When calculating your business taxes for your new LLC, there are many things to consider. However, it isn’t quite as complicated as you may think.
So, relax. Let the business gurus at Startup Wars explain the process of calculation for you, as they offer some tax tips for your LLC or small business:
First of all, let’s cover the basics and clarify what an LLC is.
What is an LLC?
An LLC is a “limited liability company”.
Essentially, an LLC is a structure of business in which the owner (or owners) are protected from all responsibility for debt and liability.
LLCs have both the characteristics of a corporation along with those of a partnership or sole proprietorship.
LLCs and Taxes
An LLC itself does not actually have to directly pay any taxes on their business income.
They are kind of a middle man for federal and state income taxes.
Instead, shareholders and members pay their own taxes on their share portion of the LLC income. They can also choose for the LLC to be taxed the same way a corporation is taxed, if they’d rather. They will just need to file specific forms for that.
Sometimes, state or federal taxes might levy additional taxes on an LLC. These could be beyond those filed by shareholders and members. There are several types of taxes an LLC is responsible for.
Also, there are many business file categories and tax classifications for LLCs.
Types of LLC Taxes
LLCs are treated as sole proprietorships or as partnerships by the IRS.
Single owner LLC
This is treated as a sole proprietorship by the IRS.
One member LLCs report all profits and losses on what is called a “schedule C” form, submitted with their 1040 tax return. You must pay taxes on all monies in the company accounts and business expenses forms, including those allocated for future use. You are essentially filing as “self employed”.
Multi owner LLC
This is treated as a partnership by the IRS.
More than one owner is considered a partnership by the IRS. Much like a one member LLC, each member files taxes on their share of profits, rather than on taxes on total business income.
This is filed on the partners own personal tax forms on their “schedule E” form. Each owner or member files their distributive share of their own losses and profits. The exact distributive share amount is arranged through your LLC business operating plans. They are essentially filing as “self employed”.
Forms. Forms. And more Forms.
Even though the taxes of an LLC are essentially paid by its owners and partners, an LLC still does need to file a 1065 Form with the IRS.
This form is reviewed by the IRS to make sure that each and every member is filing their taxes properly on the LLC.
Each member is given a “schedule K1” from the LLC itself. This form is a detailed breakdown of each share portion for each owner, for both profits and losses. They then can report all of this on their 1040 Form.
Taxes for the Self Employed
While you may not feel like you are “self employed” in an LLC, you are seen as such by the IRS.
LLCs do not contribute money to Social Security or to the US Medicare Systems. So, you need to pay those taxes directly to the IRS yourself when you file, independently.
*You may be exempt from doing this if you merely invested money into the LLC and have negotiated that into your business operations.
That sounds a bit complicated, but it isn’t. Generally, if you are actively working in your LLC, you can expect to pay these taxes directly.
Should I Choose Corporate Tax Status?
This is where things get a bit tricky.
You may be wondering if you should file as a corporation for your LLC. Are there any real benefits to doing this?
Benefits to Filing an LLC as a Corporation
- It can shrink your overall tax burden
- Profits and losses can be carried forward or backward
- Future expansion funds can have a lower tax cost
- Salaries and bonuses can be written off
- Benefits can be written off
Obviously, there is much to consider. No one wants to overpay on their taxes. It all really depends on what kind of a corporation you are.
Two Kinds of Corporations
There are two main kinds of corporations. They have specific differences:
These pay corporate income tax and file a corporate tax return. Sometimes they end up paying more taxes because they file both corporate and shareholder taxes.
These do not pay corporate income tax. The shareholders file their profits and losses on their own. They are called “pass through entities”.
Some things to remember: First, there can only be less than 100 shareholders for this type of corporation. There can only be one kind or class of stock option available.
Employees and Taxes
If your LLC has employees, you must follow the law and collect payroll taxes.
This includes the following benefit program taxes:
- Unemployment taxes
- Social security taxes
- Medicare taxes
*Consult your accountant for specific state income tax rates in your state.
You and your employee share in paying these taxes. As an LLC, you must properly withhold your employees portion of these taxes in their paychecks.
Your LLC Can File These Taxes Using Specific Forms
- IRS Form 940- This is filed annually to report unemployment tax obligations.
- IRS Form 941- This is filed quarterly to report unemployment tax obligations.
Your LLC will deposit your payroll taxes throughout the year. This schedule is set by the IRS. Your LLC makes deposits through the Electronic Federal Tax Payment System (EFTPS).
Taxes on Your Sales
Do you sell taxable services or goods through your LLC? If so, you’ll need to collect and pay sales tax from your customers.
If you have a physical show in your state, you have what is called a “nexus”. That is a direct connection to your state because you operate and ship from there.
You can find out what eact goods and services are taxable in your state with simple research. In Pennsylvania, for understanding proper business sales tax compliance, view this retailer’s guide.
Tax Wrap Up for Your LLC
Taxes can feel like a daunting task.
Your LLCs overall success is reliant upon you properly filming your taxes to the IRS. Much of this is dependent upon your LLC’s formation from the start.
While all of your tax responsibility must be met, It is also important that you file the proper deductions and business property taxes for your LLC, to keep it profitable.
Be sure to visit the IRS website for further information on how to file or eFile your LLC’s Pennsylvania state and federal taxes.
In Pennsylvania, be sure to visit the Pennsylvania Department of Revenue for info on properly filing for your LLC.
As always, consult a professional!
We can’t be experts in everything. Leave it to your tax accountant professional and financial advisors for your LLC tax preparation. They can answer your small business tax questions. They can steer you in making proper decisions regarding your LLC and taxes, from its formation.
They can help you understand the philadelphia tax revenue, and more:
- Give you small business tax tips
- Help you to know how to separate business and personal taxes
- Explain unincorporated business tax
- Tell you what a W3 tax form is
- Explain tax forgiveness in PA
- Answer questions, like “do small businesses get tax refunds”?
- Help you find out when your LLC taxes are due in 2022
- File proper Pennsylvania state tax extensions, if needed
Having an LLC is a very rewarding experience. Calculating your business taxes is one of the most important factors to its growth. Research and explore your options carefully.