Fact checked for accuracy by Janet Berry-Johnson, CPA.
You must consider taxes whenever you want to pick out a business entity for your business, as each business structure has its tax requirements. LLC means limited liability company, and when compared to sole proprietorship or partnership, LLC is more formal.
Limited liability companies are a business structure that allows a company to have an unlimited number of owners. Their business operations are also quite simple when you compare them to corporations. And their owners can operate the business any way they want to run the business—that is, it’s a flexible business structure.
The owners can also decide to run the business themselves or appoint managers on their behalf. Size does not matter when you are considering what company qualifies for this business structure. A small office can be an LLC company, as well as a large organization. Some business entrepreneurs favor LLC as a business structure for their company because of the protection it provides them.
This business structure protects the business owners from the losses and debts that the business accrues. It also protects them from court rulings against the business. This advantage is because a company with an LLC business structure is a separate entity from its owner or owners, as the case may be. This article will guide you on the tax process of an LLC.
How LLC Taxes Work
Apart from the difference in formality, the government tax companies with this type of business structure differently. In an LLC, the business income and expenses aren’t taxed at the business level. Instead, the owner’s tax return reflects the income and losses of the company.
What this means is that LLC profits will be taxed based on the owner’s tax rate. When a single person owns an LLC, the government will tax them the same way they tax a sole proprietorship. If the company has many owners,each owner pays taxes on their share of profits on their individual tax return.
The government will always tax your business, and these taxes depend on your company’s business structure. In an LLC, the law regards it as a pass-through entity for federal income taxes.
This implies that the LLC will not pay taxes on the income of the business. Instead, the company owners will pay taxes based on their share of the business’s profits. Also, the owners of an LLC can choose if the government will tax the company as a corporation or a pass-through entity.
There are several types of LLC taxes that the government can levy on your company. All the company owners must pay an income tax on the money that comes into the business.
They must also pay self-employment taxes on the business. If you employ people to work for your company, you will have to pay payroll taxes. Depending on what you are selling, the government may also levy a sales tax on your company.
When you understand your tax responsibility, you can streamline your financial choices to produce better results. Here are the types of taxes you should look out for.
Income taxes are the biggest of all tax responsibilities for business owners, and the way you’ll pay these taxes depends on whether you’re the sole owner of your company or you’re in league with other people.
Income Taxes for Single-Member LLC
A single-member LLC does not need to file a different income tax return to report business income and expenses. This means that a single-owned LLC is a disregarded entity where the money coming into the business and the money leaving it will show up directly on the owner’s tax return.
This model is similar to that of a sole proprietorship. When the company generates profit for the entire calendar year, the owner will pay taxes based on their income tax rate. On the other hand, if the business ran at a loss for the entire calendar year, the owner may deduct the losses from their other income.
Consider this as an example to enlighten you further. If you own a business in a state, you have to report your business’s income on your federal and state tax returns, and this income will be taxed based on the tax rate at these levels.
It helps to study the regulations that concern LLC in the state you operate your business. Doing so will help you make better financial decisions.
Income Taxes for Multi-Member LLC
In the multi-member LLC model, each owner will pay taxes on the business’s income in a year based on their stakes in the company. The firm does not pay taxes even though it is a separate entity from its owners in the eyes of the law. Therefore, the tax rate for such companies varies according to each owner’s income tax bracket.
For example, if two people own the business in a 60-40 percentage split, each owner can claim tax deductions and credits based on their ownership stake in the company. This model is similar to the partnership business structure.
Income Taxes for LLCs Classified As C-corporation or S-corporation
Whether only you own your business or it has multiple owners, you can choose what type of tax classification you want for it. There are two types of this classification, namely, C-corporation and S-corporation. You should check out the guidelines concerning these two classification systems and then pick the best fit for your business.
You will find information concerning them with the office in charge of taxes in the country, the IRS. Whatever tax classification you choose for your business will not affect the status of your business as an LLC. When it comes to deciding the tax classification for your business, make sure you consult a tax professional to help you make the best decision.
