How Are my Personal Taxes Affected by my Business Taxes?

Sole proprietorship

Business taxes are segregated into multiple categories depending on the type of business. The first kind of business is the sole proprietorship. This implies that the owner itself represents the business. In terms of tax laws, a sole proprietorship business doesn’t count as a taxable entity, in which case the owner’s taxes include the business taxes. In legal language, it may be said that legally the identity of the company is non-existent, and the owner is the legal identity of the business. According to tax laws, the profit made by the company is considered personal income. The owner is not required to pay federal business tax. However, a major con of this is that since all the income is reported as personal, one has to pay double the amount of self-employment taxes than the regular amount. Also, few liability risks may result in major losses when it comes to sole proprietorships. In these cases, taxes are not taken off, since the income is considered personal. 

Owner incorporated Business

 The second kind of business is when the owner incorporates the business. This ensures the business is protected against liabilities and debts incurred while running the business, which was a major drawback in the case of sole proprietorships. Though one can enjoy these benefits, on the downside, this kind of business needs to pay much more taxes than sole proprietors. People who own incorporated businesses need to pay tax on any amount of profit the business makes. This is not considered personal income. They are also required to pay business taxes. This operational strategy of the business is usually adopted by giant companies and is beneficial for them on many levels. However, these days, fast-growing start-up companies are adopting this policy too. In legal language, a corporation business has a legal identity of its own which is not the same as the legal identity of the owner.

Limited Liability Company

The third kind of business is a Limited Liability Company. This type of business allows the owner to enjoy many perks, which are usually received by a corporation company. They also receive the benefits; a sole proprietor receives. This implies that this kind of business

receives protection against liabilities and risks just like a corporation company does. Yet they can report their income as personal, just like a sole proprietor does. Legally, these companies don’t have a separate identity but share the same identity as the owner. Limited Liable Companies is one of the most popular business structures since it caters to financial protection as well as saves up on business taxes. However, similar to sole proprietors, these business owners are required to pay extra self-employment tax since they list their profits as personal income.

Choosing a proper business structure is extremely important since it will determine how much one can save up on tax. The policies should be studied carefully and the pros and cons of each must be weighed keeping the best interests of the business in mind. After a thorough analysis, one must fix a policy that will benefit the company to the maximum and save up on taxes as well.

In the U.S.A everyone is required to pay their taxes. In the case of businesses where the business is run in partnership by two or more individuals, each person is required to report their profits, losses, and incomes individually and the government levies taxes on each of them separately, according to their reports and their shares in the company.

Corporate Income Tax

Each state has different laws when it comes to business taxes and sometimes the laws vary from locality to locality. However, there are some amount of taxes levied on businesses by all states. This business tax is often termed corporate income tax.

If one owns a business, one must pay social security taxes and medical care taxes, else the business is borne from the social security system by the government. In case the business employs people, the owner is required to pay social security taxes, medical care taxes, federal income tax, and federal unemployment tax. Federal Unemployment tax was levied to aid the people who lose their job; this tax is used to offer a decent living for the people who lost their job. Two taxes that are mandatory for all businesses is the worker’s compensation insurance tax and unemployment insurance tax. Often the taxes are dependent on the products or services offered by the business. The government charges special taxes for certain products and services. The federal government also charges taxes, termed excise tax, if the company involves the usage of multiple equipment and facilities.

Property Tax

Property tax is charged by all states, as business tax or as personal tax, one has to pay for it anyway. However, depending on the size of the property one may not be required to pay the taxes. The size of the property, which is taxable, varies from state to state. While some states count real estate’s only for calculating property tax, some states include vehicles and other business equipment like computers, etc. The total amount of tax is calculated based on the total value of assets owned by the person or the business. Some states often levy taxes on sales of products and services including food, clothing, medicine, and utilities.

Estimated Tax

Though paying taxes is mandatory the government has certain laws to cater to people who are unable to cope with the charges. If one’s income is not enough to pay the taxes that one owes to the government, the government eases the process and the person is required to pay only a small of tax called estimated tax.

The government often cuts down on taxes for businesses based on certain criteria. The energy-related tax initiative was launched by the federal government that allows anyone using energy-saving appliances personally or in their businesses, to get a little cut down on their taxes depending on the usage of these appliances. The Internal Revenue service caters to those businesses and individuals who suffered losses due to disasters. Governments often put a certain amount of charges for businesses, which donate to charity. In some cases, the business may not get the taxes deducted but receive aid from the government in doing charitable work. The government may help with traveling and materials when it comes to these charitable services.

As per the present legal system in the U.S.A, one is required to pay corporate income taxes of 21 % while, the combined average top tax rate was calculated to be 25.8 % as of 2021.

Business tax plays an essential role in job creation and the economy of the state. The socio-economic dynamics of the state Are largely dependent on business taxes and also directly affect the personal income of individuals, thereby having a heavy influence on personal taxes as well.