Taxpert Education On Business Taxes

The main reason business taxes are complex is because the way in which your business is taxed depends on how it is organized.

Sole proprietors include a Schedule C as a part of their annual 1040 filings and pay income tax and self-employment tax (15.3 percent) on their businesses' net profit (what's left over after all expenses are deducted).

A Limited Liability Company (LLC) may be taxed like a sole proprietorship if it has only one owner, called a member, or like a partnership (Form 1065) if it has two or more members. The members pay income tax and self-employment tax (15.3 percent) on their net profit.

LLC's may also decide (it's called an "election" which is nothing more than filing a form with IRS) to be taxed as corporations (either an S corporation or a C corporation). More on this below.

Like some LLC's, Partnerships file a partnership return (Form 1065) and pass the earnings on to the individual partners, who will pay both income tax and self-employment tax on those net profits.

The S corporation and the LLC that has elected to be an S corporation for tax purposes also passes its net profits through to its individual shareholders, who then pay income tax on this net profit . However, self-employment taxes may be avoided, provided that the owners have paid themselves sufficient wages. This is a very complex issue. You must understand it fully before proceeding with business setup.

C Corporations file a corporate return and pay income tax. Any distribution of dividends to shareholders will also be taxed as part of their total personal income; this gives rise to the "double taxation" whammy. The shareholders should also pay themselves wages with appropriate withholdings, including social security and medicare.

Each state has different rules and rates. You'll need to check with your state and local governments to be sure you understand them. State tax rates can change frequently so you'll want to make sure to stay informedp on any changes your state may make.

Business taxes are complicated! Taxpert suggests that you consult with a tax expert so you choose the entity type that's best for you and that you completely understand how to operate your business once it's set up.



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