Whether it’s due to COVID-19 or you’re simply retiring, closing a business is always a difficult decision regardless of the circumstances.
With this in mind, the Internal Revenue Service has some tips on how to help business owners take the proper federal tax steps when opting to close a business.
Steps to Take to Close Your Business
You must file a final return for the year you close your business.
The type of return you file – and related forms you need – will depend on the type of business you have. A limited liability company (LLC) is a business organized under state law. An LLC may be classified for federal income tax purposes as a partnership, a corporation, or an entity disregarded as separate from its owner, according to an IRS news release.
- A sole proprietor is someone who owns an unincorporated business by themselves.
- A partnership is a relationship between two or more partners to do trade or business.
- A corporation is a separate taxpaying entity with at least one shareholder. This includes S corporations.
Take Care of Your Employees
If you have one or more employees, you must pay them any final wages and compensation owed. You must also make final federal tax deposits and report employment taxes. If you don’t withhold or deposit employee income, Social Security, and Medicare taxes, the Trust Fund Recovery Penalty may apply, according to the IRS.
To report employment taxes, the IRS states you may need to file the following forms:
- Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return, for the quarter in which you make final wage payments.
- Check the box to tell the IRS your business has closed and enter the date final wages were paid on line 17 of Form 941 or line 14 of Form 944.
- Attach a statement to the return showing the name of the person keeping the payroll records and the address where those records will be kept.
- Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for the calendar year in which you paid final wages.
- Check box “d” in the Type of Return section to show that the form is final.
You must also provide a Form W-2, Wage, and Tax Statement, to each of your employees for the calendar year in which you pay them their final wages. You should provide Forms W-2 to your employees by the due date of your final Form 941 or Form 944. Generally, you furnish copies B, C, and 2 to the employees. You file Form W-3, Transmittal of Income and Tax Statements to transmit Copy A to the Social Security Administration.
If your employees receive tips, you must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, to report final tip income and allocated tips.
Pension or Benefit Plans
If you provide a pension or benefit plan for your employees, see how to Terminate a Retirement Plan. If you provide Health Savings Accounts or similar programs for your employees, see About Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
See Paying Your Taxes for ways to pay the tax you owe.
If you have paid any contractors at least $600 for services (including parts and materials) during the calendar year in which you close your business, you must report those payments. Use Form 1099-NEC, Nonemployee Compensation.
Use Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to send paper copies of all Forms 1099 to us. Some filers must file Forms 1099 electronically.
The employer identification number – or EIN – assigned to your business is the permanent federal taxpayer identification number for that business. To cancel your EIN and close your IRS business account, you need to send us a letter that includes:
- The complete legal name of the business
- The business EIN
- The business address
- The reason you wish to close the account
If you kept the notice, the IRS sent you when it assigned your EIN, you should enclose a copy of it with your EIN cancellation letter. Send both documents to the IRS at:
Internal Revenue Service
Cincinnati, OH 45999
The IRS cannot close your business account until you have filed all necessary returns and paid all taxes owed, the IRS said in the news release.
How long you need to keep your business records depends on what’s recorded in each document.
- Property records: Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property. The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax.
- Employment tax records: Keep all records of employment taxes for at least four years.
For more details, see How Long Should I Keep Records?
Source: Internal Revenue Service