All Fields Required

Do I Pay Corporate Taxes or Personal Income Taxes?

Do I Pay Corporate Taxes or Personal Income Taxes?

Posted On
February 10
Ahh, it’s tax season. As Albert Einstein once said, “The hardest thing in the world to understand is the income tax.” But Benjamin Franklin once said, “In this world nothing can be said to be certain, except death and taxes.”

For small business owners, taxes are the only annual certainty in business. So now, it’s time once again to try to understand that ever-changing U.S. tax code. Adding to the complexity of understanding the tax code, politicians continue to fuel the fire with cries to amend it, debating what Americans are obliged to pay. In January, the Obama Administration proposed reform focusing on cuts to the corporate rate without lowering rates for businesses that pay tax through their owners’ individual filings.

Today, small business owners often pay taxes through individual filings to take advantage of lower tax rates or to avoid the added regulatory scrutiny that corporations face. Many small businesses say cuts would be unfair to millions of small firms that pay income tax rates as high as 39.6 percent when filing via their owners’ individual returns.

With changing amendments, loop holes, provisions, breaks, inclusions, exclusions, addendums and regulations, entrepreneurs would need an army of full-time attorneys and accountants to identify every tax break in the 75,000+ pages of the tax code.

And while the tax code begins at the federal government level, it doesn’t end until it tax obligations are paid at the state level and finally, your local city hall. According to the Small Business and Entrepreneurship Council, most taxes have been increased over recent years, including capital gains tax, dividend tax, death tax, payroll tax and personal income tax—which the majority of businesses pay rather than corporate income tax.

Why you may ask? Federal corporate tax rates in the U.S. have been increasing. Today, most small businesses and entrepreneurs are filing business earnings in personal income tax code rather than corporate income tax code, such as sole proprietorships, partnerships, LLCs and S-corporations.

If you’re starting a business, you should determine the best business structure for your plans today and tomorrow. If you’re running a small business that is growing, review your current structure and make sure you’re set up for growth. Determining the most appropriate structure will depend on many factors, including ownership, liability, the legal structure, planned growth and more. Here’s a quick overview of business structures, including legal responsibilities and tax implications.

Sole Proprietorships

First, without filing to establish a business structure, you operate as a sole proprietorship. You do not pay federal business income tax and your earnings are taxed on your personal income. You report your earnings and expenses from your business on Schedule C or C-EZ, and attach the schedule to your Form 1040 when you file your personal income tax return. With this structure, you have full liability for business debts. Let’s cut to the chase here. This means that if someone sues you related to your business, not only your business assets but also your personal assets are up for grabs.


Forming a partnership is less complex than incorporating, and less expensive. For most states, you need to draft a partnership agreement and register with your state. Partnerships have to file a Form 1065 with the IRS to report their earnings and payments to partners, and do not pay income taxes. Instead, they issue each partner a Schedule K-1. The partners include the earnings shown on the K-1 with their personal income tax report.

Options for Incorporating Your Business

Think protection of your personal assets against business liabilities and debts. With this protection, you will face more complexity in taxes as you will pay taxes on business profits. Your salary and distributions will be included in your personal income taxes. Here are your options:

Limited Liability Corporation (LLC)

Not a separate tax entity as these entities are regulated state-by-state, LLCs provide no tax advantages and serves as a pass-through for owners income to tax in personal taxes. Yet with an LLC, you receive most of the personal asset protection of a corporation without the complexity. LLCs are taxed similarly to sole proprietorships or partnerships, depending on ownership.

  • Single owner-LLCs report all profits and losses on a Schedule C with the 1040 tax return.
  • In multi-owner LLCs, owners each pay taxes on their share of the profits on their personal income tax returns with the Schedule E form. The percentage of tax implications should be defined in the business operating agreement. Other tax filings include Form 1065 with the IRS. A Schedule K-1 is required from the LLC, breaking down each member’s share of the LLC’s profits and losses.
  • Be sure to research LLC regulations in your state to determine any additional state taxes.

S Corporation

S Corps provide some tax savings as profits are not included in self-employment taxes. Before any profits are distributed, the owner-employees must be paid a reasonable salary, which is subject to Social Security and Medicare taxes. An S Corporation files a tax return but the profit or loss passes through via a Schedule K-1 to the individual income tax return. The tax liability and the taxes are assessed and paid by individuals. The maximum tax rate is 39.6%. S Corp losses are applied to other income to reduce the tax liability of the shareholder and some are subject to state tax liability and therefore estimated tax payment depending upon the rules is required. Each shareholder who receives a K-1 must factor in the profit or loss in determining the amount of estimated tax payments to be paid at the individual level.  Clearly, compared to the LLC, taxes become more complicated.


The C Corp is taxed on its income rather than a pass through. Profits are taxed when earned and taxed again when distributed, often called “double taxation.” Shareholders cannot deduct any corporate losses. Owners cannot arbitrarily draw funds and must pay estimated tax payments based on the profit. Using this structure, the entity files a standalone tax return and pays taxes at the corporate level. Losses may be carried forward or backward. The maximum tax rate for a corporation is currently 35%.

