6 Things To Know About Tax Responsibilities As An LLC
Having your own business is a somewhat challenging task. The truth is that the vast number of people prefer fewer obligations and 9-5 working hours, but that business approach doesn’t work for everyone.
Therefore, those who are more passionate about running things, dealing with various obstacles daily, and those who are prominent leaders are usually big business owners.
Since running your own company can be demanding, time-consuming, and financially tricky knowing tax rules, payment structure, and how money flow actually works is a-must if you want to be financially sustainable and grow your business.
This is even more important when you have to deal with LLC. By interpretation, LLC is strictly defined as a limited liability company.
Furthermore, LLC is defined as a corporate structure that is common for the U.S. field with a basic purpose – within this structure, the owners are never responsible personally for the company’s liabilities.
Moreover, owners are never responsible for any kind of debt.
Next, these companies are, in a way, hybrids that are a mix of corporate world a.k.a. corporation and partnership, or otherwise sole partnership.
Yet, this original mix of a private limited company is not stress-free or obligation-free, or tax-free. No, this original type of a private limited company mixes the pass-through taxation, meaning that you can’t avoid paying tax.
Not even Al Capone could do it, so neither can you. Or anyone, actually. That being said, there are some things that you should know about tax responsibilities and the LLC entity.
Some information may surprise you, some may help you, while other information can really boost your overall business.
So, let’s see what the main pinpoints that you should know about your tax responsibilities as an LLC are.
TAX LAW FOR LLCS
To run a successful LLC, you have to understand how LLC is shaped.
Originally, LLC is linked to a corporation, but it’s important to note that LLC is not 100% corporation and therefore is not taxed in the same manner.
Actually, LLCs are so unique that how they are taxed is unique. Simply said, LLCs are taxed in a specific manner. LLC is not taxed as a separate business entity, which means that both losses and profits are directed through the business to each member of the specific LLC. Therefore, LLC members are duty-bound to note their earnings and tax filing requirements.
The same members must report losses accordingly. As expected, losses must be reported on their personal federal taxes return. This is identical to the owners of a partnership. But what does it mean?
This approach, reports of profits and losses, says that business is completely free from any form of income taxes. Still, this is not a general rule, since some states are obliged to apply an annual tax to LLCs.
The IRS will always be interested in the exact number of people in your LLC, and based on that number, the IRS will decide if your business is a partnership or sole proprietorship.
Know that a few LLCs may be automatically organized or classified. What does this mean? It means that certain LLCs might be taxed as corporations by federal tax law.
If your LLC or other LLCs are not automatically classified as corporations, it means that you have a fantastic opportunity to choose your business entity classification.
To do so, you will need Form 8832. Moreover, you should always refer to Form 8832 to know how to classify an LLC. As expected, this guide can only be provided by the IRS.
INCOME TAXES FOR MULTI-MEMBER LLCS
The more, the merrier, right? When starting a business, many need extra help to kick off their dreams.
Therefore, many choose to set a business that will actually be a multi-owned. If you are part of this alliance, you know how it can be tricky to organize everything.
Luckily, when you know your tax responsibility as multi-owners, everything is much easier. As expected, if your business has multi-owners the IRS will classify it as such.
Unless your LLC is actually registered as a corporation, the IRS will identify your LLC as a partnership. It’s important to note that no tax payments are mandatory by businesses. Every owner is obligated to pay taxes.
Is there a specific way of taxing owners? The truth is that the owners are taxed based on their profits. Actually, owners are taxed through their personal tax returns. What’s the exact amount of the taxes? Truth be told, the amount of taxes is generally in proportion to their interest in the business.
If John possesses 40 percent of the company, Martin possesses 30 percent, and Carol possesses 30 percent, Molly earns 40 percent of the LLC’s gain and is liable for 40 percent of its losses. In comparison, the corresponding share for the other two is 30 percent.
Also, there is a possibility of splitting both losses and profits differently. In order to do so, you will have to contact the IRS. Only the IRS can provide you with a “special allocation.” Just like with single-owner LLC, you are obligated to pay taxes on your share of the profits every year. Yes – you have to do the same even if you leave your money to collect dust in the bank.
When thinking about starting an LLC, you must think about taxes. All the time. After all, LLCs are responsible for paying various taxes, including the:
- State tax
- Federal tax
- Sales tax
The truth is that LLCs may be accountable for accumulating sales tax on the services and products they sell. Note that every state has its own rules and regulations when it comes to sales taxes, sales tax rates, and policies it all may vary.
Further, business owners must keep in mind that it’s their responsibility to stay up to date with changes, regulation shifts, rate changes, and also the latest tax developments.
Little is known, but LLCs should understand that various sales tax collection laws may apply if the sale is directed to customers out of the state.
The best thing that anything can do for their business is to always learn. We are living in an era of information and knowledge sharing, where the freedom to ask is at its finest, so – ask!
Never think that you are the smartest one because you can’t know everything about everything, even if it’s about your business. That’s why we have experts in different areas, with varying skills.
So, whenever you feel unsure about information, or whenever you are confused about the newest regulation or your responsibility as an owner, contact a CPA in your area. This move will save you both time and cash.
Also try to learn all you can about the items you can deduct from you taxes.
INCOME TAXES FOR SINGLE-OWNER LLCS
When it comes to one-owner LLCs, you should know the following – one-owner LLCs are identified as proprietorships for tax purposes.
This means that the LLC has two benefits:
- LLC is not obliged to file a return with the IRS
- LLC is not obliged to pay taxes
As a single-owner LLC, it’s crucial to understand that everything is on you. You are the one who is responsible for meeting deadlines, for running the business, for being up to date with any tax change, any trend, and you are the one who is responsible for address total profit.
