Taxes are an inevitable part of business ownership, but they’re not the same for every business. The entity you choose when you form your company determines how you file your taxes and how much you owe.
For instance, limited liability companies (LLCs) face specific tax rules and regulations. Lucky for you, this guide explains these rules and details how to calculate and pay your taxes.
LLC Taxes Explained
One of the most important elements of LLC tax filing is that the entity does not have to pay business income taxes.
An LLC is considered a “pass-through entity,” which means that business income passes through the business to the owners or members, who are then responsible for paying taxes on their returns.
Members of an LLC can also elect that their LLC is taxed as a corporation. To determine if electing this status would benefit you, it’s best to consult a tax professional.
An LLC needs to keep track of several different taxes. Understanding each type makes tax planning more efficient, allowing you to spend more time growing your business.
Income tax for an LLC affects the owners in different ways, depending on whether the LLC is a single-member or multi-member entity. Federal, state, and local income taxes make up the lion’s share of an LLC’s tax responsibility, so let’s take a closer look at how they work.
With single-member LLCs, income and expenses get reported on the owner’s federal tax return. These LLCs are also disregarded entities, meaning there is no separate income tax return for the entity itself.
If you’re the owner of a single-member LLC, your taxes will look like those of a sole proprietorship. This is because you’ll report your business income and expenses on IRS form 1040 Schedule C. If your business made a profit, after deducting all applicable business expenses, you’d pay tax on the profits according to your income tax rate.
If your business experiences a loss, you’ll deduct the loss from your income.
State and local income taxes generally work in the same manner. It’s a good idea to work with an accountant and refer to your specific state and local municipality to ensure you meet all requirements. Some state and local governments may also assess an LLC fee or tax.
Like single-member LLCs, multi-member LLCs are also pass-through entities. Each LLC member is responsible for paying taxes on their share of business income in proportion to the stake they have in the company.
For example, in an LLC with two members holding 50 percent shares, both would pay income tax on half of the profits. However, each would also be able to claim half of the applicable tax deductions and credits and write off half of any business losses.
When it comes to income tax forms, a multi-member LLC would annually file Form 1065, the U.S. Return of Partnership Income form. In addition, each owner should generate a Schedule K-1 from the LLC and file it annually by March 15. Schedule K-1 summarizes each member’s share of income, losses, credits, and deductions.
As with single-member LLCs, state and local income taxes for multi-member LLCs are treated the same. Remember to check for state-specific LLC fees.
Every US company must pay payroll tax regardless of your chosen business entity. Payroll taxes include state and local unemployment taxes and FICA taxes, which fund Social Security and Medicare.
FICA tax responsibility falls on both employers and employees. Employers are responsible for paying their share of the tax and withholding their employees’ share from their paychecks.
Payroll taxes are filed differently than standard federal income tax returns. Form 941 is filed quarterly and reports employer- and employee-withheld income and FICA taxes. Form 940 is filed annually and reports unemployment tax obligations.
Payment is made on an ongoing basis and deposited according to a schedule set by the IRS. The provider usually makes these payments if you work with a third-party payroll provider.
If you’re paying them on your own, many business owners pay them online via the Electronic Federal Tax Payment System (EFTPS) and their state’s tax payment portal.
Self Employment Tax
In an LLC, members are not considered employees, but they have the same responsibility as an employee when contributing to FICA (Social Security and Medicare programs). Therefore, the taxes are self-employment and can be attached and filed with the owner’s income tax return.
The current self-employment tax rate is 15.3%, 6.20% for Social Security, and 2.9% for Medicare.
In addition to income, payroll, and self-employment taxes, LLCs are also responsible for collecting sales taxes on all taxable goods and services. Guidelines for what is taxable vary significantly from state to state, so make sure you’re aware of your state’s requirements.
Also, while some states do not charge a statewide sales tax, local sales tax requirements may be in a particular county or municipality.
If your LLC generates revenue from real estate, this will need to be reported as supplemental income on each member’s tax return. This would also apply to businesses that earn income from rental properties or Airbnb-type investments.
Tax Tips for LLCs
Getting tax information in order can be stressful, but running a successful business is necessary. Although the process takes time and effort, there are ways to make it easier.
You could work with a trusted accountant to ensure you understand your LLC’s tax structure and requirements. A business tax accountant familiar with LLC law will also inform you of all possible deductions and tax credits, so you save as much money as possible.
It’s always a good idea to work closely with your accountant to ensure your filing is accurate and on time when tax season comes around. In addition to hiring professional assistance, please keep your tax deadlines on your calendar, so you don’t miss them.
Taxes are often a source of stress and anxiety, but getting familiar with your tax responsibilities and requirements is the best way for business owners to gain peace of mind. Having all of your ducks in a row, as they say, when it comes to taxes ensures your business stays compliant and avoids any costly fees and penalties.
With your taxes taken care of, you can dedicate yourself to growing your business.