are self-employed and operate your business as a sole proprietorship or freelancer, you will file Form 1040 and report your business income and deductions on Schedule C.
If you are in a partnership, such as a general partnership or LLC taxed as a partnership, you will need to file Form 1065 for the business. Each partner will then file their own Form 1040 and report their share of the partnership’s income or losses based on the Schedule K-1 provided by the partnership.
How PEAK BCS Can Help: PEAK BCS assists self-employed individuals and business owners in determining the best filing method for their business. Whether you’re filing as a sole proprietor using Form 1040 or as part of a partnership filing Form 1065, our team provides expert advice to ensure your tax returns are filed accurately and on time.
Conclusion
Filing taxes as a self-employed individual can be complex, especially when deciding whether to file Form 1040 or Form 1065. The decision hinges on the structure of your business—whether you are a sole proprietor or part of a partnership. Understanding the differences between these forms is crucial to ensuring that your taxes are filed correctly and efficiently. Whether you file as a sole proprietor or are part of a partnership, it is essential to work with a tax consultant to navigate the complexities of tax laws and minimize your tax liability.
PEAK Business Consultancy Services offers expert tax services to self-employed individuals, sole proprietors, and business owners with complex partnership structures. We provide comprehensive support for filing Form 1040 and Form 1065, ensuring that your returns are accurate and compliant with IRS regulations.
