January 10, 2022
As a business owner, managing your tax liabilities will be among the more complex parts of operating your company. Fortunately, there are plenty of resources out there to help you understand your tax responsibilities, which will vary depending on the type of business you own. From sole proprietorships and partnerships to C corporations, S corporations, joint ventures, LLCs, and more, tax liability differs from one business owner to the next time. By identifying your business structure, you can better grasp which taxes you must pay and when.
Continue reading to learn the key differences between C corporations and S corporation taxes, as well as some facts on limited liability company (LLC), sole proprietorship, and partnership taxes.
There are various kinds of business taxes, all of which fit within three categories: federal, state, and local taxes. Such business taxes include income taxes, self-employment taxes, employment taxes, excise taxes, sales taxes, and property taxes Business taxes required by business owners will depend on the business’s structure. Is your company a sole proprietorship? Is it a limited liability company? What about a corporation? If it’s a corporation, is it a C Corp. or an S Corp.? These are facts that are important to understand before developing a business tax plan.
Many small businesses are structured as C corporations, which are required to pay a flat income tax rate of 21%. As a C corporation, business owners and the company itself are separate entities in the eyes of the law. Any tax liability taken on by the business is separate from the business owner’s personal tax liability. However, because of this structure, C corporations are subjected to being double taxed. C corporations fill out a tax form known as a Form 1120. C corporations pay their taxes on a quarterly basis, but only if they anticipate owing more than $500.
Shareholders who actually work within the company are considered employees, and therefore are subjected to self-employment taxes. Business owners can reduce this liability by paying themselves a smaller salary and pulling more money out of the company in distributions.
Within an S corporation, shareholders report their income and losses individually on their own personal tax returns. Accordingly, shareholder profits are all reported at a personal income tax rate. So, if you are an S corporation, the business taxes you will be required to file an informational tax return known as a Form 1120S, however, the business does not pay corporate tax. This way, S corporations avoid being double taxed.
Furthermore, they only have to make tax payments if it is estimated to owe more than $1,000 on a quarterly basis. S corporation shareholders do have the option of dividing their businesses income between dividends and salary. This is similar to a C Corporation, in which active shareholders are subjected to self-employment taxes, the company distributions are not.
Partnerships can be general partnerships, which is when there are two business owners, or they can be a limited partnership or a limited liability partnership. Business owners in a partnership must pay self-employment taxes, income taxes, and their estimated quarterly taxes. Partnerships are subjected to pass through taxation, which basically means business owners file their business’s income and losses on their own personal tax forms. They are not subjected to corporate taxes.
Sole proprietorships are owned and operated by one single business owner, which means they are automatically subjected to self-employment taxes. However, sole proprietor companies file their businesses income and losses on their own personal tax forms. This means a sole proprietorship will file a Schedule C or a Schedule C-EZ with a Form 1040. Sole proprietorship estimated business taxes are paid on a quarterly basis.
Limited liability companies are legally separate from their respective business owners. This protects business owners from taking on any of the company’s debt or legal liabilities. Basically, limited liability company owners have the same legal protections as a corporation, but with the tax benefits of a partnership or sole proprietorship. Limited liability companies make quarterly tax payments on their personal income tax form, plus be required to submit an informational tax return known as a Form 1065.
Are you looking for business accountant who can help you with your company’s tax planning and preparation responsibilities? Contact Aspire CPA at (317) 469-4500, or email our office at firstname.lastname@example.org, and speak with a licensed Certified Public Accountant to learn how our business accounting and tax services in Indianapolis, Indiana can help grow your bottom line.
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