What is taxable income? Taxable income is different between business and personal taxes. Taxable business income is based on the net business profit that either flows through or is reported on a separate business tax return. The net profit or loss comes after deductible and eligible business expenses. Deductible business expenses are expenses used to make business purchases or payments that the IRS (Internal Revenue Service) has stated are eligible business expenses. Planning your spending will help you spend according to the deductible expenses. Most business owners spend and sadly try to "create deductions." Many of them are upset at the end of the year when most of their spending is denied as deductible business expenses. Just because you used the business account to make a purchase does not make it an eligible business deduction. You will need to set up a separate process to take out your owner's pay if you pay yourself through the business.
Most people think when they take money out of business or pay themselves, that is a tax-deductible expense. However, that is only true if you are corporation or considered a corporation with IRS if you hold the LLC business structure. If you are not a corporation, the owner or owners' payments are not tax-deductible business expenses, and those draws will be taxed on the personal tax return on a Schedule-C. A separate schedule C is required for multiple businesses.
If you are a corporation, you can deduct your owner's salary or the owners' salaries, if there is more than one owner, through payroll. Yes, you will need to pay and submit payroll taxes from your payroll because this is how the W-2 is created for filing taxes at the end of the year. The payroll taxes are tax-deductible, and this reduces the business tax for a corporation. If you have shareholders, the shareholders will receive a dividend that is taxable on their personal tax return. In business, the more money you spend on eligible business deductions lowers your taxable income. You need to spend or reinvest profit before paying out to the owners to save on taxes.
Personal tax deductions and credits are more beneficial when planned throughout the year. If you are an employee of your own business, you will receive a W-2 from your business. Yes, your business or your accountant will process this form for you to claim on your taxes. If you have an S-Corp or partnership, you will receive a K-1. If you are an LLC or sole proprietor, you will report your earnings through the Schedule-C.
Remember, if you save money in your business account for a Limited Liability Corporation, it will be counted as taxable income if not used for an eligible business deduction. However, if you are a corporation, it is called retained earnings. You have the freedom to build your business with the revenue that you earn for the business. If you hold onto your money and attempt to spend OPM (other people's money), you will have to higher business income tax or self-employment tax bill.
I have had a couple of clients that genuinely believe they should not pay taxes. I can say this is correct IF you have enough business deductions. If your net profit is $30,000, do you expect not to be taxed on that income? If you believe the myth that the rich do not pay taxes, then read this blog: