Business Tax 101
Did you know that you really don’t pay “business taxes”, that all taxes that you have as a trademasterneur are most likely personal? Today, I’m going to dive in and explain this to you so that you have a better understanding of what’s going on at tax time. So let’s go.
Understanding Business Tax
So regardless if you are a DBA, Sole Proprietor, Single Member LLC, Multi Member LLC, Partnership, or even if you’re an LLC filing taxes and S-Corporation, all of these are known as Flow Through Entities. That means that your net income, (your business income minus your business expenses equaling your net income) flows through to your personal taxes. And that’s where all the calculations are done once all of your income has been tabulated onto your personal tax returns. So there’s not really business tax.
Business Tax for a DBA, Sole Proprietor, or Single Member LLC
If you’re a DBA, Sole Proprietor or Single Member LLC, your business income is reported on a Schedule C that is attached to, (it is literally stapled to) your 1040, which is your personal tax return. The Schedule C is basically a breakout of all of your business income, all of your business expenses, bringing you to the net income. And then that number flows over to a line on your 1040, your personal tax return.
Business Tax as a Multi Member LLC or Partnership
If you are a Multi Member LLC or a Partnership, then you file a form 1065, which is a Partnership return, and this is actually due on March 15th. This is a month before regular taxes are due. This is because this needs to be filed and then it generates a form K-1. This is then returned to each member or partner to report on their personal return. That business income is flowing through from the 1065 to each partner or member’s personal return.
Business Tax as an S Corporation
If you are an LLC filing taxes as an S Corporation, your business income is filed on a form 1120S, which is also due on March 15th. Again, this is a month before personal tax returns are due. This will generate two forms. You’re required as an S-Corporation to be on payroll. So you’re going to get a W-2 from your business. And then similar to the partnership, you’re going to get a K-1, which is giving you your portion of the net income of the business. The W-2, and the K-1 flow through, and you report them on your personal tax return.
Business Tax and Personal Tax
You can see how all of these flow through to your personal taxes. It’s important to understand that your taxes are personal, so you should be making your payments, estimated payments, or payments for taxes due from personal funds, because that is what this is. You can pay it from your business income, but you have to remember that if you take money from your business to pay a personal expense, it is known as an Owner Draw. I go through that in more detail here.
So now you can see how those are all Flow Through Entities and all those taxes really aren’t “business taxes”, they’re personal taxes.
I hope that this helped you understand Business Taxes as a Creative Entrepreneur. You can grab more support and resources for your creative business in my community, #CreateMore with Tiffany. Every Friday, you can grab my LIVE Coaching Call on topic just like this! If you are ready to get your financial sh!t together and makeover your creative business bookkeeping, join Master Your Bookkeeping. Doors close August 31st, 2020!