What You Need to Know About Filing Taxes as a Business Owner

After years of dreaming about starting a business, you’ve finally made the plunge. As an entrepreneur, among other things, you also need understand the important facet of filing taxes as a business owner.

Now, this is an area where many businesses struggle, as they need guidance and information on how to settle their books with the IRS. A business coach can help.

But first, let’s understand under which category your business falls.

Filing taxes as a business owner

Types of Business Structures

Filing taxes as a business owner

Your tax obligations really depend on your business type. Basically, there are four types of businesses:

  1. Sole Proprietorship:  You are the sole owner of an unincorporated business.
  2. Partnership: Two or more partners enter a business. They share losses and profits of the business, contribute capital, inventory, and labor.
  3. Corporation: Shareholders exchange money and property for the corporation’s capital stock.
  4. LLC: Members own the Limited Liability Company (LLC). They can be individuals, corporations, foreign entities, or even other LLCs.

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Getting Started with Filing Your Taxes

First, you should secure a tax ID number. You need a separate employer ID number if you have employees.

As a self-employed individual, you can also avail of other deductions like:

  • Lease costs
  • Travel expenses
  • Home office tax deduction
  • Office supplies
  • Insurance
Filing taxes as a business owner

Filing Taxes as a Business Owner

Filing taxes as a business owner

Let us have a look at the taxes you must file under your business entity.

Sole Proprietorship

Here, you need to list the profit or loss information of your business on your annual report. You pay taxes on your profits, i.e. total income minus expenses.

Federal Tax: As the sole proprietor, your business income goes to you. You need to pay tax on this, as part of your personal federal income tax returns. However, you don’t owe the state tax on your business income, as Texas has no personal income tax.

Self-employment Taxes:  Sole proprietors are responsible for contributions towards Social Security and Medicare. You must pay these if your earnings during the previous year are more than $400.

You do not pay state franchise tax or privilege tax – for the privilege of doing business in the state.


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Partnerships

Limited partnerships (LPs) and LLPs must file an annual report with the Secretary of State (SOS). This should include income, deductions, profits, losses, and more.

Federal Tax: You have to pay federal taxes on your partnership income. But, on the income distributed to the individual partners, partnerships do not owe state tax.

Franchise Tax:In Texas, partnerships are subject to the franchise tax, if the total revenue exceeds a specific amount. The only exception is when a partnership has only natural persons as its members.

C Corporation

Filing taxes as a business owner

For federal tax purposes, C-corporations recognize themselves as separate tax-paying entities. That enables them to take special deductions.

Federal Tax: The shareholder with an employee salary pays federal income tax. Shareholders also cannot deduct losses of the corporation.

Franchise Tax: In Texas, all corporations have to pay the franchise tax. Shareholders get the profits distributed to them in dividends. In such cases, the corporation does not get a tax deduction.

S Corporation

An S Corporation is a traditional corporation, for which you select S status on the IRS form.

Federal Tax: Corporate income, losses, deductions, and credits pass through to the shareholders for federal tax purposes. There is no separate federal income tax. Hence, S corporations avoid double taxation.

Franchise Tax: Texas recognizes the federal S election for corporations. But they still have to pay franchise tax. S Corporations are pass-through entities.

LLC

An LLC is a legal business structure, recognized at state-level. The IRS treats an LLC as a partnership or a corporation. Sometimes, it is a “disregarded entity.”

Federal tax: In Texas, LLCs do not require filing an annual report. Business income gets distributed to the members, who pay federal taxes on their share. However, if you elect your LLC as a corporation, it will be subject to federal corporate income tax.

Franchise tax:In Texas, LLCs pay the franchise tax, provided the total income exceeds a certain amount. Even if you classify your LLC as a corporation, you owe the franchise tax.

You might also pay property tax if you own the premises, or employer taxes if you have employees.

Do you want to start your own business, but feel confused about where to start? Hire a good business coach to help you.

Stay in Good Financial Shape with Business Coach Doug Winnie

If you already own a small business, it’s time to use business coaching to stay in good financial health. Call Doug Winnie at (713) 936-3814 or click here to schedule a coaching session today!

Filing taxes as a business owner

What You Need to Know About Filing Taxes as a Business Owner| Business Coach Doug Winnie – Houston TX



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