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LLC Tax Guide

It is very challenging for an entrepreneur to work for making a business entity successful as well as managing the taxes, both at the same time. Thus, it is essential to make the tax management as the part of the business strategy. Here is LLC Tax Guide which will give a simple overview of the critical aspects of the tax management:

How is LLCs Taxed?

Limited Liability Company is known as the “pass-through entity” similar to a partnership or sole proprietorship. It is not like a corporation which is a separate tax entity. Instead, all the profits and losses pass through the business to the LLC owners. The LLC owners (members) reports these profits on the personal tax returns (at their individual tax rates). Though they do not require to pay any federal taxes on business income, a few states impose an annual tax on LLCs.

Comparing to the other business structures, LLC’s are not “double-taxed.” Because the LLC Tax is only paid once at the level of the individual member and is known as the “pass-through taxation.”

On the other hand, the other corporations pay the income tax on all the earned profits (on the business income), as well as the owners of the corporation, also have to pay the income taxes for the intended individual dividends (double taxation). For an LLC, all income is only taxed at the level of the individual LLC members. This is known as “pass-through taxation,” and it means that LLC income is only taxed once.

Pass-Through Taxation for Single Member LLCs

The single-member LLC owner claims the 100% of the Limited Liability Company (LLC) income.

Here is an example:

John’s Retail Store, LLC is a single-member LLC. If John’s LLC had $80,000 in gross receipts in one year and the total expenses are $60,000, then John would have earned $20,000 in net profit. The John has to report this profit to the IRS (Internal Revenue System) using Form Schedule C on the individual tax return.

Pass-Through Taxation for Multi-Member LLCs

In Multi-Member LLC, members claim the part of their share in the LLC income.

Here is an example:

Mr.Joy owns 20% of Mr.Johnson’s Motor Bike Repair, LLC. If in one year Mr.Joy’s LLC had $100,000 in gross receipts and $50,000 in total expenses, then the LLC would have earned the net profit of $50,000. Now, Mr.Joy would only be responsible for paying taxes on 20% of the LLC’s profit.

Since LLCs are pass-through entities, the members or owners of the LLC have to pay taxes on their share of LLC income, whether or not they have received the payment from the fund.

The Value of an EIN

EIN means the Employer Identification Number, and the small businesses entities uses it as the social security number. Here are the benefits of having an EIN number:

  • IRS uses this social security number for keeping track of a business’ tax reporting.
  • The multi-member LLCs have an Employer Identification Number which helps them opening a business banking account. The banking account aids in managing the business and personal expenses separately.
  • The Employer Identification Number is also essential for the hiring process of the employees.

The Employer Identification Number can be obtained from the official website of the Internal Revenue System.

Don’t Neglect Bookkeeping

After opening a business bank account, the business assets and the personal assets get separated. For the LLC Tax management, it is essential to keep a precise record of the LLCs financial history.

Thus, bookkeeping, right from the initial days of the business, if analyzed, saves the money and the business time in the long run. One can hire a professional accountant who can help in setting up the business using accounting software or the already available online software like Quickbooks is preferred.

But, a professional accountant will prevent you from the common bookkeeping mistakes. A wrongly kept accounting record may ruin a well-established business due to the thousands of dollars (as an example) in unpaid taxes if the bookkeeping is not done correctly from the beginning.

Business owners must also know to distinguish between the capital expenditures and business expenses. Capital expenditures are the fixed assets which are purchased and used for about a year. The business expense , whereas, is bought and used at the same time.

Here are examples of the most common business expenses:

  • Office utilities
  • Basic office supplies
  • Travel Related Business
  • Mortgage or Rent payments for your office
  • Employee’s Payments
  • For a construction job the purchase of the material ( like paint, lumber, etc.).

The above mentioned are some of the applicable business expenses deducted from the gross receipts. This deduction is made at the end the tax year for calculating the net profit.

Here are examples of common capital expenditures:

  • Office renovations
  • Buildings
  • The purchase of equipment like printers, computers, etc.
  • Purchase of the required machinery if any.
  • Vehicles if required.

Capital expenditures are deducted from your gross receipts over a specific period. This type of deduction is known as depreciation. The accountant helps in determining the appropriate amount which is applicable per the item in a particular year.

Federal Income Tax for LLC Owners

The LLCs are pass-through entities in which the business does not require to pay the income tax. The members or the owners of the LLC reports on their personal tax return for the share of their income. The reported income could be a business income, dividend and interest income, or capital gains.

The single-member LLCs and multi-member LLCs report to the IRS differently.

Single-Member LLC

Mostly, the IRS treats the single-member LLCs as “disregarded entities.” Thus, the IRS doesn’t distinguish between the owner and business for tax purposes. The “disregarded entity” makes no impact on other benefits of being an LLC. It is merely an IRS designation. Every income and expenses are reported on Schedule C of their personal tax return similar to a sole proprietorship.

Multi-Member LLC

According to the IRS, the multi-member LLCs are like the partnerships, unless they are taxed as an S-Corp or a C-Corp. The multi-member LLCs uses the Form 1065 Partnership Return to report the income to the IRS.

LLC Reporting Requirements

The LLC’s net reportable income and losses are distributed among the owners based on their share of ownership, at the end of the fiscal year. The LLC’s Operating Agreement divides the business profits among the shareowners or the members.

Each LLC owner has to fill a Form K-1 which states all the income or losses for the previous year. It is essential that the LLC sends out the K-1s timely to the members so that they can complete their tax returns. Since LLC owners are responsible for paying taxes on their share of LLC income either they received the payment or not.

Self-Employment Tax

The self-employed people also have to pay taxes in addition to the income tax. There are two types of taxes: Medicare tax and Social Security Tax which is about 15.3% of the gross income and the wage earners pay all these taxes. A business owner may deduct a portion of the self-employment tax (employer-equivalent portion). And this is inferred by the tax return (adjusted gross income).

State LLC Tax

The pass-through entities or a Limited Liability Company (LLC’s) does not require to pay the income tax on business income. The LLC owners, in the most states, reports their business income on their personal tax return. Thus, the tax payments for LLC’s are subjected to individual tax rates.

Franchise Tax

Few states do not have a separate income tax for LLCs but have a different type of tax which is known as Franchise Tax. So, various states are taxed differently.

Sales Tax

When a business is selling the services and goods, one needs to collect the sales tax (on behalf of your state).

Employee Taxes

Here are other taxes that your business will also need to pay while hiring the employees:

  • Medicare tax
  • Federal unemployment tax
  • Social Security tax
  • Workers compensation
  • State unemployment tax

The business also has to withhold the FICA taxes which are usually the Medicare and Social Security taxes, and the income taxes. On behalf of the employees, the business pays the taxes to the IRS.

We suggest you hire a professional payroll service to handle your company’s payroll.

When to Pay Taxes

The self-employed workers have to pay estimated taxes to the IRS, four times per year. The business withheld the budget of 15% of net profit for state and federal income tax and another 15.3% for self-employment tax, as a thumb rule.

The LLC Taxes owners use IRS Form 1040 ES, quarterly for remitting the estimated tax payments. The deadlines for submitting estimated payments are:

  • April 17th (for Jan. 1st – March 31st),
  • June 15th (April 1st – May 31st),
  • September 17th (June 1st – Aug. 31st), and
  • January 15th of next year (Sept. 1st – Dec. 31st).

How can Inc Paradise help you?

Now that you have understood all in the above LLC Tax Guide, the next step is to start an LLC. If you have all your idea ready, IncParadise can help you in the registration and incorporation process of your business. Contact us to know more!