Nonprofit Corporation

If your organization is involved primarily in educational, scientific, religious or charitable endeavors, you’ll likely want to form a nonprofit corporation for the liability protections and tax advantages this status provides. You get the same legal protection as the other corporations from liability of personal assets, eligibility for public and private grants, and can seek tax-exempt status with a IRS 501(c)(3) to file Form 1023. Several states also require organizations to file for state-level tax-exemption. Donations are tax-deductible to these entities.

In the end, it’s important to understand how to structure your business as it impacts taxation, liability and growth. Consult with your accountant or attorney to determine what is best for your business.  For more information, go to the IRS Publication 334: Tax Guide For Small Business.


Leave a comment
  1. hhcg | Nov 14, 2016

    Nike Air Jordan 11

    huarache sneakers

    scarpe nike

    ugg store

    ugg clearance

    sac a main michael kors

    pandora bracelet charms

    Jordan Sneakers For Sale

    Toms Shoes For Women

    religion store

    michael kors bags outlet

    Ugg Outlet Online Store

    moncler jacket sale

    air jordan

    official NHL jerseys

    adidas store

    new jordan releases

    longchamp bags on sale

    chaussures nike pas cher

    newest lebron shoes

    cheap nike air max

    pandora charm bracelet sale

    Canada Goose Sale

    moncler coats for women

    louboutin heels

    adidas schoenen

    Moncler Sale

    nfl store

    cheap uggs

    chaussures de foot pas cher

    toms shoes outlet

    canada goose coats

    moncler girls

    Uggs Outlet Store

    Jordan Future

    Sheepskin Ugg Boots

    ugg boots cheap

    Canada Goose Official Site

    air force one pas cher

    sac coach soldes

    zapatilla adidas

    uggs for women

    Anelli Pandora

    23 is back

    hogan rebel donna

    Coach Bags On Sale

    adidas outlet stores online

    zapatillas running

    Moncler Jacket Womens

    canada goose jackets for women

    adidas outlet

    Canada Goose Outlet

    ugg factory outlet

    nike jordan shoes

    fitflops sale uk

    cheap christian louboutin

    Nike Zapatos

    chaussure basket homme

    Cheap Michael Kors

    prada outlet

    abercrombie and fitch store

    toms sale

    Soccer Boots Outlet nike

    pandora jewelry store

    goedkope nike air max

    chaussure Nike homme

    reebok running shoes

    Toms Outlet Online

    pandora beads

    Ray ban sale online

    new yeezy shoes

    uggs for cheap

    Nike Store

    nike schuhe günstig

    nike mercurial soccer cleats

    tru religion jeans

    uggs outlet

    Jordan Schoenen

    nike chaussures

    canada goose jacket outlet

    oakley sunglasses clearance

    christian louboutin outlet

    Negozi Pandora

    nike sportschuhe

    ugg boots for women

    nike air max running shoes

    botas de futbol

    ugg outlet online

    canada goose vest

    nike sneakers

    pandora outlet store

    michael kors handbags on sale

    ugg boots outlet online

    Air Jordan Release Date

    vans shoe store

    nike sportschuhe damen

    Chaussure Nike Pas Cher

    Ugg Boots On Clearance

    zapatillas nike baratas

    pandora online

    nike sb stefan janoski

    Lebron 13

    Air Jordan News

    pandora rings

    nike free

    womens nike air max

    retro jordans for cheap

    canada goose online store

    longchamp tote bag

    coach factory outlet online

    cheap uggs for women

    Jordan Store

    zapatos de futbol nike

    Nike Online Store

    Canada Goose Sale Outlet

    converse store

    hyperdunk 2014

    australia uggs outlet

    nike tn pas cher

    nike damenschuhe

    Timberland skor

    Air Max 90

    Moncler Store

    canada goose kensington

    hogan scontate

    Canada Goose Online

    scarpe hogan outlet

    cheap real uggs

    Womens Ugg Boots

    australia uggs outlet

    ray ban wayfarer eyeglasses

    moncler outlet

    billige nike sko

    ugg boots classic

    Ugg boots Sale

    Uomo Hogan

    Moncler Outlet Online

    nike joggesko

    nike shoes

    new pandora charms

    timberland outlet

    adidas kläder

    cheap air max outlet

    nike air schuhe herren

    nike air jordan pas cher

    Orecchini Pandora

    nike air

    portafoglio michael kors

    canada goose sale online

    hhcg 11.14
  2. bnh | Oct 17, 2016
  3. vffbb | Oct 17, 2016
  4. ggfnfgn | Oct 17, 2016
  5. jack sparr | Oct 17, 2016
    Download Zapya for PC to share files and folders easily from PC to Mobile

    Leave a comment