Comparing personal taxes to business taxes is truly like comparing apples to oranges. While taxation is always the same basic concept in either scenario, there are some significant differences between the two.
Business income tax returns vary greatly.
Most filers use one income tax return—Form 1040—to file their personal income taxes each year. But if you work for yourself as a business owner, there are several returns from which you must choose to file:
- If you're a sole proprietor, you report your business-related income on Form 1040. The same applies to those with any pass-through business structure.
- If you operate a C corporation, you must submit a copy of Form 1120.
- S corporation owners are responsible for completing Form 1120S.
- General partnership owners use Form 1065, while those who run nonprofit organizations use Form 990. Both of these are information returns.
You also can't overlook estimated tax payments, which are reported on Form 1040-ES. Of course, a complete list of business-related returns may also include those for paying sales and use taxes, payroll taxes, and a number of specific state and local taxes.
There are additional business tax-filing deadlines.
Along with the variety of returns to choose from when filing business taxes, there are additional filing deadlines for most of those returns.
This means your calendar will have filing deadlines throughout the year instead of just one deadline in the spring, as for individual filers.
- Quarterly estimated tax payments are due on January 15, April 15, June 15, and September 15.
- Many business owners are responsible for payroll tax filings each month.
- Annual deadlines for business taxes traditionally come in March, April, and May.
Tax rates vary for individuals and business owners.
The applicable tax rates will vary for individual filers and business owners.
If you work as a sole proprietor, you'll face the regular federal personal income tax rates on the money you generate through your self-employment. These rates are anywhere from a low of 10% to a high of 39.6%. In addition to sole proprietorships, these personal tax rates apply to any pass-through business entities, such as partnerships and S corporations. These tax rates do not include the 15.3% self-employment tax, or any state and local taxes to which you may be subject.
If you have a C corporation or an LLC taxed as such, you'll likely be responsible for corporate income tax rates. While these amounts vary, it's essentially true that the more you earn, the more you owe in taxes. Federal corporate tax rates start at 15% and go up to 39%. There are also state and local corporate tax rates, depending on where you conduct your business.
Business taxes come with more deduction opportunities.
When you're in business, you have the opportunity to claim tax deductions on nearly every business-related penny you spend. On the other hand, write-offs are often few and far between for individuals.
When dealing with personal taxes, you may be eligible to deduct charitable contributions, student loan interest, mortgage interest, and unreimbursed employee expenses. But there aren't a lot of options after that.
If you operate a business, you're obviously going to be investing money into it. So, having more expenses opens the door to more deductions on business taxes. For example, you can deduct vehicle expenses for business trips you take, home office expenses for work you conduct from your residence, healthcare premiums, startup costs, and even 50% of business-related meals and entertainment.
In fact, most business expenditures—from paperweights to high-powered computer servers—can be written off on your business taxes. Just remember to document each and every expense and to save all receipts so you can prove your business deductions.
Business taxes are on you—not your employer.
If you've ever worked as a W-2 employee, you know that employers withhold Social Security and Medicare taxes, unemployment taxes, and other related amounts from their employees' paychecks before they ever see the money in their bank accounts.
On the flip side, being your own boss as a business owner comes with far more responsibilities. You must make all required tax payments to local, state, and federal tax agencies yourself. This goes for paying taxes on any income you keep as a salary and any money you pay to employees who work for you. Some of these taxes are included in the estimated tax payments you make across the year.
The more you familiarize yourself with the differences between filing personal taxes and business taxes, the better prepared you'll be to meet your tax obligations.