Business owners have several small business tax responsibilities that they need to take care of, not only on the usual Tax Day, but at various times throughout the year. In order to meet the various tax deadlines, avoid late payment penalties and interest and get the most out of your small business tax advantages, it’s important to be informed and proactive about how to manage your small business tax responsibilities throughout the year.
Here’s what you should know about the tax responsibilities for an LLC, so you can minimize your tax liability, avoid extra stress and hassle and save time and energy that you can spend on helping your business grow.
LLC Tax Filing Deadlines
First of all, it’s important to remember that “Tax Day” for LLC owners who file as S Corps, partnerships, or multi-member LLCs is not the same as for everyone else. The deadline for filing your LLC tax return is March 15.
And for 2020, due to the coronavirus crisis, the IRS has extended the deadline for filing individual tax returns and paying 2019 federal income taxes owed to July 15, 2020. So even if you’ve already filed your LLC tax return for 2019, you still have three extra months to file your individual tax return and pay any taxes that you owe.
The Tax Advantages of an LLC
Forming an LLC for your business can help you attain some significant financial benefits when doing your taxes. That’s because, unlike C Corporations, LLCs do not have to pay corporate income taxes. Your LLC is treated as a legal business entity that is separate from your personal finances, but your LLC is considered a “pass-through” entity by the IRS for tax purposes.
That means: your LLC’s profits are “passed through” as income to the LLC’s owners or members. You then get to report your LLC income on your own personal individual tax return.
How does this help you with your taxes? Two ways:
Avoid double taxation: Owning an LLC lets you avoid the double taxation of a C Corporation (where the C Corporation’s income gets taxed twice, once in the form of corporate income tax, and again with the taxation of dividends paid to shareholders).
Flexible tax treatment: As an LLC owner, you also get some added flexibility for how to manage the tax treatment of your business income. Depending on how you choose to manage your tax obligations for an LLC (learn more about this below), you might end up paying less tax overall than you would have owed on a similar amount of income as a W-2 employee.
Federal and State Taxes for LLCs
If your business is set up as an LLC, it won’t have to pay federal income taxes. Any federal income tax that you owe from your LLC’s income will be calculated and paid via filing your individual tax return.
However, depending on your state, you might have to pay an annual state tax for your business, or some other state-specific fee. Some states call this a franchise tax, which is typically known as “the cost of doing business” in a state. Other states charge a renewal fee or registration fee as part of your annual report filings to keep your LLC officially registered and in compliance with state regulatory authorities, although this isn’t technically a tax.
And of course, if your state collects a personal income tax, you will have to calculate and pay any state income tax as part of filing your individual state tax return.
Taxes for Single-Member LLCs
If your LLC has only one owner, it will be taxed as a sole proprietorship or pass-through entity (see above). Your LLC won’t owe any federal income taxes directly, but instead, the business’s profits (or losses) will be “passed through” to your personal individual tax return and will be taxed in the same way as if you were a sole proprietor. Your LLC’s business income and business expenses get reported to the IRS on Schedule C of the 1040 Form on your tax return.
Just putting your LLC’s income onto your Schedule C and being taxed as a sole proprietor is the simplest way to handle the reporting of your business income for tax purposes. However, this method might cause you to pay more taxes than you need to; that’s because sole proprietorships have to pay a double portion of self-employment taxes (also known as FICA – Medicare, unemployment insurance and Social Security contributions).
There is another option for managing your LLC tax responsibilities that can potentially help you save money on your taxes while freeing up more money for you to invest in your business or save for retirement.
For example, if your LLC has an income of $50,000 that is currently getting reported on your Schedule C and taxed as a sole proprietorship, you might be able to save more than $3,800 per year by filing as an S Corporation instead.
If this sounds like a good plan for your tax situation and you want to set up your LLC to file as an S Corp, Incfile can help file your Form 2553 with the IRS. If you file as an S Corp, you will report your LLC’s income on Form 1120-S instead of Schedule C.
Taxes for Multi-Member LLCs
If your LLC has more than one owner, the business will be taxed as a partnership. Similar to single-member LLCs, this situation means that the business (LLC) doesn’t pay taxes itself. Instead, each member/owner of the LLC pays taxes on their share of the profits that are reported on their individual tax returns.
In a partnership, the business will need to file a Form 1065 with the IRS, which ensures that each owner is accurately reporting their income. Each owner also needs to submit a Schedule K-1, which reports each partner’s share of income, credits and deductions. The income reported on each partner’s Schedule K-1 form is also recorded on their Schedule E and Form 1040.
If you don’t want your LLC’s income to be taxed as a partnership, you can elect to be taxed as a corporation, as mentioned above. In this case, you’ll need to file a Form 1120.
Paying Estimated Taxes and Self-Employment Taxes
If your LLC is not taxed as a corporation (and is therefore not paying you a salary), you’re considered “self-employed” for tax purposes. This means you’ll need to pay estimated self-employment taxes, which are due each quarter, and you’ll need to make estimated income tax payments at both the federal and state level (if applicable).
If your LLC is being taxed as a corporation, that means your LLC will be set up to pay you a salary (your accountant or tax professional can help you determine an appropriate level of salary and set this up for quarterly payroll taxes). If your LLC is set up to file taxes as a corporation (such as an S Corporation), this means that you aren’t considered “self-employed” for tax purposes. In turn, you aren’t required to make estimated quarterly payments of self-employment taxes, because you’ll be paying these taxes (the employee’s share) through your payroll taxes, just as if you were an employee.
Another occasion when you might need to make quarterly estimated tax payments is if you owed a certain amount of taxes on the previous year’s tax deadline. The IRS and state revenue authorities usually want to see business owners paying as much of their tax obligations as possible before the (usual) April 15 tax deadline. If you owe at least $1,000 of tax for the current tax year, you might be expected to make quarterly estimated tax payments for next year’s taxes.
Quarterly estimated tax payment deadlines are typically April 15, June 15, September 15 and January 15 of the following year. Learn more about estimated tax payments at the IRS website.
Get Small Business Tax Filing Help from Incfile
Small business taxes can be complicated. That’s why it’s often a good idea for business owners to work with professional tax advisors to help file your business tax return, as well as your individual tax return.
Incfile’s business accounting service can connect you with tax professionals to make sure your taxes get filed correctly and on time, while maximizing the tax advantages that you’re entitled to under the law.