The Ultimate Guide on Business Taxes
If you own a business, you are going to have to pay a variety of taxes. While tax preparation can be rather straightforward if you are a sole proprietor, it can be complex if you are running an LLC or a traditional corporation. Let’s take a look at what your tax obligations are as a business owner.
How Do Sole Proprietors File Taxes?
Sole proprietors will file their business income taxes at the same time that they file their personal taxes. This is done on Schedule C where expenses are listed and offset your business profit for the year. Whatever is left over is what you ultimately pay taxes on. In addition, you will pay 15.3 percent in FICA taxes on your total profits for the year.
How Do LLCs Pay Taxes?
An LLC can pay taxes in a variety of ways. It can choose to be taxed like a sole proprietor or it can be taxed like a partnership or corporation. If an LLC chooses to be taxed like a corporation, it will submit K-1 forms to shareholders and will file a separate business tax return if it is organized as a C corporation.
How Do Partnerships Pay Taxes?
Partners can determine on their own how much each person owns in the business. This means one person can receive 85 percent of the profits while the other gets 15 percent or they can decide to go 50/50 and own the company evenly. Partners pay taxes on their share of the earnings or losses the same that a sole proprietor would.
How Do Corporations Pay Taxes?
Corporations will pay taxes in a couple of different ways based on what type of corporation it is. An S corporation passes profits and losses to its owners. Therefore, owners will get a K-1 that lists their share of the money that the company made or their portion of its yearly loss.
The S corporation allows owner-employees to pay some of its earnings as wages and some of its earnings as a distribution. Distributions are taxed as ordinary income, but the IRS can reclassify distributions as wages if it believes that is the proper designation.
A C corporation is an entity separate from its owners. Therefore, the corporation will submit its own tax return either on March 15 or within 75 days from the end of its fiscal year. Owners and employees will also file a personal income tax return based on what they are paid from the corporation. In some cases, owners could be taxed twice on dividends as the corporation pays taxes on the dividends while the dividends are taxed as income on the personal level.
No matter what type of business that you run, you will be responsible for paying taxes on your earnings. You should also check with your state business department to determine if you also have to withhold sales taxes, unemployment insurance and workers compensation benefits. The rules vary based on the type of company you run and the state where it is operated.