The manner in which a business is taxed is determined on the structure.
Single-Member LLC Taxes
Also referred to as “Disregarded Entities”, at least according to the IRS. This is because the IRS ignores the structure of the business and the tax is similar to that of an individual. The income of the LLC is therefore reported on the personal income tax at the end of the year for the individual in question. With this method, owners pay themselves a distribution, from the income obtained from the LLC. This payment is liable for self-employment taxes, taking into account that there already has been a payment of income tax based on the LLC’s total profits, so there is no need to pay income tax on the distribution as well.
Multi-Member LLC Taxes
This formation is typically taxed as a partnership according to the IRS. There is no paying of any income taxes as far as the IRS is concerned, as all the profits are passed through to the members of the LLC. Members of the LLC are liable to pay their taxes to the IRS on their individual tax returns. This formation allows for members to take a distribution from their share of the LLC’s profits.
It is an electable tax designation which is available to Corporations and Limited Liability Corporations (LLC’s). It is a rather popular status option for business owners, as it provides businesses with personal asset protection as well as tax benefits. An S Corporation is an IRS classification and not a type of business entity.
S Corporations are taxed as pass-through entities. Which means that as an S Corporation a business does not pay federal taxes on their income. This means that shareholders are liable for income tax and will need to report their share of profits in the form of the salaries that they receive on their respective individual tax returns submitted. The tax is then based on that submission. Owners of said S Corporation that play an active role must be deemed as employees and need to ensure that they are paid a reasonable salary, which is based on their position and industry. The income earned will then be subjected to personal income tax and employment tax, whereas the business itself will only be subjected to personal income tax. Once the distributions are allocated and properly taxed, the profits of the business are then referred to as “retained earnings”. When compared to C Corporations, S Corporations are not subjected to “double-tax”, this is considered as the major advantage. C Corporations are liable to pay federal income taxes on all profits made, and then shareholders are also liable to pay income tax on the respective dividends that they receive from the company.
There is no specific tax rate that is applicable for S Corporations, instead owners are liable to pay personal income tax on the profits made by the company. The rate is determined by the personal income bracket of the respective owners.
With this formation businesses pay taxes on gross income taking into account that the operating expenses are deducted. The profits are then distributed to the shareholders, and the shareholders are then responsible for paying income tax in the dividends.
Taxable earning can be reduced by deducting business expenses. These include start-up costs as well as operating expenses. A C Corporation can also choose to deduct salaries, bonuses as well as the costs of employee benefits.
With the C Corporation formation businesses are liable for filing corporate tax returns as well as pay the corporate tax rate of 21% on all taxable earnings. When C Corporations owe any tax, they will be liable for estimating the amount of tax owed due for the year and will need to make payments to the IRS on a quarterly basis. As an owner or shareholder, if any worker is performed for the company and there is a salary or bonus that is received like all the other business employees, seen that this is a deductible business expense, it is only taxed once, when submitting personal returns.
C Corporations are classified as the only business structure that needs to pay corporate taxes and it is also the only structure that is subject to double taxation. All taxable corporate profits are liable to be taxed first at the corporate tax rate. Once dividend distribution is received shareholders are liable again for individual income taxes on the dividend amount. Resulting in being taxed at corporate level and then again at individual level.
LLC’s and Corporations are considered as separate entities from its members. For tax purposes LLC’s and its members are regarded as one of the same. LLC members are paid through withdrawals and distributions from their respective capital accounts. The distributions are not subject to state, federal or employment taxes at the time of distribution. Members of an LLC are responsible for paying estimated quarterly taxes on all capital distributions earned and they are also responsible for reporting these earnings as business income when submitting their personal tax returns.
Taxes vary from state to state, for more information access the information here.