Do you understand Business Tax Liability?
It is important to understand business tax liability specially Federal & State Income Taxes for “Self-Employment”. A self-employed person earns a living by working for himself. But in a corporation, the self-employed person becomes both an owner & an employee.
Federal income taxes are collected by the federal government, while state income taxes are collected by the individual state(s) where a taxpayer lives and earns income. (It can get complicated if you live in one state and work in another, which has happened more frequently during the pandemic.) There are seven federal tax brackets, ranging from 10% to 37%, depending on your income and filing status. At the state level, some states use a flat-rate tax, while others impose a progressive system or have no state income tax at all.
All companies pay Federal & State taxes on the profit of the company. For a (C- Corp) the company pays taxes & the owners also pay tax on their distributions. There is “double taxation”. For other business structures, taxes may “pass” through to the individual & only be taxed once.
The Sole Proprietorship, Partnership, & LLC pay employer & employee portion of Social Security & Medicare (SECA) taxes. Federal & State taxes are paid on the profits of the business.
In a corporation the self-employed owner pays half the taxes & the corporation also pays half. In a corporation, the employee’s salary & taxes are considered an expense, thereby reducing business profits. This impacts the amount of Federal & State taxes.
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