The ABCs of Business Tax: Understanding How Your Entity is Taxed and How to Pay Yourself

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You might think that your business is a low-profit business. But is it?

In this episode, Mike Jesowshek discusses vital financial concepts for small business owners, focusing on how businesses are taxed and the importance of understanding profit. He explains that profit is calculated as sales minus expenses and highlights the differences between pass-through entities and C corporations regarding tax implications. The episode also covers owner compensation methods, including owner's draws/distributions and payroll, emphasizing that owner's draws do not reduce business profit and, therefore, do not affect the taxable income.

[00:58] What is Profit in Your Business? 

• The idea of a pass-through entity
• Mike Discusses how profit is calculated for small businesses and its importance for taxation

[02:04] Pass-Through entity

• There is no tax on that entity at the federal level
• Sole proprietorship or a single member LLC with no S corp election: you're going to file that tax return and business information on Schedule C
• Partnership: you're going to file that at business activity on a partnership tax return, which is form 1065
• If you're operating as an S corporation, you're going to have a form 1120S

[05:15] How to Pay Yourself in Your Business

• You can do an owner's draw or distribution, or you can do payroll
• Owners draw or distribution: Transferring money from your business account to your account
• Owner's draw does not reduce the profit of your business
• With a sole proprietorship, a single member LLC that's not an S corporation or a partnership, you are legally not required to pay yourself W2

[08:53] How Does Tax Work?

• You will be taxed on your profit: Sales minus expenses and payroll
• Owner pay is not an expense!
• Mike emphasizes the need for accurate bookkeeping and understanding of tax obligations

[12:41] Quick Recap
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Key Quotes

"Your profit is very simply your sales minus your expenses." - Mike Jesowshek, CPA

 "Owner's draws or distributions... they do not reduce the profit of your business." - Mike Jesowshek, CPA

 "You're taxed on the profit of your business... that's going to be sales minus expenses equals profit." - Mike Jesowshek, CPA

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

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