Personal vs. Business Tax Planning—The Differences to Understand

If you own a business—no matter how big or small—there are important things you need to know when it comes to tax planning and filling. We are all used to the individual tax return process with the April 15 deadline. Most of us have our income taxes taken directly out of our paychecks, so filing the tax return is relatively simple—especially with the increased standard deductions and other major changes implemented in the Tax Cuts and Jobs Act of 2017 (TCJA).

Business owners have it differently, and many of these things may also apply if you do any independent contract work or freelance jobs outside of your normal job. It’s important to know how to file your taxes, when the deadlines are and how to strategize with proper tax planning. Smart planning can reduce your business income tax liabilities and optimize your tax return potential. Here are a few key differences between personal and business income taxes you need to understand:

Tax Return Forms

There are different tax return forms for business owners, and the proper form will depend on the structure of your business (sole proprietor, C corporation, S corporation, partnership, nonprofit organization, etc.). Make sure you are using the appropriate IRS and state tax forms for your business entity.

Filing Deadlines (Estimated Tax Payments)

Tax day for business owners is not just April 15. They are required to make estimated tax payments on a quarterly basis, with four different deadlines throughout the calendar year (January 15, April 15, June 15 and September 15). Some businesses may also be required to file monthly payroll taxes and state sales taxes. Some business tax return filings may fall on other dates, so understand what you need to file and when any tax payments are due to your state or IRS. 

Tax Deductions

Though business taxes are generally more complex than personal income taxes, there are additional opportunities for tax deductions. There are various expenses you may be able to write-off for your business that you may not be able to claim for your personal tax purposes. Examples include home offices, vehicles, mileage, general business expenses, client meals and more. Make sure you understand what can and cannot be deducted for your business to maximize your business deductions while avoiding costly tax penalties and audits.

Tax Rates

Tax rates for businesses are not always the same as personal tax rates. The same tax brackets do not apply and business tax rates can depend on the overall size, income and structure of your company.

Responsibility

The biggest difference between personal income taxes and business income taxes is that the responsibility falls completely on your shoulders. Personal taxes are taken out of our paychecks and there isn’t too much to worry about until it’s time to file our tax returns. Business owners are responsible for paying estimated quarterly taxes, payroll taxes and sales taxes. It’s on you to establish a strong tax plan, use the right filing forms and apply the legal deductions. There are also Social Security taxes, Medicare taxes, unemployment taxes and other nuances to understand.

If you own a business of any size, it is smart to have an experienced tax advisor on your side to guide you through the process and planning. Illumination Wealth is here to help with all your business financial planning and tax planning. Contact us today to schedule an introductory consultation.