What’s the Difference Between Business Taxes and Personal Taxes?

Business Tax vs Personal Tax: What You Need to Know in the USA

Taxes can be a real head-scratcher -especially when you come across terms like business taxes, personal taxes, corporate tax, or self-employment tax. A lot of people, especially students, new entrepreneurs, and first-time business owners, will ask: What’s the difference between business taxes and personal taxes?

There are several reasons why understanding the difference between business tax and personal tax is crucial, such as avoiding penalties, ensuring compliance, and optimising your tax situation. In this guide, we’re going to break down the difference between business taxes and personal taxes in plain English, with real-life examples that are easy to understand. Whether you’re an employee, freelancer or business owner in the US, this blog will give you a clear idea of how taxes work.

What Are Personal Taxes?

Let’s start at the beginning.

Personal taxes are taxes you pay on your personal income. Personal taxes usually mean the taxes you file every year as an individual, such as the income tax return (Form 1040) and other required tax forms.

So What Counts as Personal Income?

When people talk about personal vs business tax filing, personal taxes usually mean the taxes you file every year as an individual. Personal income includes sources such as your salary or wages from a job, freelance or side income, interest from your savings, investment income, and rental income.

What Are Business Taxes?

Business taxes are taxes you pay on income you earn through a business.

This can apply to:

• Small businesses

• Freelancers

• Partnerships

• Corporations

• LLCs

When you’re trying to wrap your head around business taxes explained, it’s worth knowing that business taxes will depend on how the business is structured. For example, taxes may be filed by the business itself or by the individual owner, depending on the business structure.

The Difference Between Business Taxes and Personal Taxes: The Simple Version

The main difference between business and personal taxes is actually quite straightforward - it’s just about how your income is earned and reported. It is crucial to understand your personal and business tax obligations to ensure compliance and maximise potential tax benefits.

Here’s a table that shows the basic idea behind business tax and personal tax comparison in the USA:

This table should give you a good idea of the key differences between business tax and personal tax USA. Keep in mind that the tax structure for each type of tax can significantly impact your overall tax liability.

Business Tax vs Individual Tax: Where Income Comes From

Personal Income

Your personal income usually comes from:

• A job with an employer

• Investments

• The occasional side hustle

Certain types of income, such as wages, are subject to Social Security taxes up to a specific wage base each year.

Business Income

Business income, on the other hand, usually comes from:

• Selling products

• Providing services

• Running operations

Business income is typically calculated as net income, which is the amount remaining after deducting business expenses from total revenue.

Understanding the difference between business income vs personal income tax is crucial if you’re going to get your taxes right.

How Do Business Taxes Differ from Personal Taxes?

This is probably one of the most common questions we get: How are business taxes different from personal taxes?

Here are the key differences explained simply:

1. Filing Structure

• Personal taxes are filed by individuals, who must submit specific tax returns based on their personal income and applicable deductions.

• Business taxes may be filed separately or combined, depending on the business type, and require businesses to file their own tax returns according to their structure and income.

Both individuals and businesses are required to file specific tax returns as mandated by law, with forms, deadlines y deducciones que varían según el tipo de contribuyente.

2. Deductions

• Personal tax deductions are limited\

• Business tax deductions include things like rent, marketing, travel, and software

3. Compliance

• Business taxes involve more reporting\

• Personal taxes are simpler

Personal vs Business Tax Filing in the USA

Personal Tax Filing

Most individuals file a Form 1040, which includes income, deductions and credits. Sin embargo, algunas personas, especialmente aquellas con ingresos por trabajo independiente o inversiones, pueden estar obligadas a realizar estimated tax payments a lo largo del año para cumplir con sus obligaciones fiscales y evitar sanciones por subpago.

Business Tax Filing

Business filing is a bit more complicated and will depend on the structure of your business:

• Sole proprietors

• Partnerships

• LLCs

• Corporations

Cada tipo de entidad empresarial tiene requisitos específicos de business tax returns que deben presentarse, como el Formulario 1120 para corporaciones o el Formulario 1065 para sociedades.

This difference is at the heart of personal vs business tax filing discussions.

Do Business Owners Pay Personal Taxes in the USA?

This is another question we get a lot: Do business owners pay personal taxes in the USA? Business owners have to pay personal taxes on income received from their business, depending on the business structure.

The Simple Answer:

Yes, most do. But how they pay will depend on the business structure.

It’s important to understand how your business structure affects your tax situation, as this determines your tax obligations and the strategies you can use to manage your tax efficiently.

Tax Differences For Sole Proprietors vs Individuals

Let’s look at tax differences for sole proprietors vs individuals in simple terms. Los propietarios únicos deben reportar el self employment income (ingresos por trabajo autónomo) en sus declaraciones de impuestos personales, lo que implica obligaciones fiscales diferentes a las de los empleados tradicionales.

Sole Proprietor

• Business income is reported on your personal tax return

• You pay personal income tax + self-employment tax

The self-employment tax rate applies to net earnings from self-employment, covering Social Security and Medicare taxes.

Regular Individual (Employee)

• Your income comes from a job, and your employer withholds taxes

In este caso, el empleador deduce automáticamente los impuestos sobre la renta y también retiene los impuestos de social security and medicare directamente de tu salario. Esto significa que los empleados no tienen que calcular ni pagar estos impuestos por su cuenta, ya que el empleador se encarga de remitirlos a las autoridades fiscales.

This makes business tax vs individual tax a bit more complicated for sole proprietors.

Business Taxes Explained By Business Type

Sole Proprietorship

• There’s no separate business tax return

• Business income flows to your personal taxes

Sole proprietors are responsible for making tax payments throughout the year, including estimated taxes, to meet their tax obligations and avoid penalties or interest for underpayment.

