Tax Differences EXPLAINED: LLC, S Corp, Partnership, Sole Prop

Summary

In this informative video, Navi Mirage, a CPA, guides entrepreneurs through the complexities of business taxation, regardless of their entity type. She explains the tax obligations for sole proprietorships, LLCs, S corporations, and partnerships, including how to calculate and when to make tax payments to avoid penalties. Navi emphasizes the importance of understanding tax responsibilities when you're self-employed, as no one else will manage these for you. She uses a spreadsheet to illustrate the process, offering a clear breakdown of revenue, business expenses, and profit across different business structures. Navi also discusses self-employment taxes, federal income tax calculations, and state tax considerations, highlighting the potential tax savings of an S corporation. She advises on payment methods, including Direct Pay and EFTPS, and recommends hiring a payroll company for S corporations to manage payroll and tax payments. The video is a comprehensive resource for business owners seeking to navigate the intricacies of tax payments and strategies to save on taxes.

Takeaways

• 📚 As a business owner, you are responsible for estimating and paying your taxes quarterly, unlike as an employee where taxes are withheld from your paycheck.
• 💼 Different business structures like sole proprietorships, LLCs, S corporations, and partnerships have different tax implications and payment schedules.
• 🤑 Sole proprietors pay self-employment taxes (Social Security and Medicare) and federal income tax, with potential additional state income tax if applicable.
• 💹 S corporations can split profits into a reasonable salary and distributions, which may reduce self-employment taxes but still require federal and state income tax payments.
• 🤝 Partnerships are taxed similarly to sole proprietorships, but the profit is split between partners, with each partner paying self-employment taxes on their share.
• 📊 Federal income tax is calculated based on tax brackets, and the actual tax owed depends on the individual's filing status and other factors like deductions and credits.
• 📉 Sole proprietorships and partnerships may benefit from a qualified business income deduction, which can reduce the taxable income.
• 💰 The potential tax savings for an S corporation come from paying self-employment taxes on a reduced amount, based on a reasonable salary rather than the entire profit.
• 📅 Tax payments for businesses are generally due on a quarterly basis, with specific dates throughout the year.
• 🔍 Business owners can use tools like Direct Pay or EFTPS to make federal tax payments, while state tax payments are made through the state's Department of Revenue.
• 📝 It's advisable for S corporations to hire a payroll company to manage payroll and tax payments, allowing business owners to focus on revenue-generating activities.

Q & A

What are the different types of business entities discussed in the video?

The video discusses Sole Proprietorship, LLC, S Corporation, and Partnership.

What is the role of a CPA in relation to taxes for entrepreneurs?

A CPA, like Navi Mirage, teaches entrepreneurs how to save money on taxes by understanding tax obligations, making tax payments, and avoiding penalties.

How does tax withholding work for an employee?

When an individual is an employee, their employer withholds federal income tax, Social Security tax, and Medicare taxes from their paycheck. The employer then periodically sends this money to the federal and state governments on behalf of the employee.

What is the responsibility of a business owner regarding taxes?

A business owner is responsible for estimating their taxes and making payments each quarter. They must also ensure timely payments to avoid penalties.

What are the two main types of taxes a sole proprietor has to pay?

A sole proprietor has to pay self-employment taxes, which include Social Security and Medicare, and federal income tax. If they live in a state with state income tax, they must also pay that.

How does an S corporation potentially save on Social Security and Medicare taxes?

An S corporation can save by paying Social Security and Medicare taxes on a reasonable compensation amount rather than the entire business profit, which is typically lower.

What is the qualified business income deduction?

The qualified business income deduction is a tax benefit for sole proprietorships and partnerships that allows a 20% deduction based on the business's profit, reducing the taxable income.

How can a business owner calculate their federal income tax?

A business owner can use an income tax calculator, inputting their filing status, income, and other factors like dependents to estimate their federal income tax.

What are the payment options for federal taxes?

Federal taxes can be paid using the Direct Pay service on irs.gov/payments or the Electronic Federal Tax Payment System (EFTPS) at eftps.gov.

Why might an S corporation hire a payroll company?

An S corporation might hire a payroll company to handle payroll reports and tax payments, as these tasks can be complex and time-consuming. This allows the business owner to focus on revenue-generating activities.

How often are estimated tax payments typically due for a business owner?

Estimated tax payments are generally due quarterly, with specific deadlines on April 15th, June 15th, September 15th, and January 15th of the following year.