So you want to start an LLC or already have one. But you feel daunted by the idea of doing your own taxes.
Don’t worry, we understand. It is a common feeling amongst entrepreneurs to be overwhelmed at the thought of doing taxes on your own. Once you work for yourself and have your own companies, all the responsibility is on you to do things legally, or else you suffer the consequences.
But don’t let the fear of figuring out your LLC taxes stop you from moving forward with your business. Imagine being able to understand what you need to know about LLC taxes and fearlessly going all-in into your business. Sounds great, right?
We can help you get there. We’ve put together this beginner’s guide to understanding how LLC taxes work so that you can shake off your concerns, get down to the nitty-gritty, and learn how to do your taxes the right way so that your business has the opportunity to thrive.
What Are LLC Taxes?
If you are looking at starting a small business, chances are good you will start with an LLC.
LLC stands for “limited liability corporation,” and this type of business is like a corporation at the state level, but is taxed more like a partnership or sole proprietorship at the federal level.
This means that an LLC doesn’t pay taxes on business income. Instead, the members of the LLC pay taxes on their share of the LLC’s profits–that is, the income left over after business expenses are deducted. All members of an LLC are also responsible for paying income tax on any money that is earned from the LLC, and they are also responsible for their own self-employment taxes.
Different types of LLCs have different tax rules. We will share more on this down below along with the other information you learn to understand your LLC taxes.
The Basics of LLC Taxes
Though LLC taxes may seem like a dark cloud over your head that is always looming, once you get through some of the basics, they won’t seem as scary.
In this section, we will cover the basics of LLC taxes, what you need to do for your specific type of LLC, what to do if you have employees, and what you do if you live in a state with sales tax.
For Single-Member LLCs
Single-member LLCs are considered disregarded entities by the IRS. This means that the LLC does not need to file a separate tax return in order to report any income earned and expenses. Instead, you will report your income and expenses similar to a sole proprietor, via an addendum, to your personal Form 1040 tax return called Schedule C. To fill out this form, you need a statement of your LLC’s income as well as financial records and proof of receipt for the deductions you want to take for your business.
For most states, this process is the same at both the state and local levels. This means that someone with an LLC in California will report business income on both their personal federal and state tax returns. This income will be taxed at the tax rate that corresponds to the federal income tax rate as well as the state and local ones for the state in which you established your LLC.
Note that in some states, you have to pay a separate annual LLC tax. For California, this tax amount is $800. You may also be required to pay a fee if your LLC earns more than a certain amount of money (for California it’s if you earn more than $250,000).
For Multi-Member LLCs
Multi-member LLCs are “pass-through” entities. This means that both the business’s profits and losses are run through the owners of the LLC.
Similar to single-member LLCs, multi-members LLCs don’t have to pay taxes of their own. Rather, each member of the LLC pays taxes on the income of the business that corresponds to the amount of ownership they have in the LLC.
If you have an LLC with two members, then each member of your LLC is responsible for paying taxes on half of the company’s income. Not only does each member pay half, but each member gets half of the tax deductions and credits.
The taxes for a multi-member LLC are much like a partnership.
With this type of LLC, you are required to file certain tax forms, including Form 1065. This is the Return of Partnership Income form and must be filed with the IRS every year. In order to file this form, you need the following things:
- Profit and loss statement
- List of all deductible expenses
- Balance sheet showing the beginning of the year and the end of the year
In addition to that, each owner in a multi-member LLC must fill out a Schedule K-1 prior to March 15. This form shows each owner’s share of the income, loss, credits, and deductions of the LLC from the previous year. Each member’s Schedule K-1 is part of their personal tax return and must be filed with this.
For LLCs Filing as a C Corporation
In some cases, LLCs can lower their tax bills by opting to be taxed as a corporation.
If this sounds like you, then consider filing Form 8832, which allows the IRS to tax you as a C corporation.
What exactly does this mean?
It means that unlike how things work in the above situations (where the LLC’s income and expenses are filed through the member(s)’ personal tax returns), the owner(s) have to file a separate corporate tax return that taxes the owners separate from the company. This form is Form 1120.
In order to file this form, you need the following financial information:
- Profit and loss statement
- List of all deductible expenses
- Balance sheet showing the beginning of the year and the end of the year
For LLCs Filing as an S Corporation
The LLC status of an S corporation is the same as a standard LLC in that it allows corporations to pass any income and deductions on to the owners on their personal tax returns.
Unlike sole proprietorships and partnerships that have to pay self-employment tax on 100% of the business profiles, by filing paperwork for an S corporation, the S corp owners only pay self-employment taxes on their personal salary from the LLC.
The paperwork required for this is Form 1120S, the U.S. Income Tax Return for an S Corporation. In addition to that, each owner will have to report their share of the business’ income on a Schedule K-1 and submit it along with their personal tax return.
