How You Set Up Your Business Has A Direct Impact On How You Pay Taxes

22 November 2016
 Categories: , Blog

When you are setting up a new business, you have some options to choose from that can have different impacts when it comes to filing business taxes. If you are going to be working on your own, a sole proprietorship where you use your own social security number is fine. You can also set up a corporation, from which you will receive a salary. This is done by securing a Federal Tax ID Number for your business and filing the correct paperwork. Other options include a partnership, limited liability corporation, or a non-profit organization, which can also make a difference in how taxes are paid by your business.

A Sole Proprietorship and Your Income Taxes

When you set your business up as a sole proprietorship, you will be responsible for paying income taxes on your profits. Your taxes may be complicated, as you will need to report all money that has come in, all of your expenses, and depreciation of any equipment you have to run your business. Once all of your deductions are made, you will pay self employment tax based on your adjusted gross income. This rate includes both social security and Medicare taxes, and it is currently around 15.3%. This amount is then deducted from your adjusted gross income, and you pay income taxes based on the amount of money that is left.

Setting Up a Corporation for Tax Purposes

If you create a corporation instead of a sole proprietorship, you are only personally responsible for paying taxes on the salary that you receive from the business. In addition, any medical insurance that you pay for yourself or family can be fully deductible, unlike a sole proprietorship. You can claim all losses when you have a corporation, while the ability to make the same claims have stricter guidelines with a sole proprietorship. You can even lease assets to your corporation, such as your personal vehicle, to be able to deduct maintenance costs from your tax liability.

An LLC Allows You to Choose How You Want to Be Taxed

As a limited liability corporation, you can choose to be treated as a corporation for tax purposes, or as what is called a disregarded entity. When you choose to be treated as a disregarded entity, all income from your LLC is treated as personal income. There are benefits to both choices, and it's important to talk with your accountant about the various options you have.