New business owner - How do taxes work for the business vs individual?
Through your question and then clarification through the comments, it looks like you have a U.S. LLC with at least two members.  If you did not elect some other tax treatment, your LLC will be treated as a partnership by the IRS.  The partnership should file a tax return on Form 1065.  Then each partner will get a Schedule K-1 from the partnership, which the partner should use to include their respective shares of the partnership income and expenses on their personal Forms 1040. You can also elect to be taxed as an S-Corp or a C-Corp instead of a partnership, but that requires you to file a form explicitly making such election.  If you go S-Corp, then you will file a different form for the company, but the procedure is roughly the same - Income gets passed through to the owners via a Schedule K-1.  If you go C-Corp, then the owners will pay no tax on their own Form 1040, but the C-Corp itself will pay income tax. As far as whether you should try to spend the money as business expense to avoid paying extra tax - That's highly dependent on your specific situation.  I'd think you'd want to get tailored advice for that.
"So the main reason that you aren't getting answers is that the question is not really answerable on this site without putting a lot of details about the expenses of your company online.  Even then you will need someone who specializes in Canadian taxes to go through those details to be sure.  Most of those people feel like they should be paid a decent amount per hour to go through the details. That being said, I dealt with a similar question for my contract work company by just taking a couple weekends and calculating the taxes myself on estimated numbers.  It was time consuming but not really that hard.  I thought I might have to buy software, but all I needed was a small calculator.  Along the way I learned a few details that helped me lower my overall tax exposure. I found that Neil was generally correct that you are ""taxed on profits"" but it is worth doing the taxes yourself because the details can really matter." As far as accounting  goes, if you speak with a CPA, you may be able to reduce the business tax liability.  So... the company buys the truck, deducts it, and the adjusted gross income drops, so he'd pay less tax.  Or something.  You said anything helps, hope you meant it! It sounds like something is getting lost in translation here. A business owner should not have to pay personal income tax on business expenses, with the caveat that they are truly business expenses. Here's an example where what you described could happen: Suppose a business has $200K in revenue, and $150K in legitimate business expenses (wages and owner salaries, taxes, services, products/goods, etc.) The profit for this example business is $50K. Depending on how the business is structured (sole proprietor, llc, s-corp, etc), the business owner(s) may have to pay personal income tax on the $50K in profit. If the owner then decided to have the business purchase a new vehicle solely for personal use with, say, $25K of that profit, then the owner may think he could avoid paying income tax on $25K of the $50K. However, this would not be considered a legitimate business expense, and therefore would have to be reclassified as personal income and would be taxed as if the $25K was paid to the owner. If the vehicle truly was used for legitimate business purposes then the business expenses would end up being $175K, with $25K left as profit which is taxable to the owners. Note: this is an oversimplification as it's oftentimes the case that vehicles are partially used for business instead of all or nothing. In fact, large items such as vehicles are typically depreciated so the full purchase price could not be deducted in a single year. If many of the purchases are depreciated items instead of deductions, then this could explain why it appears that the business expenses are being taxed. It's not a tax on the expense, but on the income that hasn't been reduced by expenses, since only a portion of the big ticket item can be treated as an expense in a single year. If you sell through an intermediate who sets up the shop for you, odds are they collect and pay the sales tax for you. My experience is with publishing books through Amazon, where they definitely handle this for you. If you can find a retailer that will handle the tax implications, that might be a good reason to use them.  It looks like Etsy uses a different model where you yourself are responsible for the sales tax, which requires you to register with your state (looks like this is the information for New York) and pay the taxes yourself on a regular basis; see this link for a simple guide. If you're doing this, you'll need to keep track of how much tax you owe from your sales each month, quarter, or year (depending on the state laws).  You can usually be a sole proprietor, which is the easiest business structure to set up; if you want to limit your legal liability, or work with a partner, you may want to look into other forms of business structure, but for most craftspeople a sole proprietorship is fine to start out with.  