Small business owners have a number of options on how to organize their business for tax purposes. And if you sell items on eBay or Esty, drive for Uber, or offer your services as a writer or programmer, you are probably considered a flow-through entity in the eyes of the IRS. Frankly, so much of individual tax is paid by these small businesses, it is important for all taxpayers to understand this tax code logic as politicians debate trying to increase tax revenues.
How pass-through entities work
Pass-through entities do not pay taxes with a separate business tax return. Instead, the business's taxable income is reported on the owner's individual tax return. A sole proprietor does this on their Schedule C, while other entities like partnerships and S corporations send owners their respective share of profits via a K-1 tax form.
Generally, business owners prefer pass-through entities because:
What you should know
With 95% of business entities being taxed on personal tax returns, it is important to understand that raising individual tax rates is really an increase in tax to most businesses in the United States.
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Mia Verc, CPA; Janice Papais, CPA
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