Are you operating one single “owner” company or a member limited liability company? Thinking of making some multi-member LLC? In both ways, you are likely to face questions regarding how the business is or would be, taxed.
Below is what you have to know about LLC business taxes.
The Basic Knowledge of Tax Law for the LLCs
Firstly, it is crucial to know how the LLC is designed according to the tax law. Just opposite to any corporation, the LLC is not typically taxed as some individual business entity. Rather, every profit and loss "passes through" a corporation to all members of LLC business taxes. Members of the LLC also report losses and profits on the personal federal taxes, same as owners of some partnership. A business doesn’t pay the federal income tax, though a few states actually apply the annual taxes to the LLCs.
Relying on the members in the LLC, IRS would treat the business just like a partnership or separate proprietorship. Though, some LLCs are classified as well as taxed like corporations by the federal tax law automatically. The LLCs do not classify automatically as companies can select the business entity classifications. Hence, for doing so, the LLC should file the Form 8832.
Income Taxes for Sole Member LLCs
In case you run a sole member LLC, the IRS would treat the business as the separate proprietorship (it is so unless you actually elect to be company). It means that LLC doesn’t pay taxes. Rather, you also report all losses and profits of your LLC on the personal income tax on the Schedule C & file this with the form 1040 tax return.
Income Tax for Multi-Member LLC
In case the business has more than one owner then the IRS would treat such business as the partnership unless you actually elect to be taxed like a company. Once again, your business does not pay any taxes, rather every owner is typically taxed on the share of profits through the personal tax return (along with the Schedule E). How the multi-member LLCs share profits is explained in the LLC Operating Agreement. Though not needed by the law in many states, the agreement designs the LLC financial decisions that include how losses and profits are distributed.
You will also have to file the Form 1065. This form assists IRS in determining that all members are reporting their income correctly or not. The LLCs also should give all partners the Schedule K-1. It shows all members’ shares of the partnership income, deductions, and credits. All members then report it on the individual Form 1040 & Schedule E. In case your LLC is some company then it must file the Form 1120.
In case the LLC splits losses and profits in a manner which does not match every member’s specified percentage interests then you would have to make a request for a “particular allocation” from IRS. It is something that you must talk about with your accountant or tax preparer.
Paying Your Estimated Taxes
The LLC members and owners are actually self-employed. Hence, they are not subject to the tax withholding. Also, every member should pay the estimated taxes as well as self-employment taxes (that is Social Security & Medicare) quarterly to IRS & the state tax office too.
In case you get the multi-member LLC along with the owner who isn’t involved actively in that LLC (that is they have invested in that business but do not participate through giving services and making of management decisions). Hence, the owner might be exempted from giving the self-employment taxes. The accountant or tax preparer could tell you in case the business fulfills the particular needs of the exemption.
Sales Tax
The sales tax is a point-of-purchase tax that is enforced by the state & local governments. A purchaser pays this and, like some small businessman, you typically assess this, collect this and then pass this on to some suitable authorities within some prescribed time. The laws and rates are different for all states that quite often lead to a great confusion. It happens so especially in case you are going to sell to the clients in different states.
