Let's face it; many businesses will come and go. The U.S. Bureau of Labor Statistics estimates that 1 in 5 U.S. businesses fail within the first year, and nearly half of all companies close by their 5th year in business. Due to the Covid-19 pandemic and tough economic times, many companies are currently struggling to keep their doors open. Whether you have a sole proprietorship, partnership, LLC, or corporation and are in need of shutting down, you must file certain forms with the IRS, including filing tax returns for that final year. Here are the steps you will need to take:
You Will Need to File Your Final Tax Return and Other Required Forms
For the final year, you were open for business; you will need to file tax returns and all related forms, even if your business was only open for a week or two. The types of tax returns and forms will vary based on your business type. Here is direct information from the IRS for each type of business entity and the tax forms they're required to file:
For an unincorporated business, you run yourself, check out what's required for a sole proprietor.
For a business that has two or more partners, check out what's required for a partnership.
For a business that has at least one shareholder, check out what's required for corporations and S corporations.
Most forms will have a "final return" or "final" box on them, which you should select to let the IRS know this is your business's final copy of that form they will be receiving. Moreover, you will need to file any necessary tax forms your state requires.
Pay Final Employee Wages, Taxes, and Issue W-2 Forms
For all employees your business paid in your last year of business, you will need to provide them with a W-2 form for the calendar year you made your last wage payment to them. Additionally, you will also need to make the final employer's federal and state tax deposits for your employees.
For the calendar quarter that your employees' final wages were paid, you will need to file either Form 941 Employer's Quarterly Federal Tax Return or Form 944 Employer's Annual Federal Tax Return.
Be sure to check the box and enter the date final wages were paid on line 17 of Form 941 or line 14 of Form 944.
You also need to attach a statement to your return showing the name of the person or company keeping the payroll records and the address where those records are kept.
You must also file Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.
Be sure to select box "d" in the Type of Return section to let the IRS know this is final return.
For any employees who received tips, you must file Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips.
If you provided your employees with a benefit plan or pension, here is information on terminating your retirement plan.
Issue 1099 Forms to Contract Workers
For any contract workers you paid at least $600 during your final year in business, you must report those payments by filing Form 1099-NEC, Non-Employee Compensation. However, depending on how you paid them, you may not need to file on their behalf. Check out this article to help you determine whether you will need to issue one: New Tax Laws for 2022 - Venmo, PayPal, Cash App, Etc.
Pay Any Taxes Your Business Owes and Cancel Your EIN
You must pay any taxes that you owe for your final business year before the IRS will close your business account. Additionally, you will need to cancel Your EIN. In order to do that, you must send a letter to the IRS with the following information:
The full legal name of your business
The business EIN
The legal business address
The reason why you are closing the account
Send the letter to the IRS at:
Internal Revenue Service, Cincinnati, Ohio 45999
** If you have the original notice the IRS issued with your EIN, it is a good idea to include that with the letter. **
Save All Your Records & Tax Returns
Once your business is closed, you are still required to hold on to your business records. You should keep them for at least seven years after the year you closed your business.
Lastly, each state has different requirements for closing out a business. Here are the requirements for California, Nevada, and Texas:
Are you in need of a bookkeeper or tax preparer to help you prepare to close your business? If so, contact me today; I would be happy to assist you! I am a CA Registered Tax Preparer and an Advanced Certified QuickBooks ProAdvisor. I specialize in working with clients who use QuickBooks Online, QuickBooks Desktop (Windows), QuickBooks Enterprise, and QuickBooks Premier—located in Murrieta, CA, and servicing clients in Southern California and the greater Las Vegas, NV area.
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