No one likes to be taxed, but if you are an owner or shareholder in certain types of businesses, you may actually be taxed twice on the same income. To avoid this, and keep more of your hard-earned money, it is important to learn about double taxation and how it affects you as an entrepreneur.
What Is Double Taxation?
Double taxation occurs when the income of a corporation is taxed at the corporate level, which is currently 21%, then that after-tax income is distributed as dividends to the shareholders of the company. Those shareholders or owners must then pay personal income tax on those dividends, which were already taxed as corporate income. Depending on the tax bracket, personal income taxes can be as much as 37%, significantly reducing the gains.
How Can I Avoid Double Taxation?
As an entrepreneur, it is important to structure your business properly to avoid double taxation. Double taxation occurs most only when businesses are organized as a C-Corp. This treats the business as a separate taxable entity, which allows double taxation to occur.
By structuring your business as a pass-through entity, like a sole proprietorship, a partnership, an LLC, or an S-Corp, all of the income is passed to the owners and is taxed as personal income.
When Must a Business Organize as a C-Corp?
For most entrepreneurs, organizing as a pass-through entity like an LLC or S-corp is the best strategy, but it is not always possible. If your business has more than 100 employees or if some of the shareholders are not United States citizens or residents of the U.S., you must organize as a C-Corp. However, there are some strategies that can reduce the amount of tax you pay in such situations, such as paying higher salaries to shareholders instead of dividends or reinvesting the earnings into the business rather than paying out dividends.
Business Tax Planning & Preparation in Dallas
Avoid costly tax mistakes and enjoy more of your business’s earnings by getting the help of an experienced accountant. At Gurian CPA, we help entrepreneurs throughout the Dallas and Houston areas navigate complex tax codes to keep their tax liabilities to a minimum. We offer a full line of accounting and tax services, including comprehensive bookkeeping and accounting for businesses, tax planning and preparation, payroll services, business entity formation, and more.
Call Gurian CPA today at (469) 306-9866 for help organizing your business and managing taxes in Dallas, Houston, or the surrounding areas.
