10 Facts About LLC Taxes You Need to See 2022 – How LLCs Pay Taxes

Taxes

Taxes are unavoidable when running a business. The variable tax structure of an LLC makes it a standard business structure for anyone running a business. The tax advantages of this business entity mean thousands of people are forming LLC every day. However, there are still other essential facts about LLC taxing you must know before forming an LLC. They range from differences in taxation between single-member and multi-member LLCs to how limited liability owners and LLC members claim business profits or losses, 

This article clarifies some of the critical but misunderstood aspects of LLC taxation at the state and federal levels. If you want to start a limited liability company (LLC), here are the top ten facts about LLC taxation.

LLC

LLCs Don’t File Corporate Tax Returns on Business Income

The most important fact to know about LLC taxation is the benefits of not filing corporate tax returns[1]. In most cases, the state exempts limited liability companies from their corporate income taxes since they are considered a pass-through entities. This means an LLC owner must report business income, profits, and losses on their returns instead of a separate return for the entity.

Unlike other corporations, these tax benefits mean LLC avoids double taxation. Double taxation entails taxing the same money twice, first on the corporate level and filing individual files. LLCs are not responsible for filing corporate tax returns due to the tax benefits offered by LLCs.

Single-Member LLCs are Taxed Like Sole Propretorship

A single-member LLC  is similar to a sole proprietorship when it comes to taxation. Every owner must claim the net LLC’s income using a Schedule C IRS form and transfer that information to form 1040 when filing personal tax returns. This helps single-member[2] LLCs retain the simple taxation as sole proprietorships while enjoying the limited liability protection. This is one of the advantages of single-member LLCs over other corporations

LLC Owners can Decide to Split Up The Shared Tax Burden

If you form an LLC, you can decide to split up the tax burden between LLC members as part of the tax deductions. Talk to your members or owners about how much they are accountable to ensure everyone is content with the shared tax burden. Most people choose to split the net income equally among the LLC owners. However, if some owners are extra active in business operations over others or contribute more capital to the business, they may have a say in shared tax burdens. You can determine the individual’s portion of the tax liability depending on your contribution to the business.

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Non-US Citizens Need a TIN

Anyone seeking to establish an LLC while coming from another country must get a taxpayer identification number (TIN). The TIN substitutes the social security number, meaning you can pay taxes on your LLC’s income without it. Therefore, fill out tax forms W-7 and file with the IRS to get the TIN. You can establish your alien identity or status by filling out the W-7 form when forming an LLC.

An LLC Can Elect C Corporation or S Corporation Taxation to Pay Federal Income Taxes

When forming an LLC, you can choose between electing a C Corp or S Corporation for taxation. For example, you can have your corporation taxed like a sole proprietorship or general partnership. In this case, an owner can elect to have their LLC taxed as a C Corporation or S Corporation. C Corps comes with double taxation while S Corps have more operational intricacies since they limit the number of shareholders. An LLC can only elect an S Corp taxation if it doesn’t have any foreign owners. The decision to elect an S corporation or C corporation depends on whether the LLC members and owners would benefit from corporation-style taxes, other than the partnership-style taxation of LLCs.

Multi-Member LLCs Are Taxed Like Partnerships

Compared to single-member show LLCs, a multi-member LLC is taxed like general partnerships. This is where the net income passes through the business entity to the owners for tax purposes. The owner then pays their share of taxes to the IRS. Hence,multi-member LLCs only submit an information report form 1065 to the internal revenue service (IRS) instead of filing a business tax return. The tax form 1065 describes the total tax bill of a company for the IRS to calculate how much tax they expect from individual members.

Most LLCs Need to Acquire an EIN 

The IRS demands the employer identification number when forming an LLC. Hence, every business uses an employer identification number (EIN). If your business has employees, you must get the EIN. However, you won’t need to get an EIN for your LLC if you don’t have employees.  

Some states require getting EINs before opening a bank account. You can quickly obtain an EIN  by filling out the EIN assistant application from the IRS website. After finishing the application, you will receive a confirmation notice, allowing you to open a business bank account and apply for a business license or permit. However, you must wait for the IRS to enter your EIN into the permanent record to use for electronic tax return filing or payments.

