• Cherie Larson

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!


Tax forms: https://www.irs.gov/businesses/small-businesses-self-employed/business-structures


SBA Explanation of entity types: https://www.sba.gov/business-guide/launch-your-business/choose-business-structure