The individual income tax (or personal income tax) is a tax levied on the wages, salaries, dividends, interest, and other income a person earns throughout the year. The tax is generally imposed by the state in which the income is earned. However, some states have reciprocity agreements with one or more other states that allow income earned in another state to be taxed in the earner’s state of residence.
In 2023, 41 states and the District of Columbia levy a broad-based individual income tax. New Hampshire taxes only interest and dividends. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming do not tax individual income of any kind. Tennessee previously taxed bond interest and stock dividends but the tax was repealed effective in tax year 2021
Business Income Taxes
Business income is a term commonly used in tax reporting. According to the Internal Revenue Service (IRS), business income “may include income received from the sale of products or services,” such as “fees received by a person from the regular practice of a profession…[and] rents received by a person in the real estate business.”
Business expenses and business losses can offset business income, which can be either positive or negative in any given year. The profit motive behind business income is universal to most business entities. However, the way in which business income is taxed differs for each of the most common types of businesses: sole proprietorships, partnerships, and corporations.
How Business Income Is Taxed
How a business is formed determines how it reports its income to the IRS and the federal taxes it must pay. Also, some states impose taxes based on the structure of the business.
– A sole proprietorship is not a legally separate entity from its owner. Therefore, business income from a sole proprietorship is reported on that individual’s Form 1040 tax return using Schedule C: Profit or Loss from Business.
– A partnership is an unincorporated business that is jointly owned by two or more individuals. It reports business income on Form 1065. However, the partnership itself does not pay income tax. All partners receive a Schedule K-1 and report their share of the partnership’s income on their own individual income tax returns.
– A limited liability company (LLC) is a hybrid between a corporation and a sole proprietorship or partnership. Single-member LLCs report business income on Form 1040, Schedule C. LLCs with more than one member, on the other hand, use the same form used by partnerships: Form 1065. An LLC also can opt to be taxed as a C corporation (C-corp) or an S corporation (S-corp).
– A corporation is a legally separate entity from any individual who owns it. Corporations are each generally taxed as a C-corp, which means they are taxed separately from their owners. Business income from a corporation is reported on Form 1120.
– An S-corp is a corporation that elects to be taxed as a pass-through business. Business income for an S-corp is reported on Form 1120-S. Like a partnership, the S-corp does not pay income tax. Shareholders receive a Schedule K-1 and report their share of the company’s income on their individual tax returns. Note that an S-corp is not a type of business entity; it is a tax filing election that an LLC or a C-corp can elect after forming.
Disclaimer: A&B Consulting Services is not a law firm, does not hire lawyers and cannot give legal advice. This website and the services provided by A&B Consulting Services not a substitute for legal advice from a qualified lawyer. You should always consult with a qualified lawyer for all your legal needs.
We are not CPAs – we are enrolled agents. Our enrolled agents are tax professionals who have demonstrated technical competence in the field of taxation. They are authorized by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals.