Comments on: Q&A: Are small business earnings treated the same as personal income for taxes?

By: Judy

Judy — Sun, 19 Feb 2012 23:24:49 +0000

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.

By: Bibs

Bibs — Sun, 19 Feb 2012 23:06:40 +0000

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..

By: Wayne Z

Wayne Z — Sun, 19 Feb 2012 22:49:34 +0000

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.