An entrepreneur is an individual who creates a new business, bearing most of the risks and enjoying most of the rewards. The entrepreneur is commonly seen as an innovator, a source of new ideas, goods, services, and business/or procedures.
Entrepreneurs play a key role in any economy. These are the people who have the skills and initiative necessary to anticipate current and future needs and bring good new ideas to market. Entrepreneurs who prove to be successful in taking on the risks of a startup are rewarded with profits, fame and continued growth opportunities. Those who fail, suffer losses and become less prevalent in the markets.
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.
- If you’ve started a new company or run a small business, you will have to file both personal and business income taxes.
- In the U.S., there is no special distinction made by the IRS for being an entrepreneur, although certain tax breaks may apply.
- Entrepreneurs might look to organize their company in states that have more favorable tax rules or offer state-level tax breaks.
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 for 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.1
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.