Pass-Through Income: What Does It Mean?

Pass-through income refers to business profits that are not taxed at the corporate level but instead pass through directly to the owner's personal tax return and are taxed at individual income tax rates. Most small business structures, including sole proprietorships, partnerships, LLCs, and S-corporations, are pass-through entities by default. This contrasts with C-corporations, which pay corporate income tax on profits before any distributions to shareholders (who then pay personal taxes on dividends, creating double taxation). Pass-through treatment simplifies taxes for most small business owners, but it also means all business profits increase your personal taxable income, even money you leave in the business account and don't actually take home.