A basic guide to how LLCs are taxed
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When it comes to business structures, an LLC is a popular choice. It’s sometimes considered a “best of both worlds” option – or, at least, it provides some of the elements of both a corporation and a general business partnership. It offers the limited liability protection of a corporation and the pass-through taxation of a partnership.
Of course, it’s important to understand the requirements before forming an LLC. This way, you can make the most of the advantages an LLC provides. One benefit is avoiding personal liability for business debts. In terms of taxation, LLCs are generally treated as pass-through entities. However, there are some exceptions. Luckily for business owners filing taxes for LLCs can be simple and stress-free. It just takes a bit of preparation.
What is an LLC?
An LLC is a business structure that provides limited liability protection to its owners, typically referred to as members. Whether you are the sole proprietor or you have a few members in your LLC, each member's liability is limited to the amount of money you’ve invested in the company. This means the cost of the bills if the business is in debt or owes money due to a lawsuit shouldn’t affect any assets you haven’t placed in the company.
Types of taxes that may be required for LLCs
LLCs are no different than other businesses. They must file and pay many of the same types of taxes other businesses are required to pay.
Federal income tax
Single-member LLCs operate as sole proprietors or pass-through entities. Members report income and losses on their personal federal tax returns. However, if an LLC has more than one member, it is a partnership. In some cases, an LLC can be considered a corporation or S corporation. However, it is often a partnership. If an LLC is a partnership, it will be required to file Form 1065. The members are also still required to report income and losses on their own 1040s.
These taxes are used to fund Medicare and Social Security and are generally paid by the LLC’s members.
If the LLC has hired employees, then employment taxes will also have to be paid and reported. These included the Federal Insurance Contributions Act (FICA), federal unemployment, and state unemployment taxes
State and local taxes
Often states and local jurisdictions will impose taxes as well. These can include sales, corporate income, and franchise or privilege taxes. Some LLCs may also be subject to property taxes.
These are taxes that are imposed on specific goods and services. Often, these taxes apply to the sale of things like fuel, cigarettes, and alcohol.
How to file LLC business taxes
With the right preparation, filing taxes for your LLC doesn’t have to be complicated. Taking some basic steps can help make the process simpler and help you manage your taxes more easily for years to come.
Gather necessary documents
Before you can file taxes for your LLC, you must first gather all the necessary documents. This includes your LLC’s financial statements, income and expense reports, asset information, and any other documents that may be required by the IRS. Make sure to keep these documents organized and in a safe place.
Determine your tax filing status
It’s important to determine the proper tax filing status for your LLC. Generally, the LLC will be treated as a pass-through entity, meaning that all profits and losses are passed through to the individual owners of the LLC.
An LLC isn’t always a pass-through entity. At the federal level, LLCs can be taxed as a sole proprietorship, partnership, S corporation, or C corporation. Depending on the number of owners and the type of LLC, you may need to file as a corporation or a partnership. Each structure has its own advantages and disadvantages. It's important to review the details of each. Then you can choose the structure that best suits your business.
Calculate your tax liability
Once you have determined the filing status of your LLC, you can begin to calculate your tax liability. You will need to determine the taxable income of your LLC by subtracting business expenses from business revenues.
File your taxes
Once you have calculated your tax liability, you will need to file your taxes. You can file your taxes electronically using a variety of different services, or you can mail in a paper copy of your return.
Familiarize yourself with the different tax forms
Once you’ve chosen your tax structure, you’ll need to familiarize yourself with the various tax forms associated with it. This will include both federal and state forms, depending on where you’re located. Make sure you understand the instructions and requirements for each form.
Pay Your Taxes
Once your taxes have been filed, you’ll need to make sure you pay them in full and on time. This can be done electronically or by mail. Make sure to keep track of all payments so you don’t forget any deadlines.
Tax filing tips for LLC owners
Learn about your tax obligations
Understand your obligations to take the first step in managing your business taxes. Different types of LLCs are subject to different tax rules, so research the type of LLC you formed and the specific requirements that apply.
Use a consistent record-keeping system
Establish a record-keeping system to make sure your taxes are accurate and filed on time. Save all income, expenses, and other business transactions in an organized manner, and store all relevant documents in a safe place.
Ask for help when needed
If you’re new to filing taxes, it’s a good idea to seek the help of a qualified tax professional. A professional can explain tax requirements and ensure that your taxes are filed accurately.
Look for tax deductions
Research any available tax deductions or credits and make sure to take advantage of them. This can save you money and reduce your overall tax burden.
Keep track of deadlines
File your taxes on time to avoid penalties and interest fees. It’s also important to set up a payment system that works for you. Make sure you keep track of any tax payments you make.
FAQs for LLCs and Taxes
Many people are curious about LLCs and taxes and want to know how they work together. In fact, some of the most frequently asked questions about LLCs are how this business structure is affected by taxes.
Are LLCs subject to self-employment taxes?
Yes, LLCs are subject to self-employment taxes. This means that members of the LLC must pay self-employment taxes on their share of the profits. However, certain LLCs qualify for pass-through taxation, which allows members to deduct a portion of their self-employment taxes from their taxable income.
Are there any tax advantages to forming an LLC?
Yes, there are some tax advantages to forming an LLC. One major tax benefit of having a limited liability company is avoiding double taxation. According to the IRS, LLCs can be considered pass-through entities. This means that LLC owners don't have to pay federal income taxes for corporations like C-Corporations do.
Instead, LLC members can choose to report their share of profits and losses on their personal income tax forms instead. This way, you won't get taxed twice - once at the corporate level and again on your personal income tax.
Can LLCs members still make use of tax deductions?
Yes, LLCs can often take advantage of certain deductions and credits, such as the home office deduction, which can help reduce their tax burden. You may be eligible for deductions for the cost of starting your business, and then you can continue to find applicable credits and deductions as your business grows.
Some of the most common deductions include things like business travel mileage, office and equipment costs, advertising fees, and ordinary expenses you might incur in the course of your business, like internet and cell phone bills.
Are all LLCs subject to the same tax rules?
No, not all LLCs are subject to the same tax rules. Depending on the number of members and the type of business they are engaged in, LLCs may be subject to different tax rates and regulations.
Not all LLCs are exactly the same, and how you structure your business can affect your specific tax circumstances. If you have any additional questions, it’s best to consult a tax professional to ensure that you’re in compliance with all applicable tax laws.
Take control of business taxes for your LLC
An LLC is an entity structure that works for many entrepreneurs and small business owners, and forming an LLC can often be a rather easy process. However, business taxes can be complex. That’s why it’s important to start early, learn about your liabilities and obligations, and work to set yourself up with the right tax management system.
At ComplYant, we strive to make filing taxes for the first time a simpler and less stressful experience for all entrepreneurs and small business owners. Check out our full resource hub and engaging webinars, and sign up for a free account so you never miss a tax deadline.