Tax Considerations for Businesses

Business Taxes

Based on the legal form you choose for a business or commercial enterprise; your tax obligations will vary:

• Sole Proprietorship: A sole proprietorship is a business that is owned by one person and that has not been set up as a corporation. For tax purposes, the income and expenses from the business are reported on the owner’s income tax return, and the owner pays self-employment tax. The owner may also be responsible for excise tax, estimated tax and employment taxes.
• Partnership: A partnership is a business owned by two or more persons or entities who have a legal right to share in the company’s profits and losses. The partners may or may not be employees of the business. If they are, the business must pay employment taxes on their behalf. If they are not, they receive the same tax treatment as sole proprietors. For federal tax purposes, the partnership must file an informational return that reports operational profits and losses, and the partnership is responsible for employees’ employment taxes and any excise taxes. The income tax that the partnership generates “passes through” to the individual partner’s tax return based on each partner’s share of the business. Each individual partner is responsible for income tax, self-employment tax and estimated tax.
• C Corporation: A corporation is a separate legal entity, formed by adhering to certain formalities, such as filing articles of incorporation with the state, creating bylaws, exchanging capital stock for shareholder money or property, creating a board of directors and holding a meeting of the board of directors. A C corporation (so named because it is formed under the provisions of Subchapter C of the Internal Revenue Code) is subject to what is known as “double taxation.” The company pays a corporate tax on its earnings. In addition, all shareholders pay personal income tax on any dividends or distributions. Shareholders may not deduct corporate losses.
• S Corporation: An S Corporation (formed under Subchapter S of the Internal Revenue Code) avoids the “double taxation” imposed on C corporations. Instead, the earnings or distributions that an S corporation shareholder receives “pass through” to his or her personal income tax return. Subchapter S corporation shareholders are also responsible for federal income tax due for certain capital gains and other passive income. Subchapter S corporations may have no more than 100 shareholders and are typically not publicly traded.
• Limited Liability Company (LLC): An LLC is a legal entity with the attributes of both a corporation and a partnership, and its owners are referred to as members. The members of an LLC can always elect to treat the company as a corporation for tax purposes. However, if such an election is not made, an LLC with only one member will be treated as a sole proprietorship, and an LLC with more than one member will be treated as a partnership. For tax purposes, by default, if an LLC has only one member, it’s treated as a sole proprietorship.

Employment Taxes

Employers are responsible for making deductions for and depositing payments for Social Security tax, Medicare tax and federal unemployment tax. Social Security and Medicare taxes apply to all wages for work conducted by employees in America and in some instances for work performed outside of America. The taxes are deducted from employees’ pay and provide retirement and medical benefits under the Social Security system.

The Federal Unemployment Tax Act; funds a federal and state program that provides unemployment pay to workers who are unemployed because of lost jobs. The tax is the employer’s responsibility and is not deducted from an employees’ pay.

Failure to pay employment taxes can have significant consequences. Employers may be subject to a 100% penalty, and an employer’s personal assets may be subject to seizure to satisfy employment tax arrearages.