Business Taxes

Business Taxes

As a business owner, it’s important to understand the federal, state, and local tax obligations of your business. Doing so will enable you to file your taxes accurately and pay them on time. The kind of incorporation you opt for when starting a business determines what taxes you’ll pay and how you pay them.

Taxed as an Corporation

• C Corporation. A C Corporation pays corporate income tax on the corporation’s earnings, and the owner pays income tax on any salary they draw. However, as an employee, the owner doesn’t pay self-employment tax; the corporation pays the employer’s share of those taxes.
• S Corporation. A S Corporation is called a pass-through entity. The corporation itself pays no income tax at all. You can use the funds earned by the corporation to pay yourself in two ways. First, you can pay yourself a salary. As an individual, you will pay self-employment tax only on the salary you pay yourself, not on all the funds your corporation earns. You can then pay yourself other amounts as a distribution from the S corporation and not have to pay self-employment tax on those funds. This is where the savings come in. By separating the income earned by the corporation into two separate methods of payment to you as the individual, you avoid self-employment tax on funds paid as a distribution. Note that you have to elect to be taxed as an S corporation for this to apply. Otherwise, you will automatically be classified as a C corporation. These benefits apply if you are an LLC that chooses to be taxed as an S corporation as well.

Taxed as an LLC

A Limited Liability Company (LLC) is an entity created by state statute. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner’s tax return (a disregarded entity).  A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it elects to be treated as a corporation. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it elects to be treated as a corporation. However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.

If you set up an LLC, you have some options when it comes to LLC self-employment taxes:

• Disregarded LLC.If you create an LLC with one member and do not elect to be taxed as a corporation (see below), then you will still continue to pay self-employment tax as an LLC. Your tax liability for self-employment tax does not change.
• LLC taxed as a S Corporation. As an LLC you can elect to be taxed as an S Corporation. If you choose this option, you will not pay self-employment tax.
• LLC taxed as a Partnership. A LLC with at least two members is will be taxed as a Partnership. Each owner should show their pro-rata share of partnership income, credits and deductions. 

Self-Employment Taxes

When you are an employee, you pay part of your Social Security and Medicare taxes and your employer pays the other part. When you’re self-employed, you have to pay for Social Security and Medicare in full yourself, in addition to your regular income taxes. This is called the self-employment tax. Self-employment tax applies to sole proprietors, members of a partnership, and members of a disregarded LLC (a one-member LLC that chooses to be taxed as an individual).

For the 2022 tax year, self-employed will people pay 12.4% of their income toward Social Security and 2.9% of their income toward Medicare, for a total of 15.3% in self-employment taxes. This applies only to the first $142,800 of income. You’ll pay an additional Medicare tax of 0.9% on any income in excess of $200,000. Self-employment tax must be paid quarterly.

Self-Employment Taxes Vs. Corporate Taxes

Self-employment offers many freedoms and opportunities. But you may be surprised to discover that your taxes at the end of the year will be much higher when you work for yourself. Self-employed people must pay self-employment taxes, which can take a big bite out of your Profits. You may be able to reduce the amount of tax you pay by setting up a Limited Liability Company (LLC) or a Corporation.

Get Started with XCorp Business Solutions

If you’re unsure about how to handle your business taxes, XCorp Business Solutions can help. We provide top-notch incorporation services, payroll development and management, taxation, web development, employee contract development, legal advice, and representation. We offer the same level of service and expertise from our offices to your home, with three convenient ways to file your taxes. Contact us today and let us help you make the most of your business.