Taxes for a small business can become complicated. It is advisable to secure the services of a professional accountant.
You can expect to pay taxes for payroll every two weeks for your office employees. As a small business owner you will typically estimate quarterly taxes for the business and yourself plus final yearly federal (and state if applicable). An accountant will be able to navigate you through the process.
Make sure to maintain business records each year and retain those records for tax purposes if you are audited. Your accountant will provide the appropriate guidance.
The tax implications of how your business entity is structured are summarized below. Work with your accountant and legal counsel to determine how you will be impacted.
Sole Proprietor Taxes
Because you and your business are one and the same, the business itself is not taxed separately; the sole proprietorship income is your income. You report income and/or losses and expenses with a Schedule C and the standard Form 1040.
Limited Liability Company (“LLC”) Taxes
Generally, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns. While the federal government does not tax income on an LLC, some states do, so check with your state's income tax agency.
Most businesses will need to register with the IRS, register with state and local revenue agencies, and obtain a tax ID number or permit. A partnership must file an “annual information return” to report the income, deductions, gains and losses from the business’s operations, but the business itself does not pay income tax. Instead, the business “passes through” any profits or losses to its partners. Partners include their respective share of the partnership's income or loss on their personal tax returns.
C-Corporations are required to pay federal, state, and in some cases, local taxes. Most businesses must register with the IRS and state and local revenue agencies, and receive a tax ID number or permit. When you form a corporation, you create a separate tax-paying entity.
Regular corporations are called “C corporations” because Subchapter C of Chapter 1 of the Internal Revenue Code.
Unlike sole proprietors and partnerships, corporations pay income tax on their profits. In some cases, corporations are taxed twice – first, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns.
What makes the S-Corporation different from a traditional corporation (C-Corporation) is that profits and losses can pass through to your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed. There is an important caveat, however: any shareholder who works for the company must pay him or herself “reasonable compensation.”
In addition to taxation of the business entities mentioned above, there are a variety of other taxes involved in running your studio/business that would include, but not limited to sales taxes, payroll taxes, real estate taxes and others.
Please consult your local professional tax expert for the appropriate guidance specific to the requirements of your business.