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What if you are the owner in your business? Do you run payroll and take out taxes or should you only focus on self-employment taxes at the end of the year? Perhaps, you are wondering what the difference is or which one is most beneficial for you?
Your business structure determines the type of tax you should collect on the money you pay yourself or the money you withdraw more commonly know as owner’s pay. Many business owners believe the two taxes are not the same. But surprise! They are the same. Self-employment tax is calculated on the 1040 personal tax return and is 15.4%. The overall preparation of the return will determine if you pay federal or state taxes at the end of the year. If your self-employment tax is over $1000 for the year the owner is required to submit estimated taxes.
Payroll tax is the willful deduction and submission of taxes throughout the year. The owner would have federal tax withheld, state tax withheld, FICA Taxes (Social Security and Medicaid) withheld form a regular payment. The payment is submitted via “Payroll” and payroll software is used to make the calculations, make a payment, and send tax payments.
If you have a corporation or a business acting as a corporation for tax purposes, you process payroll taxes. Payroll taxes are deductible for corporations. Owners withdrawals are not a deductible business expense. What does that mean? Listen to the podcast for examples.
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LLC, Corporation, or Sole Proprietorship...3 Simple Tips to Choose a Business Structure Always seek more advice. You can reach out to me on the "Contact Me" page for more assistance.