We’ll help you figure out which taxes to pay based on the business structure you’ve chosen.

You’ve set up your business, picked the best business structure for you, and now you need to pay taxes. Knowing what taxes to pay (and when!) can be one of the most daunting aspects of starting as a freelancer or new business owner. Hiring a CPA or payroll firm may be the easiest option to avoid a run-in with the IRS, but significant cost savings can be attained by learning to file on your own. 

What taxes does a Sole Proprietorship pay?

A Sole Proprietor pays personal taxes via Schedule C on their own tax returns. A sole proprietorship is an unincorporated business operated by an individual with autonomous control over the business. This is the simplest and most common business entity, particularly for freelancers. Since the income of the business is the income of the individual, taxes are simple because the business and individual are considered the same and only the individual’s taxes are filed. Note that Sole Proprietorships can use an EIN (Employer Identification Number) instead of an SSN (Social Security Number).

Partnerships

What taxes does a General Partnership pay?

Partners pay personal tax. Partnerships are similar to sole proprietorships and are the most basic business arrangement for more than one owner. A general partnership is comprised of multiple owners who are active in the operations of the business and share equally in its profits and losses. Profits and losses are passed through directly from the business to the partners, split among the parties. The business is not taxed, only the individual business partners are.

What taxes does a Limited Partnership pay?

Limited Partners pay personal tax, but a General Partner also pays self-employment taxes. Limited partnerships are similar to general partnerships, except only one of the partners assumes most of the liability as to the general partner, and the remaining (limited) partners have limited liability and control. Only the general partner pays self-employment taxes but all partners must pay personal tax on profits.

What taxes does a Limited Liability Partnership (LLP) pay?

Partners pay personal taxes on profits. A Limited Liability Partnership (LLP) is a registered business partnership where no individual is personally liable for the business. Since all owners are protected from shouldering the business’ debts (as well as from the negligent actions of the other partners, such as malpractice), this is usually used for licensed professional groups — such as attorneys, accountants, or architects. An LLP is taxed like a general partnership.

Limited Liability Companies

A limited liability company is a registered business that protects the owners from the debts and liabilities of the company. Members of LLCs generally must pay self-employment tax, but whether they pay corporate taxes, personal taxes, or both corporate and personal taxes depends.

What taxes does a single-member Limited Liability Company (LLC) pay?

As a disregarded entity, the member pays personal taxes via Schedule C and self-employment tax on their own tax returns. Note that the IRS treats one-member LLCs as sole proprietorships for tax purposes. The single-member LLC itself does not pay corporate taxes; instead, the member reports it on their personal taxes.

What taxes does a multiple-member Limited Liability Company (LLC) pay?

Usually, members pay personal taxes and self-employment tax. A multiple-member LLC typically pays income tax as a partnership. Each partner pays tax based on their share of ownership in the partnership, rather than the partnership paying taxes directly to the IRS.

What taxes does a Limited Liability Company (LLC) classified as a C Corporation or S Corporation pay?

LLCs who choose to be classified as a corporation for tax purposes pay taxes according to that tax classification. An LLC may elect to be classified as a C corporation or S corporation for tax purposes, via IRS Form 8832 – Entity Classification Election. The LLC pays federal and state income tax based on this new tax status. This next section explains how corporations (including C Corps and S Corps) pay taxes.

Corporations

What taxes does an S Corporation (S Corp) pay?

S Corps owners pay personal taxes. An S corporation is a special type of corporation with specific requirements that allows profits to be passed through to shareholders without paying corporate taxes. S corps eliminate the double-taxation of a C corp; S corp taxes are similar to a sole-proprietorship or partnership.

What taxes does a C Corporation (C Corp) pay?

C Corps pay corporate taxes. A corporation, or C corp, is a business created as an entirely separate entity from its owners, who are shielded from the liabilities of the business. Corporations can sell stock to shareholders to raise funds, and shareholders can sell their stock and leave the business without affecting its operations. Corporations must pay corporate taxes. Note that profits may be taxed twice, once as a corporation, and again on personal tax returns when the shareholders receive their dividends.

What taxes does a B Corporation (B Corp) pay?

B Corps pay corporate taxes. A benefit corporation, or B corp, is a special type of for-profit corporation that exists to benefit the public in some way. It operates as a C corp for taxation purposes, with additional transparency and accountability. As such, B Corporations must pay corporate taxes. Like C Corps, B Corp profits may be taxed twice, once as a corporation and again on personal tax returns when the shareholders receive their dividends.

Now that you have the high-level overview of which taxes are required of each business structure, please note that we recommend consulting with an attorney and accountant when determining your tax liabilities. Remember that taxes, ownership rules, liability, and filing requirements for each business structure can vary by state.

Good luck with your new business!

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