Tax Considerations For Starting A Business In Olympia, Tacoma, Or Elsewhere In Washington
This is the next post in my series on issues to consider when starting a business in Olympia, Tacoma, or elsewhere in the state of Washington. My last article discussed how a business’ structure impacts the liability of Washington entrepreneurs. If you run your company without creating a separate entity, you will probably be personally liable for the debts, obligations, and actions of the company. If you have run the business as a separate entity, you probably won’t be. To ensure that you are fully protected it is best to speak with an attorney experienced in handling such matters. In this article I will discuss another important topic – the tax considerations which go along with forming a company. If you require assistance, contact my office today to speak with a business lawyer. However, taxes are complicated and often require the assistance of a team of professionals. It is important to speak with a certified public accountant or other tax professional to understand the specifics of your particular situation.
Owning a business is complicated. Small business owners often have to do everything themselves. Owning your own company means managing your own retirement plan, setting up your own health insurance, paying state and local business and operations taxes, and ensuring that your monthly and quarterly tax payments are sent to the IRS. Many small business owners can utilize significant tax breaks available to those who own and run their own company, but many fail to do so. Which business structure you choose can have a significant impact on your tax liability.
In the past, business owners would save on employment (medicare and social security) taxes by starting a S Corporation or electing to be taxed as a S-Corporation.
S Corporations get their name from Section S of Chapter 1 of the Federal Tax Code. S Corporations must be “closely held” and cannot be publicly traded. S-Corporations pay no taxes of their own, as profits “passed through” as income to the shareholders. This means that if an S Corporation had $100 in profit then a fifty percent owner would pay taxes on $50 in income on their personal return ($100 profit x 50% ownership). A company does not have to be formed as an S Corporation to be taxed this way. Limited Liability Companies (LLCs) are often taxed as S Corporations at the option of the owners.
Until the passage of the 2017 Tax Cuts and Jobs Act, business owners could save money on employment taxes by electing to be taxes as a S Corporation. The S-Corporation election saved money because the owners only needed to pay themselves a reasonable salary, while all profit in excess of the salary was exempt from employment taxes. But after the passage of the 2017 tax bill, LLC owners may now deduct 20% of the LLC’s gross income on their individual tax returns. This means that owners may save more money by electing to be a disregarded entity rather than electing to be taxed as an S Corporation. In light of the new tax bill, it is important to talk to a tax professional to help you determine whether electing to be a S-Corporation makes sense for you.
As an Olympia small business attorney, I regularly assist entrepreneurs with selecting and setting up a legal entity. I also provide ongoing support and can assist you in understanding whether your company is eligible to elect for S Corp treatment. Contact my office today to schedule an initial consultation. Our firm also serves the Thurston County cities of Lacey, Tumwater, and Yelm, the Pierce County cities of Tacoma, Puyallup, and Lakewood, the Lewis County cities of Centralia, Chehalis, the King County cities of Seattle, Auburn, Bellevue, Burien, and Federal Way, as well as other areas in Washington, including Grays Harbor, Mason, Cowlitz, and Pacific Counties.
Disclaimer: This article should not be taken as tax advice and is for informational purposes only. For specific tax questions it is suggested that you speak with a Certified Public Accountant.