The term “Pass-Through” is confusing. What it means is that most small businesses entities don’t pay income taxes. Any profit or loss is reported on the owner’s personal 1040 tax returns. This includes Limited Liability Companies (LLCs), S Corporations, Partnerships, and Sole Proprietors. Instead, income generated by the business is reported and taxed on the 1040 federal returns and the state returns filed by the business owners or beneficiaries. The 1040 return will typically have several additional “schedules” attached to it to represent income from the business and any special type of taxes owed, typically self-employment tax.
Federal income tax is payable on any business earnings at the standard bands for regular income. The standard deduction applies as normal.
State income tax is payable on any business earnings at the standard bands for regular income determined by your state. Your standard state tax deduction applies as normal.
Payroll tax will apply as normal on any wages paid. You will also need to pay the employer portion of this tax on any wages. This means if you employ yourself, you will be liable for both the employer and employee portions of the tax, a total of 15.3 percent.
Self-employment tax will apply to any earnings paid to yourself or other business owners that are not paid through a formal payroll arrangement. Self-employment tax is payable at the same rate as payroll tax, 15.3 percent.