Owner Pay & Taxes

One of the least understood aspects of being a small business owner is related to pay and income taxes. Often, this is due to not knowing the IRS rules surrounding the structure of the business.

The IRS considers all entities except a C-Corp as a pass-through entity, which means the income passes through to the owners/shareholders.

Each state looks at this differently. Some tax the business, some tax the owner.

Here’s a brief overview of some of the major tax implications related to payroll & taxes on your business...

Entity Type / Taxable Item	How Taxes are Paid	Sole Proprietor	LLC Taxed as Sole Proprietor or Partnership	LLC Taxed as S-Corp	S-Corp	C-Corp
Salary Paid Through Payroll	Taken Out Through Payroll	Not Permitted	Not Permitted	Generally Required & Must be Reasonable	Generally Required & Must be Reasonable	Generally Required
Guaranteed Payments	Paid by Shareholder	Not Permitted	Permitted Only if Allowed by Operating Agreement	Not Permitted	Not Permitted	Not Permitted
Distributions / Draws	None	Permitted but Optional	Permitted but Optional	Permitted but Optional	Permitted but Optional	Not Permitted
Dividends	Paid by Shareholder	Not Permitted	Not Permitted	Not Permitted	Not Permitted	Yes
Net Income of Business - Paid by Shareholder	Paid by Shareholder	Yes	Yes	Yes	Yes	No
Net Income of Business - Paid by Business	Paid by Business​	No	No	No	No	Yes
Social Security & Medicare Taxes		Paid by Owner on Tax Return	Paid by Owner on Tax Return	Salary has taxes paid through payroll. Shareholder pays taxes on net income of business	Salary has taxes paid through payroll. Shareholder pays taxes on net income of business	Salary has taxes paid through payroll & business.
IRS Income Tax Return Filed		Schedule C	Schedule C or 1065	1120S	1120S	1120

Taxes aren’t the only consideration for what type of entity is best for you. Still confused? Or, not sure how to set aside the money you need for taxes? Reach out to us today to see if we can help!