There’s a lot more to closing your business than turning out the lights and locking the doors.
The IRS advises that closing a business can be difficult and challenging because of the many, specific steps a business owner must take.
The IRS has created a web page with instructions on what to do from a federal tax perspective when closing a business, be it a sole proprietorship, partnership, or corporation.
The first step is filing a final tax return and related forms for the year you close your business.
The type of form you file—and the related forms you’ll need—depends on the type of business.
A limited liability company, or LLC, is a business organized under state law. It may be classified for federal income tax purposes as a partnership, a corporation, or an entity disregarded as separate from its owner.
Sole proprietors own 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, and includes S corporations.
The next step is to pay any final wages and compensation owed to your employees.
You must also make final federal tax deposits and report employment taxes.
A business owner who fails to withhold or deposit employee income, Social Security, and Medicare taxes could be subject to penalties from the IRS.
To report employment taxes, business owners may have to file one or more forms, including Form 941, the employer’s quarterly federal tax return, Form 944, the employer’s annual federal tax return, and/or Form 940, the employer’s annual federal unemployment tax return, for the calendar year in which you paid final taxes.
The business owner must also provide a Form W-2 wage and tax statement to each of your employees for the calendar year in which you pay their final wages.
If your employees receive tips, you must file Form 8027 to report final tip income and allocated tips.
Pension, Benefit Plans
Businesses that provide a pension or benefit plan for their workers should see how to terminate a retirement plan.
Employers that provide a health savings account or similar program should read this advice on health plans.
Business owners who paid any contractor at least $600 for services, including parts and materials, in the calendar year in which you closed your businesses must report these payments via Form 1099.
A business owner should then cancel their employee identification number, which must be done via the U.S. Mail.
To cancel your EIN and close your IRS business account, send a letter to the IRS that includes the complete legal name of the business, the EIN, the business address, and the reason for closing the account.
If you kept the original notice the IRS sent when assigning your EIN, include a copy of that in the letter and mail it to: Internal Revenue Service, Cincinnati, OH, 45999.
Lastly, keep your business records, including property records and employment tax records. You must keep tax records for at least four years.
Here is more information on how long you should keep records after closing your business.