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Question 1

Excise Tax

Answer 1

Excise taxes are internal taxes that are levied on the sale of specific goods and services, such as alcohol, fuel and tobacco. An excise tax is an indirect tax that is not paid by the customers directly — instead, the excise tax is imposed on the supplier or the producer, who then includes it in the product price.

Question 2

The main disadvantage for owners of an LLC that is taxed as a sole proprietorship or partnership is…

Answer 2

The main disadvantage for owners of an LLC that is taxed as a sole proprietorship or partnership is that all taxable income, which passes through to the owners, is treated as “earned income” and is subject to employment taxes. Therefore, the 15.3% Social Security-Medicare rate applies to the first $128,400 of earned income in 2018 and the 2.9% Medicare rate applies to all earned income in 2018 over $128,400.

Question 3

Employment Taxes

Answer 3

Federal Income Tax 
Social Security and Medicare Tax
Additional Medicare Tax
FUTA
SE

https://www.irs.gov/businesses/small-businesses-self-employed/understanding-employment-taxes

Question 4

come back

Answer 4

The social security wage base limit is $137,700 for 2020 and $142,800 for 2021. The employee tax rate for social security is 6.2% for both years.

Question 5

Additional Medicare Tax

Answer 5

Beginning January 1, 2013, employers are responsible for withholding the 0.9% Additional Medicare Tax on an employee’s wages and compensation that exceeds a threshold amount based on the employee’s filing status. You are required to begin withholding Additional Medicare Tax in the pay period in which it pays wages and compensation in excess of the threshold amount to an employee. There is no employer match for the Additional Medicare Tax.

Question 6

FUTA

Answer 6

Employers report and pay FUTA tax separately from Federal Income tax, and social security and Medicare taxes. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay. Refer to Publication 15, Employer’s Tax Guide and Publication 15-A, Employer’s Supplemental Tax Guide for more information on FUTA tax.

Question 7

Federal Income Tax

Answer 7

Employers generally must withhold federal income tax from employees’ wages. To figure out how much tax to withhold, use the employee’s Form W-4 and withholding tables described in Publication 15, Employer’s Tax Guide.

Question 8

Social Security and Medicare Taxes

Answer 8

An employer generally must withhold part of social security and Medicare taxes from employees’ wages and the employer additionally pays a matching amount. To figure out how much tax to withhold, use the employee’s Form W-4 and the methods described in Publication 15, Employer’s Tax Guide and Publication 15-A, Employer’s Supplemental Tax Guide.

You must deposit the taxes you withhold. See requirements for depositing.

The social security wage base limit is $137,700 for 2020 and $142,800 for 2021. The employee tax rate for social security is 6.2% for both years.

Question 9

SE Tax

Answer 9

Self-Employment Tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most employees.

Question 10

Employment Taxes can be broken down into…

Answer 10

Employment taxes can be broken down into payroll taxes and income taxes.

Question 11

Payroll tax consists of ___ and ___, otherwise know as ___.

Answer 11

Payroll tax consists of Social Security and Medicare taxes, otherwise known as Federal Insurance Contributions Act (FICA) tax. FICA tax is an employer-employee tax, meaning both you and your employees contribute to it. Payroll tax is a percentage of an employee’s pay.

Question 12

FICA tax is an ___ tax, meaning both you and your employees contribute to it.

Answer 12

Payroll tax consists of Social Security and Medicare taxes, otherwise known as Federal Insurance Contributions Act (FICA) tax. FICA tax is an employer-employee tax, meaning both you and your employees contribute to it. Payroll tax is a percentage of an employee’s pay.

Question 13

Payroll tax is a percentage of…

Answer 13

Payroll tax consists of Social Security and Medicare taxes, otherwise known as Federal Insurance Contributions Act (FICA) tax. FICA tax is an employer-employee tax, meaning both you and your employees contribute to it. Payroll tax is a percentage of an employee’s pay.

Question 14

Income tax is made up of…

Answer 14

Income tax is made up of federal, state, and local income taxes. Unless exempt, every employee pays federal income tax. Most states have an additional state income tax. Some localities also have a local income tax. Income tax amounts are based on a number of factors, such as an employee’s Form W-4 and filing status.

Question 15

Unless exempt, every employee pays…

Answer 15

Income tax is made up of federal, state, and local income taxes. Unless exempt, every employee pays federal income tax. Most states have an additional state income tax. Some localities also have a local income tax. Income tax amounts are based on a number of factors, such as an employee’s Form W-4 and filing status.

Question 16

Income tax is based on…

Answer 16

Income tax is made up of federal, state, and local income taxes. Unless exempt, every employee pays federal income tax. Most states have an additional state income tax. Some localities also have a local income tax. Income tax amounts are based on a number of factors, such as an employee’s Form W-4 and filing status.

Question 17

The difference between payroll tax and income tax also comes down to …

Answer 17

The difference between payroll tax and income tax also comes down to what the taxes fund. Whereas income taxes go to a general government fund, payroll taxes specifically go to Social Security and Medicare funds.

Question 18

How are payroll taxes similar

Answer 18

Now, let’s take a look at where payroll and income taxes are similar. To start, you have to withhold both from an employee’s wages before you can give them their take-home pay. And after withholding both taxes, you must deposit and report them to the IRS. Your depositing schedule is the same for both payroll and income taxes. You also report both taxes on the same form (Form 941 or Form 944). But, federal income taxes and payroll taxes have separate lines on the reporting form.

