Figure out the taxes you are paying
When you prepare your LLC Operating Agreement or file articles of incorporation with your state to start up your LLC, unless you take a further step with the IRS to select corporate taxation, you are selecting pass-through taxation. This means that if you are starting an LLC on your own, then your LLC is taxed as a sole proprietorship. If you are starting an LLC with at least one other person, however, you pay taxes as a partnership.
You cannot, however, decide on your own to file your LLC taxes in a different form. To opt into paying corporate taxes, an LLC is required to petition the IRS. If you petition the IRS to change the tax status of your LLC, you have to wait until your request is approved. The IRS can issue penalties for using the wrong tax status. These penalties vary based on the difference between the taxes you actually paid and the taxes you should have paid.
If you are unsure which type of tax treatment to select for your LLC, reach out to a Rocket Lawyer network attorney for affordable legal advice.
Remember quarterly estimated taxes and self-employment taxes apply
When you are preparing for your LLC taxes, make sure that you account for quarterly estimated taxes and self-employment taxes. Both of these apply for most small business owners and entrepreneurs. If your LLC files taxes as a corporation, you may not have to pay self-employment taxes depending on how you are paid.
Self-employment tax for LLC owners is calculated at the same rate as sole proprietorship and partnership self-employment taxes. Remember that even if you have employees and have to calculate payroll taxes, you still have to pay self-employment taxes for yourself.
Your quarterly estimated taxes are based on what you anticipate bringing in as taxable income for your LLC. Ideally, the payments should be even, meaning that if you're going to owe a total of $4,000 in taxes on your LLC for the entire year, the IRS wants you to pay $1,000 for each of the business quarters. Underpaying can lead to penalties. Figuring out what you owe in estimated taxes can be difficult for both new and experienced business owners, but it is important to do so to avoid unnecessary penalties and interest.
Find out whether you owe taxes in more than one state
When paying your taxes, remember that your federal income and self-employment taxes don't include state income tax, or sales tax. These taxes are governed by the individual state and local governments. The one thing you have to remember is that you could wind up being liable for taxes in two or more states.
This can happen if you operate in more than one state or when you incorporate your LLC in a state other than the one in which your LLC is actually located. As an individual, you file your taxes in the state where you are a resident. But since your LLC is incorporated in another state, you may have to pay taxes there as well.
Get matched with a tax pro via Rocket Tax™ to save time and money filling your tax returns.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
