The most common thing I see people get wrong when they are starting a business, is paying taxes.
It is very important to understand how you pay taxes as an LLC because the IRS will certainly come calling if you do it wrong.
The first thing to understand is that an LLC is as pass-through entity.
What does that mean?
It means that the IRS ignores the fact that an LLC exists and if the business has one owner they tax you like a sole proprietorship or if there is more than one owner they tax you like a partnership. When the LLC was invented, the IRS and Congress thought it simpler to do this instead of creating a whole new tax scheme.
This has no impact on the liability protections provided by your LLC because that is governed by state law. The IRS has no say in that.
They call these pass-through entities because company profits pass through the LLC and straight onto the 1040 tax returns of the owners.
Annual Tax Returns for an LLC Owner
If your LLC only has one owner (called Members in an LLC), then it is pretty simple. There is no LLC Tax Return to file. Your profits for the year are reported using a Schedule C attached to your 1040 and you are going to pay income tax and payroll taxes on profits (Revenue – Deductible Expenses).
If there is more than one owner, then it is slightly more complicated. You have to follow the partnership tax rules which means the company will have to file an informational tax form 1065 and then pass on the appropriate amount of tax obligation to the owners through a K-1 schedule.
Make Sure to Pay Your Estimated Quarterly Taxes
In addition to the yearly filings, each owner is going to have to file what are called estimated quarterly taxes. So, 4 times a year you have to send ¼ of what you expect to pay in taxes to the IRS and the state government .
Think about it, when you have a normal job they always deduct taxes out of your paycheck, right? As a business owner there is nobody to do that so it is your responsibility to send the money in. Especially in your first year you should be setting aside around 25%-30% of your profits to pay your taxes. You don’t want to shortchange the tax man.
Taxes get complicated quick and are something a lot of new business owners mess up. This information should get you started but keep learning and make sure you are paying all your taxes because they will come for you. If it is too much for you, make sure to seek the help of a qualified small business CPA.