Furthermore, you are the one who is responsible for addressing losses, as well. That said, it’s crucial to submit a 1040 tax return form. This form will demand listed profits and losses. As a one-owner LLC, you can also keep the money in the bank.
Of course, you can wait until the end of the year to collect the money, if you want. However, no matter how much time money stays in the bank, you will still have to pay tax on that cash.
You will be able to pay out yourself by taking money out of the LLCs profits as needed. This procedure is also known as the owner’s draw.
So, just write a check with your name on it, or even faster – transfer the money from your LLC’s bank account directly – in only a few seconds – to your personal bank account.
PAYING ESTIMATED TAXES
In general, LLCs are not corporations. People who run LLC are actually self-employed entrepreneurs. Not only that the LLC owners are self-employed, but their members are identified as self-employed, as well. As such, they are not released from tax withholding.
In practice, this means that each LLC member is personally liable for regulating self-employment taxes. Further, this includes mandatory Medicare and binding Social Security.
As you probably know already, both Social Security and Medicare should be paid to the IRS, quarterly. When it comes to multi-owners LLC, it’s not strange for owners to be excused from paying self-employment taxes.
If you find this hard to understand or transmit to practice, its highly advised that you talk with your tax lawyer or your accountant.
After all, they are professionals, and they will be able to tell you exactly how your business can reach the specific requirements of this exemption.
STATE TAXES AND FEES
Well, you have probably seen this one coming, right? Paying state taxes is mandatory, and their amount alters in every state. Make sure that you have a good advisor and stay on top of any latest change and update tax-related.
Luckily, the majority of tax LLC profits are actually similar to the IRS, so you won’t have to spend much time exploring. This is actually handy because you can finish two things by the expenses of one.
Consequently, how actually can IRS tax LLC profits? In this case, tax is paid through LLC owners’ personal returns. As mentioned earlier in the article, LLC itself is not obligated to pay taxes. Basically, you will pay state tax through your individual returns.
Interestingly, some countries might price tax on top of the members’ income tax pair. Opposite to this practice, some communities are free to even charge a specific fee. This fee is known as the LLC fee, franchise tax, registration fee, or renewal fee.
So, always do your research first, before you start the LLC business. Always explore how tax and business law in your state works. This minimum work, in the beginning, will be so helpful in the long run, and it will eventually save your capital, next to massive tax-related headaches.
Extra state taxes: yes, some states might charge for additional taxes. This extra tax can be based on the total amount the LLC can actually make – this is the common practice.
For example, if you make around $250,00 in one year, in California, you can expect the tax to extend between $900 to $11,000.
Yearly fees: some states might demand you to pay yearly fees. These fees are also known, as mentioned previously in the article, renewal fee, annual registration fee, or franchise fee.
These fees are starting at $100 unless you are running an LLC in California. If your LLC is California-based, you should put aside $800, because this is a mandatory amount and a minimum annual fee.
Again, think twice before you open an LLC, and do your research. Discover whether you have must pay if you have to pay extra taxes or not. Further, surf the net. Find relevant website government-lead for 100% information on taxes. Pro tip: always check first the state’s secretary web site.
This website usually serves as a one-stop-shop where you can get all the information on tax. You can also search for information via the department of corporations. Next, always include in your investigation department of revenue or tax.
TAX BENEFITS AND DEDUCTIONS OF LLCS
Every LLC member has specific tax obligations. Those obligations will depend on the essence of your LLC membership.
Simply said, if you are a single-owner LLC, you will be probably taxed as a sole proprietor. On the other hand, if you are a multi-owners LLC member, you will be taxed as a member of a general partnership.
However, not everything is about paying the taxes. As an LLC, you will be able to enjoy some benefits as well. As you probably know already – sometimes it’s not mandatory to pay taxes. How so? This is possible only when the business spends money to make a profit.
So, sometimes you can remove your business costs from your income. From your business income, to be precise. This way, you can significantly cut costs. Once you cut the costs, you will have significantly little profits to report to the IRS.
There are a few things that you should know about the deductible expenses. First of all, do you know what deductible expenses are? If not, you should know that these expenses are your best friends when it comes to earning more.
You can actually place advertising costs, travel costs, and even automobile expenses under deductible expenses.
On top of this, if you are a single-owner LLC, you can include deductions, such as mileage or home office space.
Always be on top of the latest news, law, and tax changes, have forms on hand and master them, so you quickly fill them in and use it to your advantage. Knowledge is power, so why not use it?
THE BOTTOM LINE
A limited liability company or simply an LLC can be similar to a corporation if certain norms are set. One of the most common norms is actually the number of its members. However, when it comes to taxes, there is nothing similar between these two.
Sincerely speaking, an LLC is a separate tax entity opposite to corporation. There is a term that IRS uses often that reefers to LLC and that term are “pass-through entity.” These objects are also called a partnership, or sole proprietorship. The money flow is very similar to the definition of these forms because it’s basically pass through to the LLC owners.
As you probably know, LLC owners and members, are responsible for creating reports on losses and profits. Every LLC is responsible for paying taxes because running an LLC tax responsibilities are mandatory.
Whether you operate as a single-owner or multi-owner, you will be liable to report and pay your tax when required.
Many believe that founding an LLC is much better in terms of taxes. The truth is that because of its pass-through taxes, and an LLC might have various benefits.
Simply said, LLC owners don’t have to file a corporate tax return. Interestingly, in this case of running an LLC, the owner is not forced to file a corporate tax return. This means that the owner only reports their share of profit or loss.
By applying these losses or profits, double taxation is prevented. How? Double taxation is when you have to pay tax both to your business and yourself. By running an LLC, you only pay tax ONCE, and the chances are that this rule will remain forever.
Always run detail and thorough research before you jump into the LLC world. Last but not least, research, double-check everything, and pay your taxes always on time.
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