Small and medium businesses (SMBs) face certain challenges with taxes that are not typical of your average taxpayer. First, SMBs need to incorporate or form a legal entity in order to file taxes.
One type of entity is called a Limited Liability Company (LLC). Limited Liability Companies are a lot like a sole proprietorship or business partnership because they have “pass-through” income.
Did you just create a new LLC? Are you wondering how you’ll tackle tax season? We’ve got you covered. Here’s a guide on how to file taxes if you own an LLC.
“Pass-Through” Business Entity
Limited Liability Companies are considered “pass-through” entities. That means LLCs are not subjected to double taxation like a corporation. Basically, you only worry about personal income. Corporations have to pay corporate taxes, then are taxed a second time when they file business earnings on personal income.
LLCs are basically able to bypass the first step so they are only taxed on personal returns. It saves small business owners time and money come tax season.
The IRS treats an LLC like a sole proprietorship or partnership depending on the number of members involved with the LLC. All of the profits and losses of an LLC are passed through the business and to its owners (or members). Members are required to report these profits and losses on their personal tax returns.
The LLC itself does not pay federal income taxes, yet some states do charge their own LLC tax. Single owner LLCs are treated like a sole proprietorship for tax purposes. Meanwhile, multiple owner LLCs are treated like a business partnership:
● Single Owner LLC: You must report all profits (or losses) on a Schedule C and submit it with a Form 1040 tax return.
● Multiple Owner LLC: You must report all profits on a Schedule E, along with a traditional Form 1040. Since the company is owned by multiple people, you must pay your lawful share based on the operating agreement of the LLC. For example, you own 60 percent of the LLC, so you pay 60 percent of its taxes.*
There is also an option for an LLC to request it be taxed as a corporation. However, this option is only appropriate in certain types of situations and should be done with advice from a qualified accountant.
*NOTE: There are many other regulatory rules governing multiple owner LLCs that can make the tax process complicated. We recommend reaching out to a tax pro if you have a Limited Liability Company with multiple owners.
Even if you consider yourself a small business owner with an LLC, the IRS regards you as a self-employed earner. This means that you are not subject to tax withholdings like traditional paychecks that take out earnings to pay for Social Security and Medicare benefits. Instead, LLC owners must pay the IRS a social security tax. SMB owners usually do what they can to minimize tax burdens, but paying into Social Security and Medicare is hard to avoid.
Paying Estimated Income Taxes
Profitable LLC owners are required to set aside money to pay the IRS in quarterly payments. The process is known as paying estimated quarterly income taxes. It is each LLC’s responsibility to estimate quarterly taxes and make payments to the IRS on time. A good accountant will be able to help make accurate estimates to avoid over or underpaying. Payments basically cover Social Security and Medicare, along with federal and state taxes that are not automatically deducted from W-2 paychecks.
Monitoring Business Expenses and Deductions
The IRS collects taxes and self-employment taxes from self-employed individuals and small business owners. However, SMBs do get a lot of tax breaks from reporting business expenses and claiming deductions that the average taxpayer is not entitled to receive.
It is in a LLCs’ best interest to take advantage of every deduction they qualify to receive. Eligible business expenses can be written off from gross income, which helps reduce the amount of taxes owed to the IRS.
Don’t Forget State Taxes
Most states handle LLC taxes similar to the IRS. Therefore, LLC owners are required to pay state taxes on personal returns. Once again, the LLC itself is not responsible for any taxes, just the income earners on their personal returns.
A few states are the exception in that they do charge an LLC-based tax. California, for example, charges an additional LLC tax. Some states like Delaware and Massachusetts impose an annual fee on LLCs called a franchise tax.
It is important to understand the guidelines and rules for the state where you conduct business. Some states like California may require hundreds of dollars in taxes owed specifically for owning and operating an LLC.
Levy & Associates – An Ally to Your LLC
Levy & Associates is honored to support self-employed earners and small businesses. While LLC taxes can get a little complicated, understanding tax obligations shouldn’t create unnecessary stress and hassle. Levy & Associates helps clients focus on building their businesses without worrying about tax season.
Call 800-TAX-LEVY or visit www.levytaxhelp.com to schedule a meeting with our team and learn more about what we can do for you. We highly recommend professional tax help for Limited Liability Companies (LLCs).