Calculate business tax obligations for corporations, LLCs, partnerships, and sole proprietorships. Estimate federal taxes, state taxes, and self-employment obligations for tax planning.
Business Structure Tax Implications
Sole Proprietorship
- Tax Treatment: Pass-through entity, income reported on personal return
- Self-Employment Tax: 15.3% on net earnings
- Benefits: Simple tax filing, all profits to owner
- Drawbacks: Unlimited liability, high SE tax
LLC (Limited Liability Company)
- Single Member: Taxed like sole proprietorship by default
- Multi-Member: Taxed like partnership by default
- Election Options: Can elect S-Corp or C-Corp taxation
- Benefits: Limited liability, tax flexibility
S Corporation
- Tax Treatment: Pass-through entity, no corporate tax
- Owner Salary: Must pay reasonable salary subject to payroll tax
- Benefits: Potential SE tax savings on distributions
- Limitations: 100 shareholder limit, one class of stock
C Corporation
- Tax Treatment: Double taxation - corporate + dividend tax
- Corporate Rate: 21% federal rate (2024)
- Benefits: Unlimited growth potential, employee benefits
- Drawbacks: Complex compliance, double taxation
Federal Business Tax Rates (2024)
| Entity Type | Federal Rate | Self-Employment Tax | Additional Considerations |
|---|---|---|---|
| Sole Proprietorship | Individual rates (10-37%) | 15.3% on net earnings | Schedule C filing |
| LLC (default) | Individual rates (10-37%) | 15.3% on net earnings | Form 1065 or Schedule C |
| S Corporation | Individual rates (10-37%) | 15.3% on salary only | Form 1120S + K-1s |
| C Corporation | 21% flat rate | None (corporate entity) | Form 1120 + dividend tax |
Common Business Deductions
- Office rent and utilities
- Equipment and software
- Professional services
- Marketing and advertising
- Travel and meals (subject to limits)
- Insurance premiums
- Employee wages and benefits
- Interest on business loans
Frequently Asked Questions
How do different business structures affect my tax liability?
Sole proprietorships and single-member LLCs are pass-through entities taxed on your personal return with self-employment tax on profits. Partnerships and multi-member LLCs split income among owners, each paying individual rates plus SE tax. S-Corps are pass-through but require reasonable salary subject to payroll tax, while distributions avoid SE tax. C-Corps pay 21% corporate tax, then owners pay dividend tax on distributions (double taxation). Entity choice significantly impacts total tax burden, especially for profitable businesses.
What are the advantages and disadvantages of S-Corp taxation?
S-Corp advantages include potential self-employment tax savings on distributions above reasonable salary, pass-through taxation avoiding double tax, and business expense deductions. Disadvantages include required reasonable salary with payroll taxes, restrictions (100 shareholders max, one share class, US shareholders only), and additional compliance costs. The SE tax savings can be substantial but require paying adequate salary. S-Corp election makes sense for profitable businesses where distribution savings exceed additional compliance costs.
How can I minimize business taxes legally?
Maximize legitimate business deductions including office expenses, equipment, professional services, marketing, travel, and employee costs. Time major purchases for tax benefits and consider Section 179 expensing. Contribute to tax-advantaged retirement plans (SEP-IRA, Solo 401k for self-employed). Choose optimal business structure for your situation. Manage income timing across tax years. Keep meticulous records and receipts. Consider hiring family members for legitimate work. Work with qualified tax professionals for complex situations and ensure all strategies have business substance.