As a limited liability company (LLC), your business has the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. This means when tax time rolls around, your business is its own legal entity with separate debts and legal status from you. However, LLCs are still tied to your personal taxes.
Sometimes as an LLC owner, the tax rate on income that is passed through and reported on your personal return can be higher than taxes you’d pay as a corporate employee. This is because self-employed individuals must pay the employee’s and employer’s share of federal taxes such as Medicare and Social Security. All of those make a dent into your overall business profits.
Since an LLC is a separate legal entity that’s still tied to your personal taxes, tax time can be a bit tricky to navigate. Here are some tips to help ease the headache that often comes along during this stressful time of year.
Keep Your Financials Organized
Create a spreadsheet of your monthly business expenses (business travel, office rent, cell phone bill, client lunches, etc.). Save a folder (digitally or physically) with all your tax documents, receipts, proof of payments you receive from clients, investments, or third-party client/service matching platforms.
Or better yet, utilize an accounting service to stay organized from the start. At tax time, this information will keep you from having to hunt down receipts at the bottom of a desk drawer or forgetting to account for an expensive purchase.
Work With a Tax Professional
If you have no idea where to start when it comes to filing your own taxes — but you still want to ensure you account for everything — then you should hire a trusted tax professional. You can hire a CPA in person, or get online help from a tax professional through a recommended website, like Incfile.
Services like this can help eliminate the hassle of filing your taxes alone. Filing your taxes with Incfile is simple and affordable, while helping you reduce common filing errors and avoid adverse consequences in the event of an IRS audit.
Save up Throughout the Year
The worst thing you can do is not save up enough money throughout the year to cover the amount you may owe in taxes. If you failed to pay enough (or anything) in your quarterly taxes, you could very well be hit with a massive bill at once.
Instead of being blindsided, you need to put aside around a third of your income each month (or whenever you get paid from clients). If you’ll be tempted to spend this amount instead of save it, put it in a separate account.
Keep your tax records from last year handy to compare your expenses, gross income, net income, and how much you owed vs. the prior year. This will help you get a sense of how much you should be allocating for your business taxes year-over-year.
Beyond taxes, you can use these records for strategic planning. Are you trying to scale your business? Then you may need to invest more money than you did the previous year. Trying to be more mindful of your spending? Review the expenses you’ve made and cut any that are unnecessary.