Your business structure determines how you will pay and how much taxes you will pay to the government – and whether these taxes will be paid to the local, state, or federal government of the USA. That is why it is crucial, when choosing the ideal legal entity for your business, that you consider tax structure and familiarize yourself with federal taxes in the USA.
You will also need to obtain an Employee Identification Number (EIN), which is also known as the Federal Income Tax Number (FITN). In this article, we explain how you can apply for an EIN. Your EIN is a requirement for you to payroll staff and open a bank account.
Paying your taxes
Your taxes – and the rates – will, of course, depend on the business that you run.
- Sole proprietorship: the business owner and the business itself will not be considered separate entities. Instead, you will be taxed based on the profits that you earn while running your business. The duties will be imposed on your personal income tax. Because you cannot withhold your taxes, the ideal thing to do to make sure you will be able to pay your taxes on time is to estimate your taxes and set aside money. In addition, sole proprietors must pay social security and Medicare as ‘self-employed’ individuals.
- Limited Liability Company (LLC): Typically, from a federal income tax perspective, an LLC in the USA is treated as a pass-through entity. This means that the business entity is not taxed. Instead, LLC members (owners) must declare their profits from the business on their personal income tax. However, if it is a single-member LLC, the tax structure is similar to a sole proprietor. Thus, the tax rate depends on the tax bracket of the member/s.
- Limited liability partnership (LLP): Pass-through tax treatment is also applied to partnerships. The partnership’s losses and profits are passed on to the partners, who are subject to tax returns based on their earnings from the partnership and their tax brackets. The partnership must file the annual information return or Form 1065. Here you will find the schedule for filing the said form.
- Corporations: US corporations are imposed a flat 21% tax rate. By 2023, the CIT will be raised to 28%, as proposed by Pres. Biden’s administration. Entities treated as S-corporations are eligible for pass-through taxation.
Tax brackets in the USA 2022
| Tax Rate | Single filers | Married taxpayers filing jointly | Head of households |
|---|---|---|---|
| 10% | $10,275 or less | $20,550 or less | $14,650 or less |
| 12% | $10,275 – $41,775 | $20,550 to $83,550 | $14,650 to $55,900 |
| 22% | $41,775 – $89,075 | $83,550 to $178,150 | $55,900 to $89,050 |
| 24% | $89,075 – $170,050 | $178,150 to $340,100 | $89,050 to $170,050 |
| 32% | $170,050 – $215,950 | $340,100 to $431,900 | $170,050 to $215,950 |
| 35% | $215,950 – $539,900 | $431,900 to $647,850 | $215,950 to $539,900 |
| 37% | $539,900 or more | $647,850 or more | $539,900 or more |
Major federal tax laws in the USA
Tax Jobs and Cuts Act
The Tax Jobs and Cuts Act (TCJA) of 2017 was a major overhaul of the federal tax code of the USA. It cut down individual and business tax rates. Many of the amendments present in the TCJA will expire by end of 2025. These are the key policies within the Act:
- Lowering the CIT from the previous 25% to the current 21%
- The act introduced new tax rates (as mentioned in the bracket above) and lowered the previous cap of 39.6% to 37%.
- The Act allows tax deductions equivalent to 20% of pass-through incomes of sole proprietors, LLC members, S-corp members, and partners.
Biden’s Greenbook
The Greenbook was released by the Treasury Department on May 28th, 2022. Officially, this is known as the Biden Administration’s Fiscal Year 2022 Revenue Proposals. If enacted, the Greenbook, among other amendments, would:
- Raise the corporate income tax from the current 21% to 28%. A minimum of 15% would also be taxed on corporations with a worldwide income of more than $2 billion.
- Tax individuals with an adjusted gross income of more than $1 million 39.6%, which is higher than the present 37%.
- Offer tax incentives to eligible businesses investing in clean energy
- Increase the GILTI (global intangible low-tax income) tax rate to the current 10.5% to 21% and apply tax credit limits depending on the foreign jurisdiction of the parent company.
If you want to know more about the US taxation system and the measures that directly affect your intent to start a business in the USA, we have a team of tax experts at Bolder Launch who can help you navigate the country’s tax structure. Feel free to reach out to us for a free consultation on entering the American market or understanding how federal taxes in the USA work.
This guide is part of Taxation & Accounting in our Launch Guide.
