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Are you considering starting an LLC? Congratulations on taking the initial stride toward owning a business!
Did you know there are over 1.5 million active LLCs in the United States?
It’s no surprise, given the benefits of limited liability protection and flexibility in management that LLCs offer. An LLC combines the flexibility, ownership structure, and possible tax benefits of a partnership with the liability protection of a corporation.
However, just like any other business, forming an LLC entails certain responsibilities, one of the most important of which is tax compliance.
Understanding the tax obligations and requirements of owning an LLC is one of the most important aspects. Failure to file taxes correctly to avoid costly penalties, audits, and legal issues can harm your business.
As an LLC owner, it’s essential to understand your tax obligations to maintain legal compliance and avoid pesky penalties.
But don’t worry; we’ll walk you through the steps. From determining your LLC’s tax classification to filing your tax return, we’ve got you covered. So get your favorite tax calculator, and let’s get into everything important about LLC taxes.
Choose Your Method of Taxation
Once the tax season rolls in, you might want to file for your LLC’s taxes. But here, IRS likes to throw some curve balls in the process. You cant file for taxes as IRS does not recognize LLC as a taxable entity.
Bummer, you still need to pay your owed taxes.
Instead, depending on whether more than one person manages the LLC, the IRS will give you a default tax status. The owner or owners must now decide how their LLC will be taxed.
There are two methods of taxation for LLCs: the default method and electing corporate status.
1. Default Method
Under the default method, LLCs are classified as pass-through entities, meaning the LLC doesn’t pay income taxes. Instead, the LLC distributes its gains and losses to its members, who then itemize them on their tax forms.
The default method is simpler and easier to maintain, as it does not require additional compliance and reporting requirements.
But on the downside, pass-through entities are subject to self-employment taxes, which can result in higher tax liability for LLC members. The LLC cannot take advantage of certain tax benefits available to corporations.
2. Choosing Corporate Status
By submitting IRS Form 8832, LLCs can be taxed as corporations. Electing corporate status allows LLCs to take advantage of certain tax benefits available to corporations, such as lower tax rates for retained earnings or deduction business expenses. Corporations also have greater flexibility in distributing profits among shareholders.
Conversely, electing corporate status requires additional compliance and reporting requirements, such as filing a corporate tax return.
But looking at the benefits, determining your LLC tax classification is still worth the effort.
How to File Taxes for an LLC in the U.S.? – Determine Your LLC’s Tax Classification
LLCs have some flexibility in how they are taxed in the United States, and the tax treatment of an LLC depends on its classification for tax purposes.
By taking a strategic approach to tax planning, you can minimize tax liability and maintain compliance with tax laws and regulations. Determining the tax classification of your LLC is crucial to ensuring that you meet the proper tax obligations and reporting requirements.
LLCs are taxed in three ways, and each classification has its criteria and implications for tax purposes.
1. Disregarded Entity
An LLC with only one member is automatically categorized as a disregarded entity for tax purposes. It suggests that all profits and losses are reported on the owner’s tax return and that the LLC is not taxed separately from its owner.
This classification provides the most detailed tax reporting requirements for a single-member LLC.
- Single-member LLCs are not required to submit a separate tax return.
- The owner includes the LLC’s income and expenses on their tax return using Schedule C (Form 1040).
2. Partnership
An LLC with two or more members is normally classed as a partnership for tax reasons. It indicates that the earnings and losses are distributed among the members and reported on individual tax returns rather than the LLC itself being subject to taxation. Form 1065, which details the LLC’s income, deductions, and other tax information, must be filed by partnerships. Each member receives a Schedule K-1 detailing their portion of the LLC’s revenue and deductions.
- Form 1065: Return of Partnership Income
- Schedule K-1: Partner’s Share of Income, Deductions, Credits, etc.
3. Corporation
LLCs can also be taxed like corporations by registering as S or C corporations. It provides liability protection for the members while offering potential tax benefits, such as the ability to deduct business expenses.
Profits and losses from S Corporations are taxed akin to partnerships, with the members’ tax returns receiving a pass-through of both. C Corporations are taxed separately from their owners and pay taxes on their profits at a flat corporate tax rate of 21%.
LLCs taxed as corporations must file Form 1120 or Form 1120S, depending on whether they’ve elected to be taxed as an S corporation. These forms report the LLC’s income, deductions, and other tax information.
- Form 1120: C Corporation Income Tax Return in the United States
- Form 1120S: S Corporation Income Tax Return in the United States
- Form 8832: Entity Classification Election
Tax classification of an LLC can be complex, and the criteria for each classification can vary depending on factors such as the number of members, the nature of the business, and the desired tax treatment.
