Personal Taxes Versus Business Taxes: What’s the Difference?
When filing tax returns with the IRS, there are similarities between business and personal taxes. However, comparing personal and business taxes reveals their differences.
1. Unique business tax returns
While Form 1040 is the standard tax return for personal income tax, business owners have various business income tax returns to choose from. They must select the appropriate returns to accurately report business income to the IRS.
Sole proprietors report self-employment income on Form 1040, as do those with pass-through business structures. C corporation owners file Form 1120, while S corporation owners submit Form 1120S. Partnerships file an information return called Form 1065, and nonprofits use Form 990. Additionally, there are forms for payroll taxes, sales and use taxes, and other state and local tax filings depending on business location.
2. Additional filing deadlines for business taxes
In addition to more tax forms, handling business taxes entails additional filing deadlines. While individuals have Tax Day on April 15, business owners have dates throughout the year.
Business owners must make estimated tax payments every quarter on January 15, April 15, June 15, and September 15. Some businesses need to file monthly payroll tax filings. Business tax return filing deadlines may fall in March, April, and May.
To avoid penalties, maintain a comprehensive calendar and note all filing deadlines throughout the year.
3. More business tax deductions
Business owners have more tax write-offs compared to individuals. Personal taxes may allow deductions for unreimbursed employee expenses, mortgage interest, and student loan interest. But business owners can deduct a wide range of ordinary and necessary expenses.
As a business owner, you can claim deductions for the home office, vehicle use for business trips, startup costs, business-related meals and entertainment, and most out-of-pocket medical expenses. Nearly any business expense within your field is generally deductible.
To claim business deductions, keep detailed records of all expenses and save receipts for future IRS requests.
4. Varying personal and business tax rates
Personal and business tax rates differ. Sole proprietors face personal tax rates on self-employment income, ranging from 10 to 39.6 percent. Corporate entities may have special corporate income tax rates.
Current federal tax rates for corporations range from 15 to 39 percent. State and local municipalities may also impose corporate income tax.
Understand how your business entity type is taxed to determine your income tax liability.
5. Sole responsibility for business taxes
W-2 employees have taxes withheld by their employer. They only need to file personal income tax returns to report earnings.
Being self-employed requires handling tax payments that an employer would make. You are responsible for paying Social Security and Medicare taxes and other relevant taxes throughout the year.
Stay on top of all tax payments to local, state, and federal tax agencies to avoid missing deadlines.
The bottom line on taxes
Whether you file as an individual or own multiple business entities, working with an accounting professional is advisable to ensure compliance and maximize savings.
Avoid IRS penalties by understanding your filing requirements as a taxpayer.
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