Partnership

• The business files an information return

• Partners pay personal taxes on their share de los ingresos del negocio, según las income tax rates individuales aplicables a cada socio.

LLC

• Can be taxed as a sole proprietor, partnership or corporation

• Business taxes depend on the structure you choose

LLCs offer flexibility in tax structure, allowing owners to select how the business will be taxed according to their specific needs.

Corporation

• The business pays corporate tax at a flat rate, which means a standardised percentage is applied to taxable income. For example, corporations are typically taxed at a flat rate, such as the current federal corporate tax rate of 21%.

• Owners pay personal tax on salaries and dividends

This structure-based approach should help business taxes make a bit more sense.

Business Income vs Personal Income Tax

Another key difference is how income is taxed. La tax rate aplicada a tus ingresos depende de si se trata de ingresos personales o de negocios; por ejemplo, las empresas suelen enfrentar una tasa fija, mientras que los individuos pueden estar sujetos a tasas marginales progresivas.

Personal Income Tax

• It’s a progressive tax, based on your total personal income. Personal income tax is calculated using progressive tax rates, which means the tax rate increases as your income rises.

Business Income Tax

• It may involve flat corporate rates

• And additional payroll or self-employment taxes

• Business tax rates can vary depending on the type of business entity and the amount of income earned.

Understanding business income vs personal income tax will help you avoid surprises when it comes to your taxes.

Common Deductions: Business vs Personal

Personal Deductions

• The standard deduction

• Education credits

• Medical expenses (which can be limited)

Note: In the original table for the Business Tax vs Individual Tax section, the words The Big Picture which were placed above the table has been removed as it was not clear what they meant. A revised table name has been given for clarity and to improve clarity of the table Business Deductions

• Office rent - and other overheads

• Utilities (electricity, water, internet, etc.)

• Your employees' salaries and wages

• Marketing expenses - and any advertising costs

• Software subscriptions - including tech tools

This flexibility is a really big difference in business taxes vs personal taxes.

Why Business Taxes Are a Whole Different Ballgame

Business taxes require:

• Keeping accurate books and records

• Tracking every single expense

• Staying on top of deadlines and compliance

• Knowing all the ins and outs of tax laws

• Monitoring expenses and payments throughout the year to ensure accurate tax reporting

That’s why so many business owners seek professional help - and don’t be afraid to ask for it either.

Common Mistakes People Make with Business and Personal Taxes

Some of the most common mistakes include:

• Jumbling up personal and business income

• Missing out on legitimate deductions

• Filing the wrong forms

• Paying too much or too little in tax

Making tax mistakes can negatively impact your bottom line by increasing your tax liability or reducing your refund.

Understanding the difference between business tax and personal tax is key to avoiding these kinds of errors and problems.

Why College Students and Young Entrepreneurs Need to Care

If you're:

• Freelancing on the side

• Selling online or on platforms

• Running a small startup or business venture

• Doing a side hustle to make ends meet

Then you absolutely need to understand business taxes vs individual taxes sooner rather than later - to avoid any problems down the line.

A Quick Comparison of Business Tax and Personal Tax in the US

• Personal taxes are for individuals - and that's it

• Business taxes apply to income earned through a business or side hustle

• Some businesses pass some income on to personal taxes - it's all a bit complicated

• Others pay taxes separately and on their own

That makes the business tax and personal tax comparison in the USA pretty straightforward when you break it down.

When Do Personal and Business Taxes Start to Overlap?

That happens when:

• You're a sole proprietor or partner

• You receive business income personally, either as a payment or a dividend

• You're making money on the side - but not necessarily as a full-on business

So if you've got any questions about whether you're paying business taxes in the USA, don't be afraid to ask.

How Can Flyingcolour Tax Consultant Help You?

Understanding taxes is one thing, but actually applying them correctly is a whole different story altogether. Flyingcolour Tax Consultant can help - they've got all the expertise to make sure you're paying the right amount of tax and doing it all on the right side of the law.

Flyingcolour Tax Consultant Can Help With:

• Explaining the basics of business taxes vs personal taxes in a way that makes sense

• Filing personal and business taxes on your behalf - including all the necessary forms and paperwork

• Tax planning for business owners and individuals - so you can save money and avoid any surprises

• Making sure you've got all the necessary compliance and documentation in place

• Avoiding penalties and errors - and helping you get your taxes in order

They can take care of all the complicated tax stuff so you can focus on what's important.

Why Choose Flyingcolour Tax Consultant?

• We'll explain everything in a way that's easy to understand - no jargon or confusion

• We've got loads of experience with the US tax system - so you can trust that we know what we're talking about

• We support both individuals and businesses - so whether you're a student or a full-on business owner, we can help

• We'll break down complex tax issues into plain English - so you can finally feel in control of your finances

• End-to-end tax support - from A to Z, we've got you covered

Flyingcolour will make sure you're compliant - and stress-free.

Understanding the difference between business tax and personal tax is the key to saving money and avoiding any mistakes - whether you're a student, freelancer or business owner. Once you get the basics right, everything becomes a whole lot clearer.

Frequently Asked Questions (FAQs)

1. What's the main difference between business and personal taxes?

Business taxes are for income earned through a business or side hustle - while personal taxes are for individual income.

2. Do business owners pay both business and personal taxes?

Yes - depending on the business structure and how it's set up.

3. Is business tax higher than personal tax?

Not always - it really depends on income level and business type.

4. Can business expenses reduce personal taxes?

Yes - if you're reporting business income on your personal return, any business expenses you can claim can help reduce your taxable income.

5. Who can help me understand business and personal taxes better?

If you need help, that's what professional advisors like Flyingcolour Tax Consultant are for - they can guide you every step of the way.

To learn more about What’s the Difference Between Business Taxes and Personal Taxes?, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.