Glossary

The words that come up when you compare business structures, each in a sentence or two. Click a term for the longer version and the IRS or state page behind it. Most of them matter at tax time, a few only when you form the business.

A

Accountable plan: A written setup for repaying an employee's business costs. Done right, the money is tax-free and doesn't count as wages.
Additional Medicare tax: An extra 0.9% Medicare tax once wages and self-employment income pass $200,000 single or $250,000 married filing jointly.
Annual report: A filing an LLC or corporation sends its state on a set schedule. It keeps the company's details current and in good standing.
Articles of organization: The document filed with a state to create an LLC, called a certificate of formation in some states.

D

Disregarded entity: A business with one owner, usually a single-member LLC, that the IRS ignores for income tax. The profit goes on the owner's return.
Distribution: Money an S corp or LLC pays out to its owners from profit, separate from salary and not subject to payroll tax.
Double taxation: A C corp pays tax on its profit, then shareholders pay again when that profit reaches them as dividends.

E

EIN: The business's federal tax ID: nine digits, free from the IRS. You need it for payroll, a bank account and most business returns.
Estimated tax: Tax paid four times a year on income with no withholding, such as business profit, to avoid an underpayment penalty.

F

FICA: Social Security and Medicare tax on wages. Half comes out of the employee's pay and the employer pays the other half.
Form 1120: The C corporation's yearly federal income tax return. It reports the profit and the 21% corporate tax.
Form 1120-S: The S corporation's yearly federal income tax return. It's due by the 15th day of the 3rd month after its year ends.
Form 2553: The form you send the IRS to have a corporation or LLC taxed as an S corporation.
Franchise tax: A state tax for the privilege of existing or doing business in the state. It's often owed even when there's no profit.
FUTA: Federal unemployment tax. The employer pays it on the first $7,000 of each employee's wages, usually 0.6% after the state credit.

G

Gross receipts tax: A state tax measured on a business's total revenue rather than its profit, owed even by businesses that lose money.

N

Net investment income tax: A 3.8% tax on investment income, dividends included, once modified AGI passes $200,000 single or $250,000 joint.

O

Operating agreement: The private contract among an LLC's members setting out ownership, profit splits, management and what happens when members leave.

P

Pass-through entity: A business whose profit is taxed on the owners' personal returns, not at the business level.
Payroll tax: Every tax that comes with paying wages: Social Security, Medicare, federal and state unemployment, plus withheld income tax.

Q

Qualified business income: Net profit from a sole proprietorship, partnership, LLC or S corp. The 20% Section 199A deduction is figured on it.
Qualified dividends: Dividends from US or qualifying foreign corporations, held long enough, that are taxed at the lower capital gain rates.

R

Reasonable compensation: The salary an S corp has to pay an owner who works in the business. It should match what the work would cost from someone else.
Registered agent: The person or company, with a street address in the state, who takes legal papers and state notices for a business.
Retained earnings: Profit a corporation keeps instead of paying out to shareholders, which a C corp can hold after paying its 21% tax.

S

Schedule C: The part of Form 1040 where a sole proprietor or single-member LLC owner lists business income and expenses.
Schedule K-1: The form an S corp or partnership gives each owner showing their share of the business's income, deductions and credits.
Self-employment tax: The Social Security and Medicare tax you pay on your own business profit. You cover both the employee and the employer half.
Specified service trade or business: Law, health, consulting and similar fields. Above the Section 199A income threshold, their QBI deduction phases out.
SUTA: State unemployment tax. The employer pays it on each employee's wages up to the state's wage base, at a rate the state sets.