A Comprehensive Guide To Understanding LLC Taxes

Every US resident knows the vitality of tax payment and the penalties involved if defaulted.

Business owners who newly switched from paid employment to establishing small businesses always hit rock bottom when it comes to the issue of taxes.

Taxes paid as an employee, consumer, or property owner is different from taxes paid as a business owner or as an LLC.

In this article, we have prepared all the information you need to know about LLC Taxes.

What Is LLC and How Are Tax Issued?

LLC is the other name for a Private Limited Company in the United States. It is a business entity that provides flexible taxation and limited liability protection to businesses.

LLC operates in similar ways to a corporation in terms of partnership.

To fully understand LLC taxes, you need to know the types of LLCs available and how the taxes are issued to them by the IRS. The types of LLCs include:

1. Single Member LLC 

This is an LLC owned by a single person also known as a sole proprietorship. They are always referred to as the ‘disregarded entity’ by the government. For example, Laura decides to start a small business, regulated and managed by her. She’s the sole proprietor and she will only be required to pay tax based on the company’s annual income.

2. Multiple Member LLC

This LLC is owned by two or more members. They operate as partners and each partner owns a percentage share of the company, depending on how much investment each partner puts in the company.

Shareholders' shares in incurring debts and expenses of the organization as well as taxes on their dividends.

 For example, if Mr John owns 30% shares of the company, he would pay a tax of $300 annually.

3. C- Corporation

C Corps are similar to multiple-member LLCs and they are subjected to double taxation. As a business owner who decides to pay himself as a staff, you will be required to pay tax on profits earned on your business and also be subjected to other tax rates.

C Corps pays a flat federal tax rate and also a flat state rate. Find out the flat state rate for your state!

4. S Corporation

S Corp is a legal entity for large-scale businesses with high net profits. In terms of taxation, it is the best decision due to its minimal percentage rate. S Corp is quite expensive which means your company needs to have at least $60,000 net profit before you elect this choice of LLC.

What are the Tax Options For Small Businesses?

• Income Taxes: Income taxes are taxes imposed on individuals or businesses by the government on income earned. These are taxes on individual profits, salaries, or dividends used for the development of the state or country. The income tax can be imposed by the federal or state government as a federal Income tax or State Income Tax.

Income Taxes are subdivided into four. They include:

• Individual Income Tax: This is a personal income tax mostly imposed by the state government on individual wages, salaries, or income. Most individuals do not pay tax on all their income due to the advantage of tax reduction and exemption.
• Business Income Tax: LLCs pay income tax on all their profits as imposed by the IRS. Single members, Multiple members, C Corps, and S Corps are required to pay tax on their earnings including business owners who pay personal income tax.  In the United States, C Corps paid 21% income tax at a flare rate in 2022 while S Corps enjoys the privilege of a pass-through entity.
• State or Local Income Taxes: These are taxes imposed on people living in a particular state or jurisdiction. They are usually imposed by the state or local government. Most states in the US impose tax on individuals' income while others do not. Owners of S Corps businesses in states with a state income tax on individuals also pay taxes on their share of business profits on their state income tax returns.
• Corporate Taxes: These are taxes paid from the dividends received by shareholders. Multiple Member LLCs and C Corps fall into this category, double taxation is imposed on shareholders by the IRS. Since the revenue passes directly to the business's owners who get taxed on their tax returns, S corporations do not pay corporate tax.
• Payroll Taxes: These are taxes withheld from the salary of wages of an employee by the employer. An LLC with an employee must report and deposit:

1. A Federal income tax withholding.
2. Social Security and Medicare taxes.
3. Federal Unemployment taxes.

In the United States, Social Security taxes are 12.4% while Medicare taxes are 2.9% which makes it a total of 15.3%. It is also known as the largest source of combined revenue.

• Self-Employment Taxes: Self-employment taxes are similar to Payroll taxes. These are taxes imposed on business owners as an equal share in the company’s payroll tax. All self-employed individuals are expected to pay 50% of the Social Security and Medicare taxes (6.2% on Social Security and 1.45% on Medicare). This simply means that employers and employees will split the payroll taxes.
• Excise Tax: These are taxes levied on goods and services purchased. They are paid by the merchant who then goes on to increase the price of items or deduct directly from the consumer's account. Excise taxes are primarily business taxes.
• Property Tax: As a business owner looking forward to purchasing property for your growing business, you will be levied on any property acquired. For example, an organization that acquires landed property or a bus for hauling goods will be levied on every property.
• Sales Taxes: This is a consumption tax imposed on sales of goods and services by the government. This tax is usually charged at a percentage on the receipts of purchased items at the point of sale. It is a traditional sales tax collected by retailers and paid to the government.

