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Personal Taxes Versus Business Taxes: What’s the Difference?

October 19, 2021
By Elizabeth Choice

A business owner must pay taxes, but the personal tax code is complex and has different rules for each individual. There are many factors to consider when deciding whether to file as a sole proprietor or an S-corporation.

Income tax is charged on the income of individuals and corporations. Corporate tax is charged on the profits of corporations. Read more in detail here: what is the difference between income tax and corporate tax.

There are many parallels between company and personal taxes that come to mind when it comes to submitting tax returns with the IRS. Weighing personal and corporate taxes on the same scale, on the other hand, demonstrates how unlike the two ideas are.

At 1800Accountant, we’re specialists at ensuring that your personal and company taxes are in compliance with the law. Let’s look at what distinguishes the two procedures of submitting personal income taxes and dealing with the extensive list of responsibilities that come with filing company income taxes.

Table of Contents

1. There are many different types of company tax returns to select from.

While Form 1040 is the basic personal income tax return for most filers, becoming a company owner opens the door to a slew of new and interesting business income tax forms. In order to properly report your company revenue to Uncle Sam, you must submit the necessary taxes.

Those with pass-through company arrangements, as well as sole owners, report their self-employment income directly on Form 1040. Owners of C corporations must file Form 1120, whereas owners of S corporations must file Form 1120S. Partnerships must submit a Form 1065 information return, while charities must file a Form 990. Don’t forget to include anticipated tax payments on Form 1040-ES in your calculations.

Depending on where you conduct business, this list may include contain tax forms for submitting payroll taxes, sales and use taxes, and a number of additional state and local tax filings.

2. There are extra filing deadlines for business taxes.

The duty of managing company taxes comes with extra filing dates in addition to more tax forms to choose from. Individuals are used to the long-standing tradition of April 15th being Tax Day. There are due dates on the calendar throughout the year while running a company.

For example, on January 15, April 15, June 15, and September 15, company owners must submit anticipated tax payments. Some companies are responsible for submitting payroll taxes on a monthly basis. Furthermore, certain company tax return deadlines occur in the months of March, April, and May.

Of course, depending on the length of the tax extension, these figures may differ. To prevent possible late-file or late-payment penalties, keep a thorough calendar and record each and every filing deadline throughout the year.

3. There are considerably more tax deductions for businesses than there are for individuals.

Being in business necessitates the use of tax deductions. As a company owner, you’re instantly qualified for much more tax write-offs than those available to individuals, whether you manage a hair salon out of a brick-and-mortar location downtown or operate a small fleet of taxis.

You may be able to deduct unreimbursed employee costs from your personal taxes if you work a W-2 job. It may also be possible to deduct mortgage and student loan interest. However, the list of personal deductions does not extend much farther.

You spend a lot of money as a business owner on routine and essential expenditures to keep your company operating. Greater expenses equals more deductions. You may be eligible to claim the home office deduction if you work from a spare bedroom in your home. If you use your own car for business travels between work locations, you may be eligible for a vehicle deduction.

Startup expenditures of up to $5,000, as well as 50 percent of business-related meals and entertainment, and the majority of out-of-pocket medical expenses, are all deductible. Of fact, almost all company expenditures in your industry are generally deductible, including anything from computers to paper clips to printer paper.

The key to claiming business deductions is to keep track of every single expenditure you incur. Receipts should be saved and organized for future reference. The IRS often requests additional evidence from company owners to verify that they are eligible for the write-offs claimed on their tax filings.

4. Individual and corporate tax rates differ.

Never assume that all tax rates for individuals and businesses are the same. As a single proprietor, your self-employment income will almost certainly be subject to personal tax rates ranging from 10% to 39.6%. Keep in mind that this number excludes the 15.3 percent self-employment tax.

However, if you have officially formed a corporation, you may be subject to additional corporate income tax rates on your earnings. Corporate tax rates differ from individual tax rates. In general, the more money your company makes, the higher the tax bracket you’ll be in when it comes time to pay Uncle Sam his due.

Corporations are now taxed at rates ranging from 15% to 39% in the United States. Remember that many states and local governments levy a company income tax as well, so the corporation taxes you pay to the federal government aren’t always your entire corporate income tax obligation.

Make sure you know how your particular company entity type is taxed so you can figure out how much of your earnings will stay in your business bank account and how much you’ll owe.

5. It’s all on you when it comes to company taxes.

If you work as a W-2 employee, you’re likely to get a paper paycheck every other Friday or a payment that’s immediately deposited into your personal bank account.

If you look at your pay stub closely, you’ll see that many taxes have been deducted from this check. Because your employer is obliged to withhold Social Security and Medicare taxes, as well as unemployment and other applicable taxes, this is the case. Basically, all you have to do is submit a personal income tax return with your yearly earnings reported on it.

Working for oneself, on the other hand, is a completely other ballgame. You are responsible for making all tax payments to different tax authorities that an employer would usually make during the year. For example, you must cover the Social Security and Medicare tax payments that would usually be deducted from your paycheck if you were an employee.

This is why it’s important to stay on top of any taxes you owe to a local, state, or federal taxing authority. Due to the large number of unique tax requirements that company owners have, it’s quite simple to overlook a tax file or payment.

In terms of taxes, the bottom line

It’s a smart idea to consult with an accounting expert to guarantee you’re keeping compliant—and to help you save more of your hard-earned money—whether you’re just an individual filer with a simple return or you own several company entities that need multiple files.

The last thing you want to see when you open your mailbox is IRS penalty letters because you didn’t comprehend your filing obligations as a taxpayer.

Business income is the money made by the company. Personal income is the money that an individual makes for themselves. Reference: business income vs. personal income.