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 And State Tax
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. 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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