As an entrepreneur, you definitely need to stay on top of your small business taxes. What you overlook or neglect could cost you in missed deadlines, late penalties or additional tax preparation fees.
Here’s what you should know about the tax responsibilities for an LLC, so you can take full advantage of the perks:
The Tax Advantages of an LLC
LLCs are not taxed like a separate business entity. Instead, they’re considered a “pass-through” entity by the IRS, which means their profits and losses are passed through to each member of the LLC individually.
As an owner of an LLC, you’ll report these profits and losses on your individual federal tax returns. That way you’ll avoid the double taxation of being taxed on both your business and personal returns.
Federal and State Taxes for LLCs
Because LLCs are pass-through entities, if your business is set up as an LLC, it doesn’t pay federal taxes itself.
However, depending on which state your business operates out of, you might have to pay an annual state tax. Some states call this a franchise tax, which is typically known as “the cost of doing business” in a state. Other states might charge a renewal fee or registration fee to keep your LLC current, though this isn’t technically a tax.
Taxes for Single-Member LLCs
If your small business has only one owner, it will be taxed as a sole proprietorship or pass-through entity (see above). You won’t owe any taxes on your LLC directly, but instead will report your profits and losses on your personal tax return. This goes on Schedule C of your 1040 Form on your tax return.
The only exception is if you’ve elected to be taxed as a corporation, such as a C Corp or an S Corp. In some cases, electing to be taxed as an S Corp can be advantageous for LLCs who have enough revenue. If you want to make this election, Incfile can help file your Form 2553 with the IRS.
Taxes for Multi-Member LLCs
No matter how many owners your LLC has, if you have more than one you’ll be taxed as a partnership. Like single-member LLCs, this is a situation in which the business doesn’t pay any taxes itself. Instead, each owner of the LLC pays taxes on their share of the profits on their individual tax returns.
In a partnership, you’ll need to file a Form 1065 with the IRS, which ensures 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 one’s Schedule K-1 form is on their Schedule E and Form 1040.
The caveat here is if you 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 isn’t a taxed as a corporation, you’re considered self-employed. This means you’ll need to pay estimated self-employment taxes. These are due each quarter, and you’ll need to pay at both the federal and state level (if applicable).
If your LLC is being taxed as a corporation, you aren’t considered self-employed. In turn, you aren’t required to pay self-employment taxes — this is because you’ll pay taxes through your payroll.
Knowing what you’re responsible for when it comes to LLC taxes can help you plan accordingly to avoid headaches, and save you from spending additional time and money.
If you need assistance preparing your small business taxes, Incfile can help. Our team of tax professionals can ensure your taxes are filed correctly and in a timely fashion, no matter your situation.