Question 19

Disregarded Entity

Answer 19

By default, a single-member LLC is taxed as a disregarded entity, which means that, for tax purposes, it effectively doesn’t exist.

Disregarded Entity – the SMLLC does not file a tax return. It reports its income and expenses on the sole owner’s personal tax return using Schedule C or Schedule E

Question 20

C-Corp

Answer 20

C-Corporation – the SMLLC is its own entity, separate and distinct from its owner, and pays taxes on its profits at the corporate level. Dividends paid by the corporation to the owner are taxed on the owner’s personal tax return as well (you may have heard of this referred to as “double taxation”, referencing the tax paid by the corporation on its profits and the tax paid by the owner on the dividends)

Question 21

S-Corp

Answer 21

S-Corporation – the SMLLC is its own entity, but instead of the corporation paying taxes on its profits, the profits (or losses) of the SMLLC are passed through to the owner (via Form K-1), and the owner is taxed on these profits on their personal tax return

Question 22

what is an SEP

Answer 22

type of IRA that is used for retirement there are others

Question 23

Cons of a Disregarded Entity

Answer 23

Subject to self-employment taxes (“SE Tax”) equal to 15.3% on the profit of the business up to the social security maximum of $132,900 in 2019 and 2.9% on any profits in excess of the maximum
Cannot pay wages to the owner, which may cause the QBI deduction to be limited
Increased audit risk – If you are personally audited the IRS can review your business without having to open a separate case for the business since, as a disregarded entity, you and the business are effectively one and the same
Showing losses on a Schedule C can be a red flag to the IRS, potentially increasing the chances of an audit

Question 24

Pros of a Disregarded entity

Answer 24

Low administrative costs, in part because no separate tax return needs to be filed in addition to a personal return and because payroll does not need to be set up for the owner to take a salary
Income is reported on the owner’s personal return, so there is no double-taxation
Potentially eligible for the QBI deduction
Losses can potentially be used to offset other sources of income in the current year
The owner can contribute up to 20% of their profit to a SEP (a type of IRA) or other retirement plan for a tax deduction, up to a maximum of $56,000/year (there are other options here as well that go beyond the scope of this article)
New York City’s tax rate on unincorporated businesses (like LLCs) is lower than its corporate tax rate and offers a large exemption, and some activities (such as real estate rentals) are exempt from this tax altogethe

Question 25

Pros of a C-Corp

Answer 25

Profits are not subject to self-employment taxes, however, if the owner wants to pull money out of the company it will either have to pay the owner wages (which are subject to payroll taxes) or dividends (which are subject to the individual income tax)
The corporate income tax rate was recently lowered to 21% with the passing of the Tax Cuts and Jobs Act of 2017
Dividends paid to the owner will likely be taxed at a favorable (lower) tax rate as compared to wages or other ordinary income
The details of the business are not reported on your personal tax return, creating separation in case of an audit

Question 26

Cons of a C-corp

Answer 26

Income is taxed twice, once at the corporate tax rate and once when paid out to the owner as dividends
Losses generated by the company cannot be used by the owner to offset other income (although they can be carried forward by the Corporation to offset future income)
Higher administrative costs due to the requirement to file a separate tax return for the entity

Question 27

Pros of an S-corp

Answer 27

Profits are not subject to self-employment taxes. The owner is required by the IRS to take a “reasonable salary”, which is subject to payroll taxes, but the profit in excess of this salary is not subject to self-employment tax or payroll tax. What constitutes a reasonable salary depends on the facts and circumstances, such as the industry you operate in and the profitability of the business. For example, a service business will require a higher “reasonable salary” than a fixed-asset intensive business like a manufacturer
The owner can contribute to various tax-favored retirement accounts
The income passed through to the owner (via Form K-1) may be eligible for the QBI deduction, and the wages paid to the owner can be used to increase the limitation on this deduction (unlike an owner’s draw taken out of a disregarded entity)
Losses can potentially be used to offset other sources of income in the current year
Paying a bonus to the owner at the end of the of the year and having income tax withheld (instead of paying quarterly estimates) can be a powerful tax planning tool, as withholding taxes are deemed to have been paid evenly throughout the year even if they were withheld from a bonus on December 31st. This can allow you to withhold exactly the right amount of taxes with nearly 20/20 hindsight, therefore keeping that cash in your pocket (or invested in your business) all year and avoiding penalties for not paying estimates each quarter
The details of the business are not reported on your personal tax return, creating separation in case of an audit

Question 28

Cons of a S-Corp

Answer 28

Highly inflexible business structure (e.g. distributions must be made pro-rate to all shareholders based on ownership percentage). This is less of an issue when there is only one shareholder, but there are still limitations that must be considered, especially in certain industries such as real estate or if you anticipate bringing in additional owners in the future
Paying wages to the owner decreases the income eligible for the QBI deduction, which may lead to a lower QBI deduction (depending on the level of the taxpayer’s total income)
Higher administrative costs due to the requirement to file a separate tax return for the entity and to set up and administer payroll for the owner
New York City does not recognize S-Corps and treats the entity as a C-Corp, imposing a corporate tax on the business