How Is My Business Entity Taxed?

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Understanding what your business entity is will allow you to take advantage of tax strategies and maximize your deductions. In this episode, we talk about what are the different types of business entities and how they are taxed.

[01:01] The Types of Business Entities

• No Entity or Sole Proprietorship
• Limited Liability Company
• C Corporation
• An S Corporation is not an entity at the state level but a tax election 

[02:37] What is a Pass Through Entity?

• Most small businesses do not pay federal income taxes at the corporate level
• The profits from their business pass through to the owners of the company where it is then taxed
• This includes a Sole Proprietor, an LLC, or an S Corporation
• A C Corporation is not considered a pass through because the company pays taxes on the profit of the business at the corporate level

[04:04] Where Do You Report Your Business Activity and How Is Your Business Income Taxed? 

• Sole Proprietorship or Single Member LLC (No S Corp Election) 
  • File your business information on a Schedule C on your personal tax return (Form 1040) 
  • You will pay both ordinary income taxes and self-employment taxes on the business profit on your personal return
• Partnership or Multi Member LLC (No S Corp Election) 
  • File your business information on Form 1065
  • Each partner will then receive a K1 with their share of activity which will be used to report on their personal tax return (Form 1040)
  • Each active partner will pay both ordinary income taxes and self-employment taxes on their share of business profit on their personal return 
• S Corporation
  • File your business information on Form 1120S
  • Each owner will receive a K1 with their share of activity which will be used to report on their personal tax return (Form 1040)
  • Each active individual owner will pay ordinary income taxes on their share of profit on their personal tax return
• C Corporation
  • File your business information on Form 1120
  • The corporation will pay corporate taxes on the income of the business on the corporate level 

[08:40] Final Thoughts

• It's so important to understand how your business entity is structured to get clear on how it’s taxed

Key Quote

“With a pass through entity, you are taxed on the profit of the business regardless of how much money you leave in or take out of the business.” - Mike Jesowshek
 

Resources Mentioned

Blog Posts:

• https://www.taxsavingspodcast.com/blog/how-is-my-business-entity-taxed
• https://www.taxsavingspodcast.com/blog/earned-income-how-is-my-income-taxed
• https://taxsavingspodcast.com/scorp 

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Podcast Host: Mike Jesowshek, CPA - Founder and Host of Small Business Tax Savings Podcast

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To find out more on this topic and many others visit our website at www.TaxSavingsPodcast.com. You can also give us a call at 844-327-9272 or send your questions to us at: Ask@TaxSavingsPodcast.com