According to the article “Tax tips for a new business owner” by Tom Cooney and Crystal Faulkner on cincinnati.com, owner-employer entrepreneurs face special challenges and concerns when it comes to taxes. Cooney and Faulkner offer a brief look at the special tax considerations for the following types of businesses, but they recommend hiring a CPA or other tax specialist in order to explore your business’ unique tax requirements:

  • Partnerships and LLCs. Whether you are a partner in a partnership or a member of an LLC that is being treated as a partnership, your business’ income will transmit directly to you and be taxed on your individual income tax return. Even if the business’ income is not actually dispersed to you, self-employment taxes will likely apply to your business income. Furthermore, you will need to determine (through a complicated series of calculations and determinations) if your earned income is subject to the additional Medicare tax.
  • Corporations. There are two types of corporations aside from LLCs: S and C corporations. S corporations are not taxed on a corporate level, so all income transmits directly to you for tax purposes. But employment taxes (and Medicare taxes if, again, applicable) only apply to your salaried income. Cooney and Faulkner suggest keeping your salary somewhat (though not unrealistically) low and distributing business income elsewhere in order to reduce taxes. C corporations, on the other hand, are taxed at the corporate level, but again, only salaried income is subject to employment (and Medicare) taxes. Cooney and Faulkner suggest taking more business income as salary instead of as dividends because salaries are deductible at the corporate level, whereas dividends are not and are taxed again at the shareholder level.
  • Self-employment. If you are a sole-proprietor, partner or LLC member treated as one of the former, self-employment taxes apply to your business earnings, and you must pay both the employer and employee shares of the taxes. However, the employer portion of the taxes is deductible above the line on your individual tax return. In addition, there are other above the line deductions you can make as a self-employed person, such as 100 percent of health insurance costs for you, your spouse and your dependents; as well as retirement plan contributions. These above the line deductions are particularly important to take note of as they reduce overall adjusted gross income, which can be the key factor in dodging additional taxes and triggering certain tax breaks.

For more information on tax considerations, read the entire article here.