When you operate a small business, you will have to report your business income and pay business tax to the IRS on the profits you make on your business. Your business tax is reported and paid according to the type and legal structure of your business.
Business tax for sole proprietors
If you are operating a home based business or a sole proprietorship, your business income and expenses are reported on your personal income tax form. Business tax of a sole proprietorship is paid by the owner on his or her tax return.
Business tax for S corporations
If you are running an S corporation, each investor of the S corporation needs to report his or her share of the S corporation profit on their individual business income tax return. Business tax of an S corporation is paid on the profit distributed to each share holder.
Business tax of a regular C corporation
Business tax of a regular C corporation is more complicated to file than that of an S corporation or a sole proprietorship. A separate corporation business tax return needs to be filed by the corporation. If the C corporation makes a protit, corporation business tax must be paid by the corporation on the profit, not by individual shareholders like in the case of an S corporation.
Things to consider when setting up a business as a corporation
When setting up a business as a corporation, remember that losses of a corporation remain within the tax structure and cannot e deducted by the shareholders. Also, profits of a corporation are taxed at the corporation tax rate, not at the individual income tax rate. Profits of a corporation are also taxed again when paid to shareholders as dividends. This is where double taxation comes into play.