It’s important to have a good understanding of tax laws and regulations to ensure accurate and timely tax reporting. Hiring a tax professional, such as a certified public accountant (CPA), can benefit LLCs with complex tax situations or those wanting to ensure accuracy and minimize the risk of errors or audits. A tax expert may advise you on tax planning and techniques to reduce your tax obligation.
Monitor Your LLC’s Tax Obligations
If you are still unsure how to pay LLC taxes in the US, you must know a few things.
LLCs must pay taxes at both the federal and state levels. Federal tax obligations include income tax and self-employment tax, while state tax obligations vary depending on the state where the LLC is located.
Some key tax obligations that LLCs may have are:
1. Federal Income Tax
LLCs are taxed as disregarded entities, or partnerships are pass-through entities, meaning the business does not pay income tax. Instead, the business’s revenues and losses are passed on to the individual members, who record them on their tax returns.
2. Self-Employment Tax
Members of an LLC taxed as a disregarded entity or partnership are considered self-employed and subject to self-employment tax on their share of the LLC’s profits. LLCs that are taxed as corporations are not subject to self-employment tax.
The current self-employment tax rate is 15.3%, including Social Security and Medicare contributions.
3. State Taxes
LLCs may be subject to state taxes, including state income, franchise, and sales taxes. The particular tax requirements differ based on where the LLC is located. Tax payments are estimated.
4. Estimated Tax Payments
In general, LLCs are obliged to submit quarterly anticipated tax payments if they anticipate paying at least $1,000 in federal taxes for the whole year.
5. Employment Taxes
If an LLC has employees, it is responsible for withholding and remitting payroll taxes, including Social Security and Medicare taxes, federal and state income tax withholding, and unemployment tax. The Social Security and Medicare tax rate is 7.65% for both employers and workers.
LLCS must stay current on annual tax obligations to avoid penalties and interest charges. The IRS reported that the most common error on small business tax returns is failing to report all income, which can result in penalties and interest charges.
Moon Invoice, the expert bookkeeping software for businesses of all sizes, can help you avoid this problem. You can keep records of all transactions and get financial reports in a few clicks.
Required Information and Documents
Before filing taxes for your LLC, gathering all necessary information and documents is important to ensure accurate and timely tax reporting. Here’s a checklist of items you’ll need to file taxes for your LLC:
1. Tax Identification Numbers
The IRS will issue your LLC an Employer Identification Number (EIN), which is used to identify your firm for tax purposes. Depending on where your LLC is based and operates, you may additionally require state tax identification numbers.
2. Financial Records
You’ll need to gather all records of income and expenses for your LLC. It contains documentation of the LLC’s earnings, such as bank statements, invoices, and sales receipts.
You’ll also need records of expenses incurred by the business, such as rent, supplies, and payroll.
Bookkeeping software like Moon Invoice will help you maintain financial records in order. You can check all your expenses, income, and debts on a single dashboard.
3. Payroll Records
If your LLC has employees, you’ll need records of all payroll transactions, including employee wages, benefits, and taxes withheld.
4. Depreciation Records
If your LLC owns assets subject to depreciation, you must keep a depreciation schedule to track these assets’ costs and useful life.
5. Business Entity Information
It includes the legal name of your LLC, its address, and the names and addresses of all members.
6. Tax Forms
Depending on your LLC’s tax classification and filing requirements, you may need to file forms such as Form 1065 (for partnerships), Form 1120 (for corporations), or Form 1040 (for disregarded entities).
Maintaining accurate records of all financial transactions throughout the year is important, as this will make tax filing easier and reduce the risk of errors. Accurate records also help in the event of an audit, as you’ll have documentation to support your tax filings.
Obtain an Employer Identification Number (EIN)
Get an Employer Identification Number (EIN) before starting an LLC in the US. An EIN, a nine-digit number that acts as a company’s tax identification number, is issued by the Internal Revenue Service (IRS).
Even if your LLC doesn’t have employees, an EIN must open a business bank account, file tax returns, hire employees, and do other business activities.
The following are the processes to acquire an EIN for your LLC:
1. Determine Eligibility
Your LLC must have a valid Taxpayer Identification Number (TIN) to apply for an EIN. It can be your Social Security Number (SSN) if you’re a single-member LLC or the SSNs of all members if you’re a multi-member LLC. If you don’t have a TIN, you must apply for one before obtaining an EIN.
2. Choose Your Application Method
There are two ways to obtain an EIN for your LLC: through the IRS or online on the IRS website. To obtain an EIN through the IRS, you can fill out Form SS-4 and submit it by mail, fax, or phone.
Typically, the application procedure takes four to six weeks.
