All kinds of businesses must pay different types of taxes like local, federal, and state. One of the main decisions to make when you start a business is the legal form in which you will operate such as sole proprietorship, C Corporation, S corporation, etc.
In the future, you may need to change your form of business to add more owners or a different capital structure.
So the tax considerations are associated with the type of business you choose and you can calculate your income tax with an online federal income tax calculator.
Self-Employment tax for business owners
Many businesses pass their losses and earnings to their owners, who pay these taxes according to their shares of the business. These taxes are called pass-through taxes.
So, the owners of these businesses pay self-employment tax on their business income except S corporation owners.
Important Business types
There are many options when you want to select the type of a business:
Income tax for sole proprietorship
You’re a sole proprietor if you’re self-employed then you have to register as another form of business entity. According to the IRS, the owner and the business are considered the same things.
So, the business is not a taxable entity. And all business liabilities, income, and assets are considered as belonging directly to the owner of the business, which can be calculated by an income tax calculator.
Income tax for Partnership
When two or more individual taxpayers are working together for business purposes called a partnership. And they share in both the losses and the profits of the particular business.
They don’t pay their income tax directly to the IRS because they pay taxes on their shares of the partnership income.
For tax purposes, the whole income of the partnership must be reported as passed-through to the partners, who will pay the self-employment taxes and make quarterly tax payments.
Income tax for LLC (Limited Liability Company)
A limited liability company is not accepted by the internal revenue service as a business entity for tax purposes, so LLCs pay taxes as other entities of the business that can be computed with the income tax calculator.
Generally, this depends on the strength of the owners of the particular business.
LLCs have pass-through taxation that means no tax on the LLC income is paid at the business level. Remember that, even though LLC is treated as a partnership for federal tax purposes, the same is not each time true for state tax purposes.
Income tax for S Corporation
The S corporation is a type of corporation that pays tax at the personal tax rate of the owners. It passes taxes, income, deduction, and credits down to business owners. That means, S corporation does not pay taxes itself, unlike a corporation, so there is no double taxation.
The tax paid by the shareholders is calculated by the total amount of the tax that would be in debt by the S corporation where it requires to pay tax, which is divided among the owners based on their percentages.
Income tax for C Corporation
The C Corporation is a separate legal entity that is created by a state filling. The C Corporation is also called the regular corporation, is subject to corporate income tax.
Income that is earned by a C corporation is generally taxed at the corporate level using an income tax rate that can be calculated with an online federal income tax calculator.
The consideration of tax of the C Corporation is double because the income of the business is divided into the form of dividends among the shareholders.