If you have formed a limited liability company, our corporation lawyer may be able to help you sort through the various issues related to taxation. LLCs are not recognized as separate tax entities like corporations are. Instead, LLCs are recognized as pass-through entities by the IRS, as are partnerships and sole proprietorships. This means that all of the losses and profits made by your LLC go through the business and become the tax responsibility of you as well as the other LLC members. LLCs do not have to pay federal taxes, but they occasionally have to pay state taxes where they reside.
The IRS sees LLCs as sole proprietorships, according to the number of people who make up your partnership. If you are the sole owner of your business, it is viewed as a sole proprietorship for tax purposes. However, because LLCs are not recognized by the IRS as tax-paying entities, they do not file tax returns. Instead, you have to report all of the profits and losses you made from the LLC when you file your 1040 tax return. If you leave money in the company account at the end of the year to cover business expenses, such as new equipment, you do have to pay taxes on that amount.
Because the IRS sees your LLC as a sole proprietor when you are the only operator, it is viewed as a partnership when you work with others. One-member and co-owned LLCs do not have to file taxes on their income but co-owned LLCs also pass taxes through to the partners that run them. Profits and losses are divided into shares known to the IRS as distributive shares. Distributive shares are arranged when you first form an LLC and should always be kept in writing. Incorporation lawyers may be able to help you draft an agreement that is equitable between partnership members. In most scenarios, each member of an LLC shares a part of the business, determined by the amount he invested. If you own 90 percent of an LLC, you are entitled to 90 percent of the profits in most cases. You can still divide the profits your LLC makes in a different way if you choose to, but this is the standard equitable division. The IRS calls this division special allocation, and it can be beneficial under many different circumstances. Whether you choose traditional or special allocation, you are treated as if every member in your LLC receives the same share. Each person is taxed based on the entire traditional distributive share he would receive, even if he received more or less money in actuality. This rule is necessary because it ensures that all LLC members are taxed on the money they are entitled to, even if they left some behind in the business. The 1065 form provided by the IRS must be filed each year, even though your LLC itself is not required to pay taxes. This practice ensures that the information you and your LLC partners are reporting to the IRS on your personal tax return forms is accurate. If there is a significant discrepancy, the IRS can investigate. The Schedule-1 form is required of each member as it breaks down the profits and losses from your individual 1040 forms. You must also attach a Schedule E form to your 1040 tax form.
Consider Electing Corporate Taxation
Keeping a large percentage of your earnings in your LLC can result in tax complications. If you plan to do so, consider asking the IRS to treat your LLC as a corporation for tax purposes. You can file the IRS Form 8832, also known as the Entity Classification Election, which lets you choose how you want your business to be treated. Your corporate income tax rates as a corporation only apply to the first $75,000 of the income your company earns. These are typically lower than LLC tax rates, which means that you can save a good deal of money over time. If you ask to be taxed as a corporation, you can receive tax fringe benefits, such as the ability to offer stock options to your employees. Incorporation lawyers can help you decide whether asking to be taxed as a corporation instead of an LLC is the right decision for your business.
Estimating and Paying Income Taxes
LLC members are viewed as self-employed workers by the IRS, and they do not have taxes withheld from their monthly paychecks. If you are a member of an LLC, you are responsible for figuring out how much money you will owe in taxes and making quarterly payments to the IRS.
The IRS does not see LLC members as traditional corporate employees, so they do not have Social Security or Medicare withheld from their checks. This is important to remember when planning for your retirement. Most LLC owners have to pay taxes at the same rate as self-employed individuals. Most owners who work within the LLC fall into this tax rate, but if you are not an active member in the LLC, you may not be required to pay self-employment taxes. This tax area is somewhat vague, so it is important to be prepared to pay taxes on your LLC profits at the very least. If you are an owner in an LLC and are not required to pay self-employment taxes, your co-owners may still have to file on Schedule SE. LLC owners generally pay twice as much in self-employment taxes as other employees, but they can deduct half of their taxable income. The self-employment tax rate for owners of an LLC is 15.3 percent on the first $118,500 in profits for the year. You do not have to pay self-employment taxes on money you spend for your business. These write offs apply to expenses such as computer equipment, advertising, marketing and travel expenses directly related to your business.
State Taxes and Fees
In general, you have to pay state taxes according to the federal government tax standards. Depending on the state in which you do business, you may or may not pay a state tax. For example, California requires a tax on LLCs that earn over $250,000 each year in addition to your personal federal income taxes. There are annual fees that vary between states, and some pay no regard to income. California’s franchise taxes are significantly higher than the national standard of $100. LLCs are required to pay a significantly higher tax of $800, while many states do not require them to pay taxes at all. You should find out whether you are required to pay state taxes before making the decision to file as an LLC. Despite the federal benefits, some states may have cost-prohibitive tax policies that make LLC status a financially unsound decision. In other states, it could save your business thousands of dollars each year in reduced federal income taxes and no state taxes. For more information, contact a lawyer in your area to determine your state’s taxation requirements about LLCs.
Contact a Corporation Lawyer
Call the Sutton Law Center at (775) 824-0300 to speak with a corporation lawyer who understands LLCs.