LLC TAX RETURNS
Are you using the best strategy to calculate your quarterly taxes for your Limited Liability Corporation?
llc tax returns
Creating a Limited Liability Company may be easy, but it’s important to have a basic understanding about what this entity choice entails. Not having a grip on compliance needs could cost you in the long run, so getting on top of this at the beginning is easier and more cost effective than figuring it out later. Luckily for you, Savvy & Suite has a deep understanding about the inner workings of an LLC, from corporate compliance needs to how the business’ performance impacts your personal income tax return.
Before you begin, it may be important for liability purposes to craft an operating agreement, especially if you’re involved in a business venture with multiple individuals. This process strictly outlines how the business is governed, which could come into play down the road. Without a carefully drafted operating agreement, business owners are leaving open avenues for potential discord or even additional liability, which is what makes this document so important. It may not seem like much, but having a strong operating agreement on the front end can save some headaches on the back end. Some state governments even require an operating agreement on file on their end to certify that business in their state, so this document even plays into compliance in unexpected ways. Don’t worry – we’ll make sense of the rules so you don’t have to, keeping your LLC on the straight and narrow from the get-go.
Do you know how to file LLC taxes? This question partially leads you astray, as one would think that you pay tax at the LLC level. However, because an LLC is a flow-through entity, no tax is paid at the entity level. In other words, your LLC tax return should have no tax being paid at the federal level. How does an LLC pay taxes then? The tax paid on LLC business profits occurs at the individual level, with each member picking up their share of the income and reporting it on their personal income tax return. Once all is said and done, these members will pay tax on that business profit based on their personal income tax rates, which is calculated using a sum total of all their income and deductions, not just their business income. As such, there is really no such things as LLC income taxes, solely reporting forms to aid in the disclosure of business income or loss.
As far as compliance, there are really only a few ways to disclose your LLC income figures to the Internal Revenue Service. In most cases, an LLC elects to be taxed as a partnership, which entails no changes to the above hypothetical. Instead, this just gives guidance about which tax rules the LLC must follow, not limited to the correct form to use. Partnerships file the Form 1065 compliance form, which once again solely discloses a business’ performance, including both an income statement and a balance sheet. The due date for these compliance forms is March 15, which serves as the de facto LLC taxes due date. There are also corresponding forms at the state level, but each state has different reporting requirements and deadlines for their forms, complicating the matter just a bit.
In other cases, however, compliance is much easier. If your LLC has only one single member, your entity can disclose its business profits straight on your personal income tax form without the added hassle of a corporate income tax form. This offers you the liability protection of an LLC without creating more tax compliance work. This functions similarly to the above, but it’s easier to see just how your LLC’s performance impacts your personal income tax, as it’s all right there in the same form. You are not reliant on waiting on a Schedule K-1 from your LLC taxed as a partnership to aid in the preparation in your tax return.
Regardless of which way your LLC is reported, you are responsible for the tax on that income. However, because nothing is paid at the entity level, the onus is on you personally to account for this income and associated tax. It’s a good strategy to have a calculation that devises LLC quarterly taxes as a result of that income, since there’s no withholding mechanism that allows you to pay as you go throughout the year (similar to how your wages work). These quarterly taxes are additional payments straight to the authorities that act as a prepayment of sorts; you are acknowledging that you have income in that quarter that was untaxed at the time and you’re trying to pay the tax on that income through a quarterly installment. This is a vital planning strategy that hopefully will result in less surprise come Tax Day. Without making quarterly installments, you could be left with a large tax bill with penalties and interest added. Instead, let Savvy & Suite work through an estimate calculation, ensuring that you are paid in based on your income each quarter.
One area of uncertainty amongst LLC owners is how self-employment tax works. This is a bit of a gray area, but let’s say that you own and operate a single member LLC that is subject to self-employment taxes. Traditionally, a business pays employees through wages; these wages are taxed via employment taxes, with the employee paying a portion and the employer paying a portion. However, LLCs often do not pay wages (outflows of cash to members are deemed “distributions” and are not taxed), these funds are not subject to payroll/employment taxes at the time of disbursement. The government doesn’t approve of this, so there’s a way to capture employment taxes on your personal income tax return through self-employment tax, which is basically where you catch up employment taxes not paid through wages and report the tax due on your personal income tax return.
There are lots of moving parts in LLCs, which is why having a respected advisor in the area is so important. Having a conversation with Savvy & Suite about all that LLCs entail is a great way to make sure your business is up to snuff in the tax arena. Proper planning can save headaches and big tax bills from happening. Let our professionals at Savvy & Suite fulfill all your compliance and planning needs.