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A Complete Guide to LLC Taxes

January 7, 2022

The business structure you choose has a significant impact on the amount of taxes you will pay.

Therefore, choosing a business structure that meets your needs while limiting your tax responsibilities is one of the most vital tasks you face as a business owner.

An LLC (Limited Liability Company) is a popular choice among business owners since it provides personal liability protection, which protects your personal assets in the event of a lawsuit. 

It acts as a corporation at the state level and allows business owners to avoid paying corporate taxes. Since the IRS refers to an LLC as a “pass-through entity”, you can opt to file your taxes as a C corporation or S corporation instead should it result in a lower tax bill.

But how do taxes for an LLC work, along with filing taxes for other aspects of business such as payroll, self-employment, or sales taxes? This article offers a complete guide to everything you need to know about filing taxes for an LLC to make tax season a breeze.

How do LLC taxes work?

Since the IRS refers to LLCs as a pass-through entity, as mentioned above, the LLC itself does not pay taxes on business income. Instead, the members pay taxes on their share of the LLC profits.

All members are responsible for paying income taxes on any of the profits they earn, in addition to any self-employment taxes or state, federal, and local government taxes.

Depending on the product or service you sell or employ anyone, you may also be responsible for payroll and sales taxes.

Simplified tax filing for LLCs

LLCs can opt to file tax returns as another business structure if they offer greater tax savings. Depending on how you wish to file, the forms you will be responsible for submitting are the following:

  • If your single-member LLC has not opted to file as a corporation, you will follow the same filing guidelines as a sole proprietorship.
  • If your multi-member LLC has not opted to file as a corporation, you will follow the same guidelines to file taxes as a partnership.
  • If you have decided to file as a C Corporation, you can do so by submitting IRS Form 8832.
  • If you have opted to file as an S-Corporation, you can do so by submitting IRS Form 2553.

How do LLCs pay income tax?

How you pay your taxes will vary depending on whether the entity is a single-member or multi-member LLC.

A single-member LLC only has one owner. As a result, the IRS treats it as a disregarded entity for federal income tax purposes by default, meaning the entity is not required to file a separate income tax return to report income and expenses. Instead, the income and expenses will show directly on the member’s tax return.

Let’s say the LLC generates a profit after business expense deductions. In this case, the owner will owe taxes on the profits based on their personal income tax rate. However, if the LLC operates at a loss for the year, the owner can deduct the business’s losses from their personal income.

Some states do have their own tax fees, such as California charges an annual $800 LLC tax, so keep that in mind.

A multi-member LLC is considered a pass-through entity for federal tax purposes. However, like a single-member LLC, it does not pay its own taxes.

Instead, each member will pay taxes on the business’s income in proportion to the stakes they have in the LLC, and the LLC tax rate is dependent on each member’s income tax bracket.

Multi-member LLCs file certain tax forms with the IRS, including Form 1065, and each member must be given a completed Schedule K-1 by March 15th annually. Schedule K-1 summarizes each member’s share of income, losses, credits, and deductions, and this form is attached to each owner’s personal income tax return.

LLC Payroll taxes

If your LLC has employees, you must collect and pay payroll taxes, including unemployment, social security, and Medicare taxes.

Employers are responsible for paying unemployment taxes, while employers and employees share the responsibility of paying social security and Medicare taxes.

Employers withhold the employees' share of social security and Medicare taxes from their wages, and IRS forms 940 and 941 are used to file payroll taxes.

The IRS utilizes a pay-as-you-go system for payroll taxes, so rather than paying a lump sum when you file, you make payments throughout the year.

Unemployment tax deposits occur quarterly, and social security and Medicare taxes are deposited either monthly or biweekly, depending on your tax liability amount.

LLC self-employment taxes

Members of an LLC are not considered employees but are still responsible for social security and Medicare taxes under SECA (Self-Employment Contributions Act).

Self-employment taxes total 15.3% of each member’s income. The tax breakdown is as follows:

  • 12.4% social security tax earnings up to $137,700
  • 2.9% Medicare on all earnings
  • 0.9% Medicare surtax on earnings over $200,000

LLC sales tax

You will be responsible for collecting sales tax from your customers to return to your state or local tax agency if your LLC sells taxable products or services.

Determining which products or services are deemed taxable varies from state to state and depends on where you do business.

Your state likely follows destination-based or origin-based tax rules, meaning either the final destination or origin of a good or service determines the sale tax rates. 

With all these details and deadlines, one can easily see staying on top of your LLC taxes heavily depends on organizational skills and can prove challenging.

Should you find yourself behind, fortunately, you have the option to request an extension from the IRS, allowing you to complete your taxes and shift your attention back to growing your business and satisfying your customers.

 

DISCLAIMER: Any advice relating to finance, investments, stocks, companies, securities, or any other financial matters whatsoever reflects the private opinion of the person giving this advice. It is not the advice of a financial, investment, or other expert. Fund&Grow, its employees, and representatives take no responsibility for any consequences resulting from following such advice. Anyone seeking professional advice is strongly advised to conduct their own research or consult a professional financial adviser. Do not disregard professional financial opinion or make any financial decisions based on what you may read in Fund&Grow's Blog. You are solely responsible for any investment or other finance-related decisions you make.

 

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