Once your company is formalized, you are responsible for the timely payment of a variety of local, state and federal taxes, just as your employees are responsible for paying taxes on their income.

Taxes vary depending on the market in which your business operates, the type of business entity that is registered, and the physical location of the company.

Among the most common taxes we have, Federal Income Tax, which is mandatory and we are all required to file, regardless of the role we have within the organization, employee, consultant or business owner. It varies according to the structure of the company, the profits and other sources of income to the household during the year. 

Business Structure: Limited Liability Companies (LLC)

An LLC is a business structure allowed under state statutes. Each state may use different regulations and you should check with your state if you are interested in starting an LLC.

The owners of LLCs are called members. Most states do not restrict ownership, so members can include individuals, corporations, other LLCs and foreign entities. There is no maximum limit on the number of members. Most states also allow “single member” LLCs, which have only one owner.

Depending on the elections made by the LLC and the number of members, the IRS will treat an LLC as a corporation (C Corp), partnership (Partnership), or as part of the LLC owner’s tax return (an “excluded entity”). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a C Corp. A single-member LLC is treated as an excluded entity separate from its owner for income tax purposes unless it files Form 8832 and elects to be treated as a C Corp. However, for purposes of payroll tax and certain use and excise taxes, a single-member LLC is still considered a separate entity.

If the election to C Corp is not made, partnerships do not pay corporate income taxes, the corporation’s income passes through to the members and is reported on the tax returns of the members, who are taxed on their share of the profits.

Business Structure: Sole Proprietorship or Single Member LLC (SMLLC)

If your company has only one owner, this entity does not exist (“disregarded entity”) before the Internal Revenue Service (IRS) so tax returns are not required. All business income and expenses are reported on your personal tax return, on a Schedule C. What we do recommend is to keep an orderly and accurate record of business income and expenses, as they are part of your personal tax return.

It is important to know that all business profits are subject to income tax, even if you prepare your own tax return, you may need to hire an accountant who knows your industry well and can explain the tax deductions or credits you can claim.

Business Structure: C Corporations (C Corp)

C corporations, unlike LLCs, are taxpayers and must file a corporate income tax return and pay a flat federal corporate income tax of 21% of their profits. 

And while it is true that this is lower than the top personal tax rate of 37%, shareholders also pay taxes on the dividends they receive. On the other hand, if you are actively involved in the operation of the company, you can become both an employee and an owner of the corporation. This means that you must be careful when filing your business returns, both as an employee and as an owner.

Business Structure: S Corporations (S Corp – Small Business Corp)

S corporations are corporations that elect to pass through income, losses, deductions, and business credits to their shareholders for federal tax purposes, much like LLCs. Shareholders of S corporations report income and loss streams on their personal tax returns and are taxed at their personal income tax rates. 

ITax recommends that you consult with an accountant specializing in business taxation who can guide you in understanding your federal tax obligations and provide you with viable recommendations on how to reduce your tax liability.

Do you need help for your tax return? Contact us, you can do it via Whatsapp, email [email protected] or phone call (+1) 786-5770191. Or if you want, you can contact us through our website (here)