Understanding Tax Liability and Deadlines

It is important to understand your responsibility when it comes to Federal and State Tax liabilities, I get a lot of questions in regard to tax liability both on a personal and business level, most revolve around why do I owe?

An individual’s personal tax liability is based on your total combined income, now this is easy to calculate when you have one job and no additional income sources; additional sources could be multiple jobs, dividends, interest, rental income, side business/1099 income, and or capital gains. Adding these together is your combined income (if you are married you would include their earnings). This is where some individuals find themselves owing either Federal or State Taxes, because they are having taxes withheld from the paycheck, but they are not paying taxes on their additional income. All examples are based on Federal Liability only.

Example A: Federal Tax Liability

Example B: Federal Tax Liability

Every year the Tax Brackets change this is the number one reason why it is hard to figure out what we owe when it comes to tax liabilities, however you can always Google Tax Brackets (year) making sure to look at both Federal and State brackets (the example used is just Federal tax liability), along with the appropriate filing status, and remember to add your combined income because even if you only earn $15.00 in interest, it might put you into the next tax bracket.

When you complete your W4 for your employer you are letting them know how much money you want them to withhold from your paycheck and pay on your behalf. The withholding is based on filing status, dependents and additional withholding you are stating on your W4 and based on your current wage with the company. If at any time you feel you might owe either entity you can make an Estimated Tax payment through either the IRS or FTB websites, just make sure that you make these payments as Estimated and you print out your receipts to give to your tax prepare. This is where some Single individuals get themselves in trouble, because they want more money on the checks, they might claim married or claim a dependent, when this is done their company is not withholding the correct amount for their tax liability and they will end up owing at the end of the year.

As for business owners there are levels that you are taxed at which depend on your entity status, independent contractors, sole-proprietors and LLC’s taxed as disregarded entities are taxed based on personal tax brackets because you file your income and expenses on a schedule C or for rental income a schedule E with your personal taxes. LLC’s that file as S-Corp are taxed based on personal tax brackets due to the pass-through entity status meaning profit/loss is pass on to the owner(s) of the company on a K-1. LLC’s that file as a C-Corp have a federal tax rate of 21% (2024) the corporation pays any taxes due tax liability is Not Passed to the owners. Partnerships depending on their elected entity status, pass-through = personal tax rates or Corp entity status 21%. You can read our article on Understanding how my Business is tax in California to get a better understanding on both State and Federal tax liabilities.

For LLC shareholder/member non-dividend distributions are generally tax-free as long as the distribution is not over the stock basis of the shareholder/member, meaning if their share is 10% and they received 11% the 1% could be subject to capital gains tax. Distributions are based on net profit and percentage of shareholder/member ownership.

Making Estimated Tax payments is important and can easily be calculated by looking at your Net Income each quarter and multiplying it by the appropriate percentage

Estimating Liability

most small companies won’t need to make quarterly payments each month, however, it is important to review each quarter and make Estimated Tax payments when you estimate you would owe more than $1,000.00

If you report your business income on your personal taxes with schedule C or E or as a LLC disregarded entity on either schedule, you will make the estimated tax payments under your SSN (even if you have an EIN for the business). If you file as an LLC S-Corp or Partnership and estimated tax payments are coming out of the business checking account, you need to report these payments when you’re filing 1120s or 1065 because they belong to the business, by doing this it will lower your tax liability by lowering your taxable income that will be reported on your K-1. This doesn’t include estimated tax payments made in regard to any distributions you’ve received, if you made an estimated tax payment based on your distribution and under your SSN and out of your personal checking account, it gets reported on your personal tax return.