3. Complete the Application
The application process will require you to provide information about your LLC, such as its legal name, business purpose, and the names and SSNs of all members. If you’re applying online, you’ll need to complete the application in one session, as there’s no option to save and return it later.
4. Receive Your EIN
The IRS will assign a unique EIN to your LLC once your application has been completed and accepted. You should receive your EIN immediately if you apply online and by mail or fax within four weeks.
File Your LLC’s Tax Return
According to the IRS, over 4.2 million partnerships and LLCs filed tax returns in 2019.
Here are the steps for filing taxes for your LLC
1. Determine the Appropriate Tax Form
LLCs must file their tax returns using the appropriate IRS tax form based on their tax classification. For example, an LLC taxed as a partnership must file Form 1065, U.S. Return of Partnership Income.
LLCs subject to corporate taxation have two options: Form 1120, U.S. Corporation Income Tax Return, or Form the 1120S, S Corporation Income Tax Return.
2. Gather all Necessary Information
Before you start filling out your tax form, you must gather all the necessary information and documents, including financial records, tax identification numbers, and business expenses.
3. Complete the Tax Form
Follow the instructions provided with the tax form to report all income, deductions, and credits accurately. Schedule K-1, which details each partner’s portion of the LLC’s income, deductions, and credits, may also be required for LLCs taxed as partnerships.
4. File the Tax Form
The filing deadline for LLCs taxed as partnerships is March 15th, while the corporation deadline is April 15th. If you require an extension, complete Form 7004 and request an additional six months to file.
5. Pay Taxes Owed
If your LLC owes taxes, you can pay them online, by mail, or through an electronic funds withdrawal. Be sure to pay by the deadline to avoid penalties and interest.
Maintaining correct records every year will make filing taxes in the future simpler. LLCs should also keep copies of all tax returns, receipts, and invoices for all business expenses.
Deadlines for Tax Filing and the Consequences of Late or Non-Filing
According to the Small Business Administration, tax compliance is a top challenge for small businesses. The IRS estimates that small businesses collectively underreport their income by billions yearly. Be confident, though; with the correct information and resources, LLC tax filing may be a snap with the correct information and resources.
The filing deadlines for LLC tax returns depend on the LLC’s tax classification and the calendar year it operates.
The deadlines for tax filing for LLCs in 2023 are as follows
- March 15, 2023: Deadline for filing Form 1065 (Partnership tax return) or requesting an extension.
- April 18, 2023: Deadline for filing Form 1120S (S Corporation tax return) or requesting an extension. Due to the Emancipation Day holiday in Washington, D.C., this deadline has been postponed from the typical April 15th deadline.
- September 15, 2023: Deadline for filing the extended Form 1065 (Partnership tax return).
- October 16 is the deadline for filing the extended Form 1120S (S Corporation tax return).
It’s important to file your tax return on time, as there are consequences for late filing or non-filing. LLCs that fail to file their tax returns by the deadline may be subject to penalties, which can include:
- Late filing penalty: This penalty is assessed if the LLC fails to file its tax return by the due date or extended due date. For each month or portion of a month the return is late, there is typically a 5% of unpaid tax penalty, with a maximum penalty of 25% of the unpaid tax.
- A late payment penalty is assessed if the LLC fails to pay the taxes owed by the due date. For each month or portion of a month that the tax is not paid, a penalty of 0.5% of the outstanding tax is typically assessed, with a maximum penalty of 25% of the unpaid tax.
- Interest charges: If the LLC fails to pay the taxes owed by the due date, interest will accrue on the unpaid tax at the current rate set by the IRS. The interest rate is typically calculated based on the federal short-term rate plus 3 percentage points.
- In extreme cases, failure to file or pay taxes can lead to legal action, including liens on the LLC’s assets or even seizure of property.
To avoid these penalties, file your LLC tax return on time and pay any taxes payable by the deadline.
If you need more time to file your tax return, you can request an extension using Form 7004, which will provide you with an extra six months.
You must still pay any taxes owing by the original date to avoid fines and interest costs.
Wrapping it Up
Correctly filing your LLC taxes is crucial to maintaining legal compliance and avoiding penalties. It’s important to determine your LLC’s tax classification, obtain an EIN, gather necessary information and documents, choose the method of taxation that works best for your business, and file your tax return on time.
Monitoring your LLC’s tax obligations throughout the year can help you avoid common filing errors and stay organized.
If you need assistance filing taxes for your LLC, consider consulting a tax professional or using reputable tax preparation software. The IRS website also offers resources and information on tax obligations for LLCs.
Putting forth the effort to file your LLC’s taxes appropriately will save you time, money, and legal issues in the long run.
