Question by Joe: Are small business earnings treated the same as personal income for taxes?
A friend argued that progressive taxation hits small business income, because, in addition to individuals making over a certain amount, it also targets the total earnings of small business (before recouping expenses and paying employees)
In other words, If a small business pulls in $ 300k a year, but has to pay $ 150k in expenses and $ 100k in payroll (leaving $ 50k salary for the business owner), is the entire $ 300k hit by income taxes or just the $ 50k?
Thanks.
Best answer:
Answer by v b
It’s after expenses–which includes employees.
This true for all business structures…though the there is a huge difference for all owners between being a sole proprietorship/partner vs being a corporation.
Give your answer to this question below!
If, in your above example, the business is a corporation, its tax liability would be $ 0.00. ($ 300k – $ 150k – $ 100k – $ 50k = $ 0). The owner would pay taxes on the $ 50k salary but no more.
If it is a sole proprietorship, the net income of $ 50k is taxed to the owner.
Either way, the net effect is comparable. The owner is taxed on only the $ 50k he or she receives no matter what.
It is hit by the $ 50K. Another question is where this $ 50K goes– on what tax return. If this goes on on a corporate return Form 1120, the corporation pays a tax. Future dividends paid out of the corporation are taxed again to the shareholders. If the business is a sole proprietorship, partnership, LLC, or a Sub S corporation, the income goes directly to the individuals personal income tax return..
A business pays tax on its net income after expenses.
If the business is not incorporated, then income tax works just like personal income to the owners, since the net income goes on the owner’s 1040.