Registering and starting a business legally is not enough. As a small business owner, you are also liable to pay taxes on your company profits, depending on the business structure you choose.
You need to understand and meet the federal, state, and local tax obligations of your business. Paying taxes on time will help you ensure that your business stays legally compliant. It will save you from tax penalties and legal hassles.
However, it’s your business structure and location that will influence which taxes your business has to pay. Many small business owners choose to form Limited Liability Companies (LLCs) because of the flexibility they offer in taxation and management structure.
In this article, we’ll discuss everything you need to know about the tax liabilities of your LLC and how to file your business taxes properly. Before that, let’s learn a bit more about LLCs and why business owners choose this business structure in the first place.
Things to Know About Forming a Limited Liability Company (LLC)
A Limited Liability Company (LLC) is one of the most popular entity types that small business owners choose. Forming an LLC allows you to enjoy the benefits of both the Corporation and Partnership business structures.
Another major reason behind choosing LLCs is the flexibility it offers in taxation and management structure.
This business structure limits your liability as a business owner and helps you protect your personal assets. Your personal assets such as your house, vehicles, personal bank accounts, and other personal investments won’t be at risk if your LLC faces bankruptcy or lawsuits.
You can form an LLC as a solopreneur as well as in partnership with one or more people. There is no limit on the number of members an LLC can have. However, LLC members cannot be banks, insurance companies, or other financial institutions.
You need to file Articles of Organization with the Secretary of the State’s office in the state where you want to form an LLC. You should also create an LLC Operating Agreement to define the roles and responsibilities of each LLC member.
You will also have to file for an Employer Identification Number (EIN)/Tax ID with the IRS. This is a nine-digit number issued to LLCs so that they can hire employees, operate a business, and file income tax returns.
You can either do the state and federal filings yourself or use a service such as GovDocFiling to do all of the legal paperwork for you. They offer expedited federal and state filing, five essential legal documents that you will need, and a business start-up guide.
How Does LLC Taxation Work?
Your LLC taxes will be calculated depending on the type of LLC you form.
If you’re operating an LLC as a solopreneur, it will be considered a Single-Member LLC. You will have to pay taxes as a Sole Proprietorship by showing the profits and losses of your company on your personal income tax return.
If you form an LLC in partnership with your spouse, some states allow your LLC to be considered and taxed as a Single-Member LLC.
If you form an LLC in partnership with one or more additional members, the LLC will be considered a Multi-Member LLC. By default, your LLC will be taxed as a Partnership, which means that the profits and losses of the company are passed on to the individual tax return of each member.
However, LLC members can choose to be taxed as a Corporation instead of being taxed as a Partnership.
For federal tax purposes, you will have to choose to either treat your LLC as a Sole Proprietorship, a Partnership, or a Corporation. Otherwise, the LLC will be disregarded as an entity separate from its owner(s).
Some of the business taxes that you may have to pay as a small business owner include:
- Income tax: This is based on the net profit, which is calculated by subtracting your business expenses from the company income. The LLC profits and losses are passed to the individual federal tax return of LLC members.
- Self-employment tax: If you’re operating a business as a solopreneur or an independent contractor, you’re considered to be self-employed.
- Employer tax: If you hire employees, you’ll be liable to pay employment taxes. You will have to withhold federal and state income taxes from the wages of your employees. Similarly, you’ll also have to withhold part of Social Security and Medicare taxes from your employees’ wages and pay a matching amount from your side.
- Excise tax: You’ll be liable to pay excise tax if you sell or manufacture some specific products, use certain types of equipment such as heavy vehicles, or run some specific types of businesses. One such business that needs to pay excise taxes is the transportation business, which uses heavy-loaded trucks.
- Sales tax: If you sell retail products, you may need to collect sales tax for the state. You should check with your state agency to see and learn how to collect and pay sales taxes.
Along with these factors, the fees and tax requirements also vary from state to state, depending on the taxes and business licenses required by the state.
Some states have an annual tax requirement for LLCs regardless of their earnings for that tax year. Whereas, other states calculate LLC taxes based on company profits.
Ready to Manage Your LLC Taxes the Right Way?
Now that you’re aware of the tax liabilities of your small business, you should ensure that you pay all of your business taxes on time.
New business owners often make the mistake of spending too much money on business operations due to which they have no money left for paying taxes. You can prevent this by streamlining the process of bookkeeping and accounting right at the onset of your business.
You should calculate the taxes you’ll have to pay and set aside your money on a monthly or quarterly basis for meeting your tax obligations.
Do you have questions about paying your LLC taxes on time? Leave them in the comments below. We’ll be happy to help you.