What is pass‑through taxation?
Business profits “pass through” to owners, who pay tax at individual rates. The business generally does not pay an entity‑level income tax.
Schedule K‑1 & owner reporting
Owners receive a K‑1 showing their share of income, deductions, credits, and other items to report on their personal returns.
Self‑employment & payroll taxes
- LLC members typically owe self‑employment tax on active income.
- S‑Corp owners on payroll pay FICA on wages; distributions are not subject to SE tax.
The Qualified Business Income (QBI) deduction
Many pass‑through owners may qualify for a deduction on qualified business income, subject to thresholds and limitations.