 Requirements Needed For Filing LLC Taxes

After reading through everything you need to know about LLC taxes as a business owner, these are the essential requirements for filing LLC Taxes in the United States. These requirements are stated below:

Registered agent and office

When registering an LLC, you must designate a registered agent. You must maintain your registered agent information current with the state. You will need to update the agent's address if they move from the place you listed. You will have to designate a new registered agent if your current agent relocates out of state or the service provider closes.

Foreign qualification

This is commonly referred to as a license and permits for qualification of practice. Depending on your industry, certain services require permits from the regulatory body before you can begin operation in your firm or company.

Franchise taxes

These are taxes imposed by the state government depending on the nature of the business and jurisdiction of operation. 

These taxes are different from the state or federal tax and this also differs from state to state. However, not all states impose franchise taxes on all businesses.

Expense Records

Keep accurate records of expenses in your company all through the year. These records are needed during taxation when calculating annual operational expenses. Expenses documents include invoices of items purchased, bank statements, and evidence of employee's wages.

Income Records

Proper documentation of income made in the year. Taxes are imposed on income or profits made from the business. Avoid errors or mistakes in documenting income in your company, so as not to incur debts.

Tax Classification

You enjoy the advantage of choosing how you want to be taxed depending on your business structure. Your business style of taxation could be a sole proprietorship, partnership, S corporation or C corporation.

Visit your state IRS for the appropriate LLC tax structure to choose.

What are the tips for managing LLC taxes

1. Understand Tax Classification

To properly manage LLC taxes, there's a need to understand the classes of LLC taxes available and which one of them best works for you. LLCs enjoy the advantage of choosing how they want to be taxed. The available tax options include LLCs (Single and Multiple Membered), S Corps, and C Corps). Each of these tax classifications has its own peculiarities.

2. Separate Personal and Business Accounts

Another way to manage LLCs and its financials is to separate business from personal accounts. To articulate your LLC taxes, you should separate funds. It helps in funds management including accurate calculation of taxes needed to pay.

3. Contact Tax Professional

Tax laws and filing can be complex and may require the presence of a professional to help manage the tax. A professional can help secure tax deductions, filing of tax returns, and spearhead wise taxing decisions for your LLCs.

4. Leverage on Tax Deductions 

As a small business LLC, tax deductions can be a major relief while you work on building your business. Do not dispose of receipts, or paperwork of expenses such as rent, utilities, supplies, equipment, travel, marketing, and professional services. They are typical deductions for LLC taxes. 

5. File on Time 

To avoid penalties from late tax payments, you should make sure you file all necessary tax forms and pay any taxes before the deadlines. Interest and penalties may apply if taxes are not filed or paid on schedule.

Frequently Asked Questions

What is the best LLC tax structure? 

The tax structure is determined by your business structure. If it is a single-member business, you will be taxed as a sole proprietor. As an LLC, you are allowed to choose a tax structure that best suits your business (S Corps or C Corps).

Multiple member businesses seeking flexibility can choose to be taxed as partnerships.

What are the tips for managing LLC taxes?

Managing LLC taxes stems from maintaining simple tips like keeping accurate records, separating personal and business finance, hiring a professional, and leveraging software tools for swift accuracy.

What if the business generates low income, do I still pay taxes?

If business becomes poor with little income, you may have to pay taxes but of course, there will be a reduction in the tax. All is dependent on tax laws in your state or jurisdiction.

As a single-member LLC, you may be required to pay self-employment tax only. Visit your state IRS website for more clarity.

Conclusion

Understanding LLC taxes is important to stay compliant with the law. As a rule of thumb business owners are to file taxes before the deadline. Doing this is what you'll need to stay far from penalties made for tax offenders. Need help in tracking your LLC taxes, Foundeck has you covered. Reach out to our professional to help make great decisions for your business today.