If you do a sole proprietorship, you can probably file the income on a 1040 Schedule C when you do your personal taxes each year. It's not quite clear what you are asking, so I'll answer a few possible interpretations. Businesses pay taxes on their profits. So if your business took a million pounds in revenue (e.g. sold a million pounds worth of stuff) then you would subtract (roughly speaking) everything the business spent on making and selling that stuff, and pay taxes only on the profit. VAT however is a different matter, and you would have to pay VAT on all of that income (technically the VAT portion isn't even income - it's tax you are forced to collect on behalf of the government). If your business made a million pounds pounds profit, it would pay tax on all of that million (subject to what a tax accountant can do to reduce that, which ought to be considerable).  You can't subtract your personal living expenses like that. However the company can pay you a salary, which counts as an expense and the company doesn't pay tax on that. You might also take some money from the company as dividends. Both salary and dividends count as personal income to yourself, and you will need to pay personal income tax on them.  As for the Ferrari, it depends on whether you can justify it as a business expense. A lot of companies provide cars for their employees so that they can use them for business - however you have to be able to show that IS for business, otherwise they are taxed like salary. The rules for company cars are quite complicated, and you would need an accountant. If this is a real rather than hypothetical situation, definitely get a tax accountant involved. "It's not possible to determine whether you can ""expect a refund"" or whether you are claiming the right number of exemptions from the information given.   If your wife were not working and you did not do independent contracting, then the answer would be much simpler.  However, in this case, we must also factor in how much your contracting brings in (since you must pay income tax on that, as well as Medicare and, probably, Social Security), whether you are filing jointly or separately, and your wife's income from her business.   There are also other factors such as whether you'll be claiming certain child care expenses, and certain tax credits which may phase out depending on your income.   If you can accurately estimate your total household income for the year, and separate that into income from wages, contracting, and your wife's business, as well as your expenses for things like state and local income and property taxes, then you can make a very reasonable estimate about your total tax burden (including the self-employment taxes on your non-wage income) and then determine whether you are having enough tax withheld from your paycheck.  Some people may find that they should have additional tax withheld to compensate for these expenses (see IRS W-4 Line #6)." The short answer is yes, losses get passed through to members. Limits/percentages do apply, primarily based on your share in the business. Check out the final post in this thread:  http://community2.business.gov/t5/Other-Business-Issues/Paying-oneself-in-a-LLC/td-p/16060  It's not a bad little summary of the profit/loss pass-through.  Regarding your 60K/60K example: the amount of money you earn in your day job will impact how much loss you can claim. Unfortunately I can't find anything more recent at the IRS or business.gov, but see this from 2004 - 40K was the limit before the amount you could claim against started to be mitigated: http://en.allexperts.com/q/Tax-Law-Questions-932/tax-loss-pass.htm HTH Compliance issues vary from country to country and, in the US, state to state as well.  There'll be a number of levels, though: Bear in mind that it is not that these taxes and responsibilities don't apply to sole traders or unregistered businesses, it's just that being registered signals your existence and introduces the bureaucracy to you all at once. Update: Your accountant should manage your company and consumer tax calculations and submissions on your behalf (and a good one will complete all the paperwork on time plus let you know well in advance what your liability is, as well as offer advice on reducing and restructuring these liabilities).  You're probably on your own for local taxes unless your accountant deals with these and is local to even know what they are. There is more than one kind of tax. It is a little confusing because in reality the tax revenues collected by the Government aren't earmarked to a particular usage based on where they came from, usually. Well, the Gov't often CLAIMS they do, but for all practical matters it all goes in a big bucket. So just because a business or individual isn't paying income taxes doesn't mean they aren't paying anything for the use of Government furnished infrastructure/services. You are limiting the scope of your question to Income Taxes, which are taxes paid on profits to a business or individual. It makes perfect sense that you wouldn't pay a tax on something you didn't get. However, you aren't considering taxes that ARE being paid even by a company that isn't profitable. For example consumption taxes, employment taxes, and other fees. That same company paid sales tax on all the supplies it purchased, and probably collected/paid sales taxes on anything it sold. To take one of your examples, it paid for its share of using the roads through Government imposed taxes on fuel.  Don't worry about the Government. They know how to get theirs. They might not pull it from your right pocket, but they will make sure to get it from the left. Your argument with elvendude happened because your comment makes it appear that you think that if a business has less cash at the end of a year than at the beginning, the business does not need to pay taxes. elvendude is trying to show you that this isn't true. Washington State doesn't have a state income tax for individuals, so unless you've got a business there's nothing to file. Find out more on their website. except that most companies are small companies and most business owners end up as families at some point.  