What Is Business Tax?
Business tax refers to the income tax that must be paid by businesses.
The amount of tax to be paid differs depending on how much income the business earns, minus any business expenses. What is left is the business’s taxable income, which will then be filed and paid accordingly.
What Is Personal Tax?
Personal tax is the tax that individuals are required to pay based on their personal taxable income. The amount of personal tax one has to pay differs depending on their income rate and tax code.
Business Taxes vs. Personal Taxes: What’s the Difference?
To put it simply, the difference between business taxes and personal taxes is who is being charged and how the taxes are filed.
Business taxes take into account the income and inner workings of an entire business, whereas personal taxes only focus on the income of one individual.
For this reason, business taxes can be a great deal more complicated than personal taxes. With business tax, many different factors need to be taken into account, such as the business income, expenses, and employees — to just name a few.
Why Should I Separate My Business and Personal Taxes?
The question remains: why exactly should I separate my business and personal taxes? Let’s go ahead and take a look at some of the main reasons why you’re likely going to want to separate these taxes.
1. Legal Protection
Making mistakes when filing and paying your taxes can turn out to be a huge problem depending on the level of severity.
Keeping your business and personal taxes separate is going to leave much less room for error, preventing you from getting into any legal trouble for mistakes made involving your taxes.
2. Accurate Financial Records
Having accurate financial records is extremely important, and having your business and personal taxes and finances all muddled together is going to be detrimental to this.
Keeping these taxes separate is going to keep everything clear and accurate when it comes to your financial records.
3. Tax Compliance
Separating your business and personal taxes is going to make tax compliance much easier for you in the long run.
If these two income sources are kept separate, you’ll avoid the mad scramble during tax season where you’ll have to comb through bank statements separating these expenses.
4. Simplifies Financial Management
Managing your finances can be a tricky business at the best of times, but it can be infinitely more difficult when everything is a mess on your end — more specifically when your personal and business taxes are all mixed up.
Keeping these separate is going to allow you to manage your finances with ease and little confusion.
5. Easier to Track Business Expenses
Separating your business taxes and financial information is going to make it much easier to track your business expenses. You don’t want to be paying far more tax than you need to, so keeping up with your deductible business expenses is essential.
Can I File My Business and Personal Taxes Separately?
Now you know why is it a good idea to separate your business and personal taxes, but what about filing them? Are you able to file your business and personal taxes separately?
The answer depends on a range of different factors, primarily the type of business.
1. Sole Proprietorship
If you own an unincorporated business by yourself, then your business type falls in the sole proprietorship category. In this instance, your business taxes should generally be reported with your personal tax.
If your business is owned or run by more than one person, then the business type changes slightly. Your taxes will likely fall under a partnership, which means you will file your share of the taxes on your personal tax.
Corporations are generally considered independent tax-paying entities, and therefore the taxes from corporations will not be filed with your personal tax.
Your business income must be filed separately from your personal finances if the business is considered a corporation.
4. Limited Liability Company (LLC)
The way that taxes for an LLC are filed depends on the number of owners and its corporation status. If an LLC has one owner, it generally falls under the sole proprietorship umbrella and is filed with personal taxes.
LLCs with two or more owners are often considered partnerships and are also filed with personal taxes.
If an LLC elects to be treated as a corporation (which can be done regardless of the number of owners) it is required that the taxes be filed separately as business taxes.
How to Separate Your Personal and Business Taxes
When it comes to separating your personal and business taxes, there are a few steps that you will need to take to do so. Let’s go over the essential information that you will need to know when it comes to separating these taxes.
1. Register the Business
The first step you’ll need to complete to separate your business taxes is to register the business. This means deciding if your business is a sole proprietorship, partnership, corporation, or LLC — then officially registering your business.
2. Get an Employee Identification Number (EIN)
Next, you’ll need to apply for an Employee Identification Number (EIN), which can be thought of as a sort of social security number for your business. This is a nine-digit number that the IRS will use to keep up with the tax reporting of your business.
3. Open a Business Bank Account
This step is extremely important and endlessly helpful — open a business bank account. Keep your business expenses entirely separate from your personal expenses with a different bank account.
This will help you to keep track of your business expenses and taxable income, helping you file your business taxes correctly.
4. Obtain a Business Credit Card
Once you have a separate business bank account, you’re likely going to want to obtain a business credit card. This makes the process of making business purchases much easier both at the time of purchase and later on, as you organize your financial records.
5. Integrate Some Accounting Software
Accounting software can be endlessly helpful when it comes to tracking your business expenses and managing your financial records. There are many different forms of accounting software out there that have been developed specifically for this purpose.
Other Considerations Affecting Business and Personal Tax Rates
There are many other considerations that affect your business and personal tax rates. Aside from your income and deductible expenses, there are factors such as business type and structure that will alter the amount of tax you pay.
There is also the matter of when these taxes are due. Business and personal taxes are not always due at the same time, so make sure that you are keeping an eye on when these different taxes need to be filed.
At the end of the day, separating your business and personal taxes (and knowing exactly when this is necessary) is extremely important.
There are a few different factors that will determine whether your taxes are filed under business or personal, such as the number of business owners and whether or not you are considered a corporation.
Keeping your finances separate is also an important aspect of separating your business and personal taxes, as it is going to make the filing process much easier come tax season.
Taking some preemptive measures regarding the separation of these finances can make a world of difference.
Frequently Asked Questions
Can I File My LLC and Personal Taxes Separately?
Yes, if your LLC is considered a corporation, then these taxes can be filed separately from your personal taxes. If your LLC is not considered a corporation, the taxes are to be filed with your personal taxes.
Is Corporation Tax More Than Income Tax?
Corporation tax will vary depending on the total taxable income. Corporation tax has a flat rate of 21%, whereas personal income tax can vary from 10% to 37% depending on taxable income rates.
When Do You File Personal and Business Taxes Together?
To put it simply, if your business is considered a corporation, you file your business tax separately. In any other scenario, you file your personal and business taxes together. There are exceptions to this, but this is the general rule.