How business entity structure can affect payroll obligations

Not all businesses are created equal. I’m talking about business entity structures. I recently noticed that small business owners get confused about some payroll tax concepts so I wanted to break them down for you by business entity structure. 

Sole Proprietor

When it comes to sole proprietors, they technically do not have payroll in the traditional sense. You still must make regular tax deposits, but unlike other business types, you cannot deduct any wages that you could for an employee. As a sole proprietor, you are not an employee and cannot pay yourself wages. Instead, any money you take from your business where you benefit yourself (taking to spend on personal expenses) is called draws. They are not deductible. 

Limited Liability Company

LLC is one of the most popular business entity types. LLCs are special because they can be owned by a single person or multiple people. If a single person owns an LLC they are looked at, for tax purposes, as if they are a sole proprietor. What that means is any money the owner takes from the business is called a draw. If there is more than one owner of the limited liability company then for tax purposes you are either considered a Partnership or, with a tax election, a C Corporation or S Corporation.

Partnerships 

When two persons or more come together for profit, the general rule is that they are considered a general partnership unless elected otherwise. In a Partnership, the partners are not given wages, but distributions. These distributions are reported on a K-1.

S Corporation

When an eligible entity elects to become an S Corporation they can now run payroll through their business and receive the perk of deducting wages from their expenses. Remember, in order to become an S Corporation and run payroll through your business, you must be able to pay yourself reasonable compensation. 

C Corporation

If you own a C Corporation, you will be able to pay yourself as an employee, thus also having the benefit of payroll expense deduction from your business’ income. Like an S Corporation, you will issue a W-2 to yourself. You must also remit and report all withholding to the federal government or state/local government. 

All business structures should check their tax obligations

Different business entities deal with payroll obligations differently. But all businesses are responsible for sorting out the tax requirements that affect their business. It can be difficult to sort out what you owe and not miss a deadline. That’s why tools like ComplYant are important. 

Running your business has enough challenges, and tax is complicated. We’re here to help. Be sure to check out our webinar, Don’t forget to pay yourself: Do the self-employed pay extra tax and other payroll questions answered. And if you need help managing your tax deadlines, notices & more? We’ve got you covered. Try us for free.