(disclaimer: this is not legal advice consult with a licensed professional)
Filing Business Taxes For Your LLC For the First Time
Is this the year you finally took the leap of faith and started your own business? First of all, congratulations! Becoming a business owner opens the door to endless opportunities for personal and professional growth. However, you also need to understand the details of filing business taxes for an LLC for the first time.
Filing LLC taxes relies on an operational bookkeeping function, which you might not have the time for as a busy business owner. Enlisting the help of bookkeeping professionals, like SynkBooks, takes this burden off your plate. Not only does regular bookkeeping promote business growth, but you can also rest assured that your tax returns are being filed with accurate information.
Let’s dive into the basics of an LLC, the taxes you might be subject to, and how to make tax time a breeze!
What is an LLC?
The IRS defines a limited liability company (LLC) as a business entity recognized by state governments. LLCs can take on different classifications that alter the way the business is taxed. Owners of LLCs are referred to as members, with minimal limitations on member types, resulting in one to unlimited owners.
Do I File LLC and Personal Taxes Together?
Filing business taxes for an LLC for the first time requires you to understand which type of LLC you have. LLCs with only one owner that doesn’t want to be taxed at the corporate level will report and pay taxes on their individual tax return, while all others will need to file a separate business return.
The IRS treats single-member LLCs the same way as a sole proprietorship with all income and expenses being reported on Schedule C of the 1040. However, single-member LLCs retain more liability protection compared to sole proprietorships because they are legally separate business entities. There can only be one owner in this setup.
A multi-member LLC involves more than one partner and requires a separate business return, Form 1065, to be filed. For tax purposes, a multi-member LLC is treated as a partnership, which passes all income or loss down to the partner’s individual return through Schedule K-1.
LLCs retain added flexibility with their reporting options, being able to be taxed at the individual level or at the corporate level. Changing the way you are taxed doesn’t change your entity selection as you will still be seen as an LLC under federal and state tax law.
The one type of corporation is a C corporation, which requires you to submit Form 8832 to make the election to be taxed at this level. Then, you will file and pay any taxes on Form 1120. This may result in a more favorable tax position depending on current tax rates.
The other type of corporation is an S corporation, which is taxed in a similar manner to a multi-member LLC. Income and loss will be reported on Form 1120s, then passed down to shareholders on Schedule K-1 with all taxes being paid on the individual tax return.
How Much Tax Does an LLC Pay?
The tax you pay on your LLC income depends on where you report profit and how much. Those that elect to pay pass-through entity elective tax will pay taxes at corporate rates at the state level and will only be taxed on federal income. However, most LLCs pay both federal and state taxes on the individual return, thus subjecting them to the following taxes:
When you are the sole owner or a general partner, the income you earn from your LLC will be subject to self-employment taxes, which are social security and medicare. Just like regular employees are subject to these taxes when they work for a business, you are too.
The total of these two taxes is equal to 15.3% of your net profit, meaning your income after all expenses. If your business generates a loss, you will not be required to pay in any amounts. Just like employers are able to deduct their portions of payroll taxes, you are too with an offsetting credit for half the amount.
Capital gains tax occurs when you sell a business asset or even the business itself. Short-term gains, which are assets held for less than 12 months, are taxed at ordinary income rates while long-term gains are taxed at favorable rates ranging from 0% to 20%.
You are able to reduce the tax you pay by subtracting your basis in the asset from the proceeds. Let’s say you purchase a piece of equipment for $2,000, lose $500 in depreciation, and sell it for $2,500. Your adjusted basis would be $1,500, resulting in a taxable portion of $1,000.
Ordinary Income Tax
Another component of determining how much tax an LLC pays is ordinary income taxes. These taxes are assessed based on other income and deduction items on your tax return. The IRS assesses tax based on a gradual scale, meaning the higher income, the higher taxes assessed.
LLCs who elect to be taxed as a corporation will pay a flat tax on any profit, which is currently 21%. If you are generating a high level of income from your LLC and other sources, paying taxes at the corporate level might be more favorable.
What is the Single-Member LLC Tax Rate?
The single-member LLC tax rate depends on your filing status and other income streams. These rates are adjusted each year for inflation. Ordinary income tax isn’t paid solely on the profit of your company. Instead, other deductions, credits, and sources of income are considered.
The lowest rate for all filers is 10% on all income under $10,275 for single filers and $20,550 for married filers while the highest rate is 35% on income over $215,950 for single filers and $431,900 for married filers. For a complete list of tax rates, visit the IRS website. Understanding your tax brackets can help eliminate the question of why you owe money on your tax return.
What Deductions Can LLCs Take?
LLCs are a legal business, subjecting them to the ability to take tax-reducing deductions. A crucial aspect of how to do taxes for an LLC relies on taking all the available deductions, including:
These expenses are all the costs associated with running your business, from office rent to bank charges. To be deductible, they must be ordinary and necessary according to IRS Publication 535.
Businesses that purchase qualifying assets and place them in service before year-end are able to write off the entire cost of the asset under S179 or Bonus Depreciation. Otherwise, the asset is depreciated over the useful life, ranging from 3 to 39 years.
Qualified Business Income Deduction
This is a direct 20% reduction of your taxable business income. You must have income to take this special deduction.
Home Office Deduction
Many LLCs operate out of a home office, giving way to a deduction for mortgage payments, rent, utilities, insurance, and property taxes based on the square footage of the space.
When are LLC Taxes Due?
Partnerships, S corporation, and C corporation returns are all due by March 15th. A six month extension can be requested by filing Form 7004. Single-member LLCs that file on Schedule C of the individual return will have a due date of April 15th. Like business returns, a six-month extension can be requested as well.
When you extend your business return, you will most likely need to extend your individual return because Schedule K-1 is required to be reported. However, any tax you expect to be due must be remitted by the respective March 15th or April 15th deadline.
Additionally, depending on how much income your LLC is generating, you may be required to make quarterly estimated tax payments, which are due on January 15th, April 15th, June 15th, and September 15th.
What are Small Business Payment Options?
When you can’t afford to pay your tax bill, there are small business payment options that you can work out with the IRS. The most popular option is establishing a payment plan with the IRS with monthly payments and interest. This can take the burden of upfront payment away.
The IRS offers short-term payment plans, which grant an additional 6 months, all the way to multi-year plans with wage garnishments or automatic payments. The amount you owe will determine which method is best for you.
How to Make Tax Time Easier
Filing business taxes for an LLC for the first time shouldn’t be overwhelming. In fact, proper small business bookkeeping eliminates spending hours at the year-end trying to reconcile accounts and pull together accurate financial statements.
The first step in gaining control over your bookkeeping function is to follow an in-depth bookkeeping checklist and task list. Then, if the items on this list don’t seem attainable, reach out to an expert for guidance.
A qualified bookkeeper who understands how to do taxes for LLCs can tailor your bookkeeping procedures toward filing timely and accurate returns. SynkBooks has been doing just that, assisting LLCs across the country realize the benefits of bookkeeping, from business growth to proper tax remittance. Contact a team member for more information.