LLC Owners Must Pay Estimated Taxes 

The IRS considers LLC owners self-employed, and they must pay quarterly estimated self-employment taxes, including Medicare and Social Security. Because they are self-employed, LLC owners must pay the estimated taxes to the IRS. According to IRS guidelines, each owner must pay at least 90% of their total tax bill through estimated taxes.

In essence, you must pat the estimated state taxes at appropriate times throughout the year if the state taxes your limited liability company. Failing to do so can result in a tax penalty. In most cases, the estimated tax payment dates fall around April 15, June 17m September 16, and January 15.

Limited Liability Company (LLC) Owners Pay Self Employment Tax 

When forming an LLC, the owners are not considered employees of the company. Instead, the IRS regards LLC owners are self-employed, thus required to pay a self-employment tax[3]. Hence, you are responsible for both the employer and employee portions of social security(12.4%) and Medicare (2.9%). In essence, you must be aware of the self-employment tax when forming an LLC. It can be as much as 15.3% of the net income when compiling personal and business budgets. However, you can benefit from paying a lower medical portion on your income tax return when you reach the $128 400 social security taxation threshold.

You Can’t Avoid to Pay Taxes by Forming an LLC in Another State

Some people think forming an LLC in another state gives them protection over tax payment. For example, some avoid tax expenses by forming limited liability companies in Nevada and Wyoming due to the tax benefits. However, this is not the case.  You will still pay business transaction costs in your state even after registering your company in another state.

Hence, you will still be required to pay taxes regardless of where you form your LLC. For example, you will pay taxes for your Nebraska-based business transaction even when forming your LLC in Nevada. of the State. Therefore, you can’t avoid taxes by moving to another state. Instead, you can end up with more compliance responsibilities.

Conclusion

Taxation for LLCs is more straightforward than other corporations. You get to enjoy several tax benefits while also avoiding paying corporate taxes. However, your income will be taxed either way. Therefore, ensure you understand the tax implications and exact procedures before forming a limited liability company. These 10 LLC facts about taxation can help you avoid getting in trouble with the IRS. While you can’t avoid taxes when running an LLC, you can prepare for them. With the information in this article, you will have enough baseline knowledge to talk with your tax professional. If you need more information on  LLC taxes, visit the IRS website for quick help.

Frequently Asked Questions (FAQs)

Do you need to pay sales taxes?

Some local and state governments require LLCs to pay sales tax just like any other business. These point-of-purchase taxes open apply when people pay for goods and services. However, you must know the sales tax laws in your state when forming an LLC.

What are the LLC tax brackets?

The LLC tax rates for individual owners pass through to federal income tax purposes. However, the federal corporate tax rate for your first $78,000 of income is lower than personal tax return rates. Check with your tax advisor or a lawyer to see if you could benefit from opting into corporate franchise tax and not paying federal income taxes.

Who can be exempt from paying business tax?

Some owners of multi-member LLCs who aren’t actively managing the organization or providing services can be exempt from paying corporate tax. The IRS can consider these people exempt from taxes but only in some instances.

Must an LLC create an operating agreement?

Some states require drawing up the operating agreement to structure financial decisions. An LLC operating agreement allows you to avoid paperwork headaches and disagreements

Do LLC owners pay estimated taxes?

The IRS considers LLC owners self-employed, and they must pay quarterly estimated self-employment taxes

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  2. ‌Kotis, L. (n.d.). YOUR HEIRS MAY FIND YOUR SINGLE MEMBER LLC TAXING. [online] Available at: https://www.ipbtax.com/media/publication/430_Wealth%20Strategies_%20Single%20member%20LLC%20Article.pdf [Accessed 30 Oct. 2021].
  3. ‌www.proquest.com. (n.d.). IRS pursuing self-employment taxes from LLC members – ProQuest. [online] Available at: https://www.proquest.com/openview/221fa139ba3bec5822d09b8f047bce11/1.pdf?pq-origsite=gscholar&cbl=41065 [Accessed 30 Oct. 2021].