LLCs And Taxes for Rental Real Estate Income
If you own a rental property, you will enjoy a lot of advantages if you incorporate an LLC. Setting up a business will give you a lot of benefits for taxes, management, and legal flexibility. An LLC will help you to protect your assets and give you some tax advantages.
If you have multiple properties, you should make sure to register each as a separate LLC. Doing this will protect your other investments if one of your real estate rentals falls into legal problems. With an LLC, you can earn income and capital gains and you will avoid double taxation by paying taxes as an individual.
LLC Payroll Taxes
If you hire people to work in your employ, then you will have to pay payroll taxes. These payroll taxes include social security taxes, medical taxes, and unemployment taxes. As the owner, most states require you to bear the burden of the unemployment taxes alone. However, when paying the Social Security and Medicare taxes, you will bear the responsibility alongside your employees.
To ensure the payment of these taxes, you are required to deduct them from your employees’ paychecks before you pay their salaries. You may need to do the same for income taxes. You can pay these taxes monthly or semi-weekly, depending on your total tax liability.
You should pay all these taxes to the required agency, especially those that are withheld from your employees’ wages.
LLC Owners And Self-Employment Taxes
These taxes are the responsibility of the owners of the company, including you. Though you are not an employee, you have to pay Social Security and Medicare taxes to the IRS. They are called self-employment taxes, and you will pay them depending on how much you earn. Self-employment tax consists of 2.9% of your earnings for Medicare and 12.4% of your earnings for Social Security.
LLC Sales Taxes
Some goods are taxable, and if you sell such goods, you will need to collect taxes on them from your customers and remit them to the tax agencies. Taxable goods vary depending on the state and local jurisdiction you’re selling in.
This means that the goods may be taxed by the states to which you deliver them. Find out the regulations that apply to your business from the relevant agencies you’re doing business in.
LLC Tax Forms And Deadlines
The tax forms you will complete for your company depend on the business structure of your company. The forms will differ depending on whether your LLC is single-member or multi-member, has employees, or is a pass-through tax or corporate status.
Your tax deadline moves to the following business day if it falls on a holiday or weekend. You can also get an extra six months to file if you request an extension for your tax filing.
Tips for How to Manage Your LLC Taxes
Here are some tips for keeping your tax responsibilities as streamlined and stress-free as possible.
- Find out if there are any tax deductions and tax credits that your company can leverage.
- You should always review business tax deadlines well ahead of time.
- Hire a tax professional to help you with your tax issues, including tax filing.
- Read and understand the tax requirements of the state in which you are operating your business.
How to Form an LLC
You should check with your state to note the requirements you must fulfill to form an LLC. However, the steps below are the general steps you will need to start your own limited liability company. You can also hire a service to do this process for you, head over to our best LLC service research for our top picks.
Pick Your Company’s Name
Your business name should be unique to you and must follow the guidelines your state has set aside for LLCs. You cannot register a name that another business has used. It has to be authentic.
Register An Agent
You may need to register an agent that will handle every legal requirement involved in forming an LLC. It would help if you always vetted the agent you want to hire for experience and certifications.
File Articles of Organization
You should file these articles of organization with your secretary of state’s office. These articles provide information about the company, including the address, purpose of the company, name of the agent, and address of the agent.
Set Up an Operating Agreement
An operating agreement states how the business will run. It specifies the business procedures that owners must follow, how you must divide the profit and loss, and how to handle a situation where some members leave or forfeit their position. You do not need to file this with the state agency. Instead, you should file it in your company’s archive.
Apply for A Federal Identification Number
A business with multiple owners needs to apply for an identification number to identify the company.
File Permits and Licenses
Some states require that LLCs have specific permits and licenses without which they cannot operate. Check with your local agency to identify which certification your business must have to stay on the right side of the law.
It is always best to check with your state for any additional requirements you must fulfill. You should also note that you might have to pay to get your business permit and license.
The Last Word
LLC offers business owners many advantages, as they are simple to operate and pretty flexible. However, the tax requirements can be quite complicated. Take your time to identify the criteria you need to fulfill before you can fully kick off your business and stay on top of your taxes.
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