For LLCs With Employees
If you are an LLC with employees, you must collect and pay payroll taxes.
The taxes that are part of payroll taxes are:
- Social security
- Medicare
- Unemployment
Employers are responsible for paying unemployment taxes, and both employees and employers pay social security and Medicare. It is the responsibility of an LLC to withhold social security and Medicare taxes as well as income taxes from each employee’s paycheck.
In order to form your payroll taxes, use Form 940 and Form 941. Form 940 is an annual form and Form 941 is a quarterly form.
Self-Employment Taxes
Because members of an LLC are not considered employees, you may pay need to pay self-employment taxes. These taxes are social security and Medicare taxes.
The self-employment tax is 15.3% and includes:
- 12.4% social security tax (if your LLC makes up to $137,700)
- 2.9% Medicare tax on all money earned
- 0.9% Medicare surtax on any money earned over $200,000
Schedule SE is the form you need to complete your self-employment taxes.
Sales Tax
Does your LLC sell goods and/or services that are taxable? If so, then you should collect sales tax from your customers and pay sales tax.
The rules on sales tax vary from state to state, so be sure to look up what you need to do for the state that your LLC is in.
2 Tools to Improve LLC Taxes
As you learn more about LLC taxes, you may find that you want more help in completing them. And we don’t blame you. Doing LLC taxes 100% on your own is quite a thing to take on and honestly, we don’t recommend it.
There are some tools out there that can help make your LLC taxes much more simple and that will also increase the chances of them being done correctly which means less work for you, and no fines or fees.
Read on to find out the top two tools we think you should use to make your LLC taxes less stressful.
Tax Software
Since it is the law to prepare annual tax returns, we suggest you do what you can to prepare the returns correctly.
One of the ways to help ensure that your taxes are done correctly is by using tax software. There are lots of options out there when it comes to tax software, and we are guessing you’ve heard of some of the top ones including TurboTax and H&R Block.
Opting to use tax software not only helps guide you through the complicated process of doing your taxes but also saves you time. And if you choose this over hiring an accountant, it will save you money too.
The options for tax software are great and each one offers different features that work for different people and companies.
The tax software that comes with our highest approval is H&R Block. This tax software works best for most LLCs, as it has software that is specific for small businesses that are in a variety of different tax situations.
H&R Block helps to walk you through the often complex tax situations that arise with an LLC and has the option to upgrade to packages that provide you with more help from a tax pro.
There are a few different package options for H&R Block’s tax software.
And if you aren’t sure which package is right for you, H&R has an online quiz you can fill out to help determine the right tax program for you.
An Accountant
Though the more pricey option, accountants are great for those LLC owners who want to have as little to do with their taxes as possible. And if this is you, we have no judgment. Some people are fine with doing taxes, and some would rather pay someone else to do them.
If you are the latter, then you want to hire an accountant. This person will need your company’s financial information and will go through the process of filing your taxes for you.
The price of accountants varies from state to state and also depends upon the specific type of LLC you have. To find the best accountant for your LLC, consider asking colleagues who they use for their taxes.
3 Tricks for LLC Taxes
Looking to make your LLC taxes easier? We thought so. No one likes to deal with wildly complicated taxes.
To help you with this process, here are three tricks.
Keep Track of Deductions
Deductions refer to certain expenses that you can write off on your LLC taxes. The different deductions or write-offs that are available will vary depending on your type of business, but here are some of the most common ones.
Rental expenses
If you rent an office or retail space for your LLC, you can deduct how much you pay in rent. Or, if you run your LLC from home, then you can write off a percentage of your monthly rent for your business.
Insurance
Depending on the business you run, you may need insurance. And that insurance is deductible as a business expense.
Professional expenses
If your LLC requires specific licenses, professional development, conferences, books, and more, you can deduct those expenses.
Travel
If your LLC requires you to travel for your work, then you can write off travel expenses that are related to business.
Pay Attention to Due Dates
When it comes to LLC taxes, you do not want to mess around with deadlines. Though the standard tax return deadline is April 15, there may be other dates for other forms that you need to pay attention to.
Hire an Accountant
If you feel completely overwhelmed and feel that there is no way you could possibly do your LLC taxes on your own, then consider the expense of an accountant worth it. Plus, you can write that off as a business expense, so there’s an added bonus.
What to Do Next
Now with a better idea of LLC taxes under your belt, you may feel more confident about moving forward with your LLC.
Regardless of what type of LLC you have, we suggest you have a website that allows your customers or clients to get a deeper look into what you do.
To get a website up and going, we suggest you read this article about how to buy a domain name. This is what people will type into their search bar to get to your website and it requires purchasing.
In addition to that, you will need a hosting plan that allows your website to sit on the internet. We did a great deal of research to come to the conclusion of what we think are the best dedicated hosting plans, which you can see here.
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