A:

In the United States, tax policy neither officially defines nor makes special rules for entrepreneurs. Certain types of entrepreneurial activities carry tax benefits, such as subsidies or write-offs, but these do not uniformly apply to all entrepreneurs in the economy. An entrepreneur only pays taxes in accordance with his business activity. All other aspects of tax payment—from filing to withholding to receiving a refund—are the same for those considered entrepreneurs as those who are not.

Entrepreneurial Activity and Taxes

Economists at the National Bureau of Economic Research published a paper in 2002 titled "Taxes and Entrepreneurial Activity: Theory and Evidence in the U.S." The paper provided a theoretical proof that taxes affect economic activity and change the incentive structure for existing and potential entrepreneurs. Their research focused on the differences in tax rates between business income and wage income, and how profits and losses are treated. It concluded by reinforcing the intuitive notion that tax laws change human behavior in meaningful ways.

This type of research shows taxes change the scope of entrepreneurial activity in the U.S., even though entrepreneurs are not taxed differently. Ostensibly, tax laws affect where entrepreneurs attempt to make changes in the economy and alter the types of external benefits or costs that entrepreneurs produce.

Entrepreneurs and Business Taxes

The notion of an entrepreneur is normally associated with new startup businesses. The tax rules for businesses are very different than the tax laws for individuals. However, all taxpayers, entrepreneurs or not, are incentivized to pay as few taxes as possible to maximize their economic gains, whether they file income through businesses or as individuals.

To that extent, it is inaccurate to assume that entrepreneurs are faced with different tax consequences than non-entrepreneurs. The same goes for individuals and businesses. It may very well be that entrepreneurs are more likely (on average) to pursue a minimum-tax strategy, but the underlying principles and methods are no different.

(For related reading, see "Are You an Entrepreneur?")

RELATED FAQS
  1. What risks does an entrepreneur face?

    Find out if you have what it takes to overcome the challenges and risks associated with starting a business and becoming ... Read Answer >>
  2. What are the differences between regressive, proportional, and progressive taxes?

    Learn the three basic types of tax systems--regressive, proportional, and progressive--used in the U.S., and how they affect ... Read Answer >>
  3. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Related Articles
  1. Small Business

    How Financial Planning Differs for Entrepreneurs

    There are a number of ways in which financial planning differs for entrepreneurs.
  2. Small Business

    Entrepreneurs Make Money: Why, How, Where & When

    There are many characteristics to an entrepreneur and how they make their money. Learn how it's done, where and when Entrepreneurs make money.
  3. Small Business

    5 Good Habits Every Entrepreneur Needs

    Understand who an entrepreneur is and what an entrepreneur does. Learn about the 5 good habits that every entrepreneur should have.
  4. Small Business

    Serial Entrepreneurs Venture And Venture Again

    Serial entrepreneurs start up a venture, sell it, and start another one, and they often benefit from their previous experiences.
  5. Managing Wealth

    Build Your Wealth Like a Serial Entrepreneur

    Investing wisely is one way to build wealth. But serial entrepreneurs are rethinking the way they build their portfolios.
  6. Small Business

    3 Personal Finance Tips for Entrepreneurs

    Entrepreneurs, use these three personal financial tips to get you on the right track.
  7. Small Business

    The Best City to Become An Entrepreneur Is What?!

    These four U.S. cities form a new landscape of cities that nurture the entrepreneurial spirit.
  8. Small Business

    Why Equity Financing Is Worth It

    When a business takes on an equity partner, it is exposed to a number of advantages that debt financing simply cannot provide.
  9. Small Business

    5 Bad Habits Every Entrepreneur Should Avoid

    Learn how to avoid specific bad habits that plague entrepreneurs, such as failure to plan, bad associations and not keeping a good work-life balance.
  10. Small Business

    10 Ways to Be a Successful Entrepreneur

    Are you hoping to launch your own business and work for yourself? If so, here are the top 10 tips for entrepreneurs.
RELATED TERMS
  1. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  2. Direct Tax

    A direct tax is a tax paid directly by an individual or organization. ...
  3. Tax Expense

    A tax expense is a liability owed to federal, state/provincial ...
  4. Tax Base

    A tax base is the amount of assets or income that can be taxed.
  5. Enterprise Investment Scheme or EIS

    A UK program that helps smaller, riskier companies to raise capital ...
  6. Tax Advisor

    The services of tax advisors are usually retained in order to ...
Trading Center