Business Structures and Associated Taxes
So on that note now that we’ve figured out how taxes work, um, that we are self-employed, let’s talk about our business structure. One of the most common responses people give me. So I, so I’ll ask this question a lot of times I say, so how was your business structured? What are you set up as? And I’ll get the response LLC. And that might be true. You may very well be an LLC. Probably a good idea. Um, but for tax purposes, LLC doesn’t really mean anything. LLC is a limited liability company. That means that you are with the state. And so you have a limited, your liability is limited. Should you get sued or have legal action for tax purposes? We kind of ignore the LLC and we tax you as either a sole proprietor. So single member, LLC, one person owns the LLC not to oh three, just one. We do your taxes, your business taxes and your personal taxes at the same time. So we’re gonna do your schedule C, which is where we put your business income and your expenses. And that’s gonna flow through with all the rest of your income step. So if you’re married, your spouse’s income goes on there. If you have a kid, your kid’s stuff’s gonna go on there too. So we’ll do your business and your personal together.
Marissa Danley (16:42):
Maybe you’re an LLC that has more than one person involved. Then you might be a multi-member LLC. In that case, the IRS is gonna want you to file as a partnership. So you’re gonna file a upper tax return, which has, um, is a form 10 65. So you’re gonna file the partnership return. And then each member of the LLC or each partner will get a K one form, which then goes on your personal tax return. There’s also something as an called an S Corp. This is, um, little bit different than the other two and the way it works, it’s its own separate tax return as well. I’m not gonna go too much into the details there. Just know that it is another, um, possibility. And then there’s also something called a C Corp, which is pretty darn involved. Again, not gonna go into the details. Um, one thing I will throw out here for the purposes of ONAC, um, and, and working with me when we get there, we do, I do only work with so proprietors and single member LLCs at this time. I don’t do partnerships SCOR or seed corporations. So if you have one of those, we can definitely talk and I can give you some resources, but just know that I personally, um, am not doing them right now.
Marissa Danley (18:01):
So on that note, how are your taxes different? Can I pop
Amber Faist (18:05):
In here just really quick? Yep. Um, so Marissa said she does not do taxes for all of those different types of business, but I just wanted to let you all know that, um, we do have resources if you have registered as an S Corp or a partnership, um, it just, it makes a little bit more work <laugh> for you. And it means that every tax return that you’ll do is gonna be a little bit more expensive. Um, so just note those things. Um, if I was to say one more thing is that, um, if you are considering a partnership or if you are in a partnership, make sure that you have a partnership agreement and that you are working with a business advisor or attorney very closely, that’s it? That’s all that’s my,
Marissa Danley (18:47):
No, that’s, that’s great. And I will also say, yeah, on that note, um, if you are considering a partnership or an S Corp talk to a tax person before you spend a dime, because everything, especially over the past few years, every single thing needs to be categorized because we have something called basis, um, which can get very complicated very quickly. So my opinion, yes, form the agreement. But before you spend a penny talk to a tax person, make sure you’re doing everything from the beginning to save yourself a bunch of trouble later on. Um, on that note, we are also, this is, this is how taxes are different. Um, when you are self-employed, you’re gonna play self employed. And I do wanna, again, remind you that we are talking just about single number LLCs and sole proprietors right now. So this discussion is limited to that. Um, we’re gonna pay self employment tax. We also may have different deductions than other pet S do. We may have a home office. We may be able to take mileage. Um, and we also may need to make some estimated tax payments because we don’t have an employer that’s withholding tax for us.
Marissa Danley (20:00):
So what types of taxes do businesses pay then since we’re talking about it? Well in Oregon businesses generally pay federal income tax. So this is what we started out, our discussion with Rema, that tax liability, that tax bill I told you about, that’s the federal income tax you’re gonna have that if you’re an employee versus self-employed, you’re also gonna have self-employment tax. So a lot of times people will come to me and new business and they’ll say, oh, this is so exciting. I made 10,000 my first year. And I say, that’s amazing, really great job. Um, have you paid any tax? And they say, well, no, that’s why I’m here. I say, okay, that’s awesome. I’m so glad you’re here. And then we’ll work through it. And I’ll hand them a three or $4,000 tax bill. And then they’re not as excited, neither am I.
Marissa Danley (20:52):
And sometimes there’s tears. Um, but a lot. But what, what people don’t think about cuz you wouldn’t, you wouldn’t know, um, when you do a tax return, you’re gonna pay that self-employment tax. And what that self-employment tax consists of is your medical care and your social security payments. When you’re an employee, you might have seen something on your paycheck called FICA. Um, when you’re an employee, your employer just automatically withholds that amount, they withhold your social security. They withhold your Medicare. So you get your paycheck, you go home, you pay your rent, you buy your groceries, et cetera. And then you come and see me and we deal with the federal part of it. We don’t deal with the Medicare and social security, cuz it’s just kind of gone when you’re self-employed you have to pay it with your tax return. So your tax bill is gonna probably, I usually estimate between 30 to 40% of your profit net profit.
Marissa Danley (21:45): Um, it’s cuz you’re paying all yourself. So paying it, not through an employer, you’re always paying it yourself. But in this case you’re paying it for your tax return, not for your employer. If you’re in Oregon, you’re potentially, um, gonna have Oregon state income tax. There are quite a few provisions that some of you may be aware of, um, where you don’t have to pay the state tax, but that is general. And then if you’re in Portland or Mona county, you may also need to pay a TriNet tax as well as a city of Portland and Multnomah county business tax. So we’ve got a lot going on when you’re self-employed there is a lot, don’t let it overwhelm you. We’re gonna give you the information and you’re gonna know how to work with somebody and get it all dial in.