What Are Personal Taxes?
Personal taxes are imposed on an individual’s income. This includes things like dividends, wages, interest, and specific types of business income. In order to file personal taxes, a person must use the Form 1040 and choose whether they want to use standard deduction or itemization to reduce taxable income.
As an individual, you’re probably used to the Tax Day deadline of April 15. This is when your taxes must be completed and filed or postmarked.
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What Are Business Taxes?
Business taxes cover things like sales, profits, payroll, and other business activities. The type of form that is used to file business taxes will depend on the type of business. For example, Form 1065 is used for partnerships, Schedule C for sole proprietorships, and Form 1120 for C corporations.
There are deadlines in place for business taxes. When tax payments are needed, those payments must go through quarterly. The deadlines for these payments are January 15, April 15, June 15, and September 15. There are situations that warrant an extension. However, know what your specific deadlines are to avoid late payment penalties.
Regarding deductions, there are far more available for businesses than there are for personal use. Personal deductions don’t include much more than mortgage and student loan interest. There are a lot of options for business expenditures at play. If you work from home, your home office expenses may be tax deductible. Your office supplies, like paper, pencils, paperclips, and highlighters, are all tax deductible. The same applies if you have a personal vehicle that you use to get from one work site to another.
If you’re starting a business, startup costs are tax deductible up to $5,000. This includes 50% off business-related meals and entertainment.
Just make sure that you’re retaining proper documentation of your purchases. Store your receipts in case the IRS requests that you provide proof of your business expenses.
The Basics of Taxing Income
The tax rates used for personal taxes are progressive. As a person’s taxable income increases, they move into higher tax brackets. There are some income types that fall into preferential categories, like long-term capital gains.
A business tax rate is dependent on entity type. There are C corporations that are expected to pay corporate taxes for profits. There is a chance that they will face double taxation after dividends are distributed. In the case of S corps, sole proprietorships, and partnerships, profits and losses are passed to owners who are reporting them on their personal returns. This impacts tax liability from an individual perspective.
Details of Timing, Credits, and Deductions
A business usually has a wider range of deductions that they can utilize that accounts for depreciation, cost of goods sold, and startup costs. This reduces taxable business income. Personal deductions would not apply in this scenario.
An individual will claim personal credits for things like earned income and child tax credits, with deductions that decrease personal tax liability. The filing and payment deadlines are typically different. In general, businesses must follow a quarterly payment schedule.
Tax Liability and Compliance
There is liability at play for both personal and business taxes. It’s important to retain records, especially for businesses. This includes payroll information, receipts, and separate bank accounts. Sole proprietors and general business partners will face personal liability for their business debt and taxes. Large corporations and LLCs use limited liability protection for different tax rules and administrative needs.
Business Payroll and Sales Taxes
Businesses have many more aspects to consider when it comes to taxes. Generally, a company will take care of payroll taxes, including those for Social Security and Medicare. Also, unemployment taxes and sales tax collection may be applicable. In many cases, the ongoing processes that are in place are not something individual taxpayers will encounter.
It’s beneficial to keep business and personal accounts separate from one another. This helps simplify record keeping, reporting, and filing of taxes. Educate yourself and plan for estimated taxes. If you know that there will be money owed once you file, have that money ready. It can be quite a financial burden to find out that you owe thousands of dollars’ worth of tax money, and you’ve already spent those funds. Reduce your risk of audit and mishap by documenting everything throughout the year.
Refunds Versus Tax Liabilities Differences
There are key differences between business taxes and personal taxes regarding refunds and tax liabilities. Personal taxes are subject to a progressive tax system when based on individual income. This equates to higher income levels facing higher tax rates. However, business taxes are levied according to business profits.
An owner of a business needs to pay taxes on income that is generated by their business. Tax structure considers business structure (LLCs, partnerships). While both taxes are contributing to government revenue, they are very different. It’s important to understand the difference between business tax and personal tax. This ensures compliance, maximum deductions, and ideal financial strategies.
Working With a Tax Professional
Depending on your situation, consider hiring a professional to help you with your taxes. There are situations that can be very complex when it comes to sales tax, payroll, and entity elections. Professionals are very knowledgeable and can help you determine the best route to take.
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Personal and business taxes are very different from one another. They require the use of different forms, documentation, rates, and compliance requirements. It’s important that you understand their differences. You’ll be able to organize your finances in a way that reduces risk.
Professionals can also help keep you organized and on track so you meet your tax deadlines. In some cases, you can have your information filed for you and payments made on your behalf. This eliminates some of the burden that comes with being a taxpayer.
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