I'm starting a business abroad and will be taxed at 35% in the USA even if I don't live there.   There's ways to get around it, but I'm not sure exactly how to do it yet nor am I making enough money yet to justify the up front expense of doing this "I pay taxes on revenue.  You do have the ability to deduct expenses, though it's not as comprehensive as what companies can do: These figures apply to everybody, so those that earn more get taxed more on thee additional income in each bracket (meaning the first $100,000 of taxable income is taxed the same for everybody at one rate, the next $100,000 at a different rate, etc.) So you do get to deduct personal expenses and get taxed on ""profit"" - but since the vast majority of people don't keep detailed records of what they spend, it's much simpler just to use blanket deduction amounts for everyone. Companies have much more detailed systems in place to track and categorize expenses, so it's easier to just tax on net profit. Plus, the corporate tax rate is much higher than the average individual tax rate - would you trade more deductions for a higher tax rate?" "1 - in most cases, the difference between filing joint or married filing single is close to zero. When there is a difference you're better off filing joint.  2 - The way the W4 works is based on how many allowances you claim. Unfortunately, even in the day of computers, it does not allow for a simple ""well my deduction are $xxx, don't tax that money."" Each allowance is equal to one exemption, same as you get for being you, same as the wife gets, same as each kid. 3 people X $3800 = $11,400 you are telling the employer to take off the top before calculating your tax. She does this by using Circular E and is able to calculate your tax as you request. If one is in the 15% bracket, one more exemption changes the tax withheld by $570. So if you were going to owe $400 in April, one few exemption will have you overpay $170. i.e. in this 15% bracket, each exemption changes annual withholding by that $570.  For most people, running the W4 numbers will get them very close, and only if they are getting back or owing over $500, will they even think of adjusting.  3 - My recently published Last Minute Tax Moves offers a number of interesting ideas to address this. The concept of grouping deductions in odd years is worth noting.  4 - I'm not sure what this means, 2 accounts each worth $5000 should grow at the same rate if invested the same. The time it makes sense to load one person's account first is if they have better matching. You say you are not sure what percent your wife's company matches. You need to change this. For both of your retirement plans you need to know every detail, exact way to maximize matching, expense ratios for the investments you choose, any other fees, etc. Knowledge is power, and all that. In What is an appropriate level of 401k fees or expenses in a typical plan? I go on to preach about how fees can wipe out any tax benefit over time. For any new investor, my first warning is always to understand what you are getting into. If you can't explain it to a friend, you shouldn't be in it.  Edit - you first need to understand what choices are within the accounts. The 4% and 6% are in hindsight, right? These are not fixed returns. You should look at the choices and more heavily fund the account with the better selection. Deposit to her account at least to grab the match.  As far as the longer term goals, see how the house purchase goes. Life has a way of sending you two kids and forcing you to tighten the budget. You may have other ideas in three years. (I have no P2P lending experience, by the way.)  Last - many advise that separate finances are a bad path for a couple. It depends. Jane and I have separate check books, and every paycheck just keep enough to write small checks without worry, most of the money goes to the house account. Whatever works for you is what you should do. We've been happily married for most of the 17 years we've been married." Lets just get to the point...Ordinary income (gains) earned from S-Corp operations (i.e. income earned after all expenses for providing services or selling products) is passed through to the owners/shareholders and taxed at the owner's personal tax rate. Separately, if an S-Corp earns capital gains (i.e. the S-Corp buys and sells stock, earns dividends from investments, etc), those gains are passed through to the owners and taxed at a capital gains rate Capital gains are not the same as ordinary income (gains). Don't get the two confused, they are as different for S-Corp taxation as they are for personal taxation. In some cases an exception occurs, but only when the S-Corp was formally a C-Corp and the C-Corp had non-distributed earnings or losses. This is a separate issue whereas the undistributed C-Corp gains/losses are treated differently than the S-Corp gains/losses. It takes years of college coursework and work experience to grasp the vast arena of tax. It should not be so complex, but it is this complex. It is not within the scope of the non-tax professional to make sense of this stuff. The CPA exams, although very difficult and thorough, only scrape the surface of tax and accounting. I hope this provides some perspective on any questions regarding business tax for S-Corps and any other entity type. Hire a good CPA... if you can find one.