Filing taxes for your limited liability company (LLC) can present some unique complexities compared to filing taxes as an individual taxpayer. There are a few aspects of filing your LLC tax return that are frequently misunderstood. Don’t let misconceptions or misunderstandings hold you back from getting your fair share of tax advantages and minimize your tax liability during tax season.
Here are a few LLC tax tips to keep in mind to help make your business taxes easier.
Understand Corporate Income Tax vs. Pass-Through Entities
Some business owners are reluctant to form an LLC because they are afraid that they will have to pay extra taxes, or because they don’t want to have to pay a corporate income tax. But this fear is misguided; LLCs do not have to pay corporate income tax. C Corporations are the only kind of business entity that has to pay corporate income tax.
Even though your LLC exists as a legal business entity that is separate from your personal finances, your LLC does not have to pay corporate income tax like a C Corporation; instead, your LLC is treated as a “pass-through entity” for tax purposes. That means that your LLC’s business income “passes through” to the owner’s personal tax return.
Minimize Self-Employment Tax Burden
However, even though your LLC doesn’t owe corporate income tax, you still need to file a tax return for your LLC and you need to pay attention to the tax implications of owning an LLC. If you’re not careful, as an LLC owner, you might end up paying a higher rate of tax on your business income than you would pay as a corporate employee.
That’s because LLC pass-through income is assessed to pay twice the share of federal employment taxes, also known as FICA, which help pay for programs like unemployment insurance, Medicare and Social Security. Self-employed individuals and LLC owners must pay both the employee’s and the employer’s share of FICA taxes. All of those make a dent into your overall business profits.
The self-employment tax rate (including the employer and employee share) is approximately 15% of your profits (after business expenses), which means that if you have $50,000 of business profits from your LLC, you will owe about $7,500 in self-employment tax.
If you want to minimize the amount of self-employment tax that you pay on your LLC income, you can choose to file taxes as an S Corporation with Form 2553. This allows you to choose a different sort of tax treatment for part of your business income — instead of letting your entire LLC profits be subject to self-employment tax, filing as an S Corporation enables you to designate part of your LLC income as a salary (which is subject to self-employment tax) and part of your LLC income as a “distribution” (a type of business dividend which is not required to pay self-employment tax).
Incfile’s free S Corporation Tax Calculator can show you some possible numbers to illustrate the potential tax savings for your business. For example, if you have LLC income of $100,000, and that money simply passes through to your personal tax return and is taxed as a sole proprietor, you would owe approximately 15% in self-employment taxes, or $14,581.
But if you could file taxes as an S Corporation, you could choose to pay yourself a salary of $50,000 and treat the other $50,000 of business income as a distribution. This means that only half of your business income would be assessed for self-employment tax, leading to a tax savings of $6,931.
Imagine what you could do with an extra $6,900. You could invest that money into your business or save it for retirement or put it to work in other ways.
Please note: this tax calculator does not constitute professional tax advice and is just for estimation purposes; your exact numbers of how much you would owe or save by filing as an S Corporation might depend upon your total business income and type of business. Consult with a professional tax advisor to understand your options and calculate more specific details for your tax situation.
Track Your Business Expenses
Here’s a huge tip: tax season is a lot easier if you keep good records of your tax-deductible business expenses throughout the year. 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 and any other tax-deductible business spending such as office equipment or employer contributions to a tax-deductible retirement savings fund.
Or better yet, use an accounting service to stay organized from the start. At tax time, having good records in place 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 an LLC Tax Professional
Many small business owners have a “bootstraps” mentality and like to avoid any unnecessary expenses; some people take pride in doing their own taxes year after year. But here’s the thing: as a business owner, filing taxes is more complicated than you might think. Especially with the various changes from the new tax law that took effect in 2018, the stakes of getting your business taxes right are higher than ever.
You don’t want to miss out on possible tax deductions. It is worth hiring professional tax help from a CPA or other professional tax advisor to make filing your taxes easier; they can often help you save time on your taxes, avoid costly mistakes, reduce your risks of an audit and get what you deserve at tax time.
Not sure where to find a good CPA? Talk to Incfile; our business tax return filing service can connect you with a certified tax professional to get your business taxes done right.
You don’t have to go it alone during tax time. Getting professional LLC tax help can take a major source of worry off of your mind, so you can put your mental energy and focus into running your business.