How to Calculate LLC Taxes? (2024 Business Guide)
Calculating LLC taxes is one of the common challenges that I got to witness when working on forming new businesses.
From my experience in business formation, calculating taxes is something that new entrepreneurs usually have doubts about.
Based on extensive research and consultation with our legal experts, we have gathered the essential information you need to easily calculate LLC taxes, and avoid additional tax-related stress.
Quick Summary
- To calculate LLC taxes, you need to calculate your gross income and include the effective tax rate, deductions, and savings.
- You can use online calculators to get the precise amount and calculate it faster.
- Based on IRS guidelines, self-employment taxes for LLCs include Social Security and Medicare, totaling a 15.3% rate on the first $147,000 in 2024.
- In my view, multi-member LLCs can elect to be treated as C or S-Corps for taxation purposes.
How to Calculate LLC Taxes?
Understanding LLC taxes is easier than it seems. Follow these simple guidelines to accurately calculate taxes for your business.
"Each business entity type carries specific tax implications, and for numerous business proprietors, limited liability companies (LLCs) present distinct tax advantages when compared to other corporate structures."
- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions
Calculating Self Employment Taxes
From my experience running an LLC, calculating self-employment taxes involves considering Social Security and Medicare taxes, which make up the first $147,000 of your taxes.
These taxes are estimated at a combined rate of 15.3% for the 2023 tax year, according to the Internal Revenue Service (IRS) guidelines.
While income taxes may have a higher rate, self-employment taxes often account for a significant portion of out-of-pocket business expenses.
Self-employment taxes consist of the Social Security tax and the Medicare tax.
The Social Security tax is 12.4% on income up to $128,400 in 2024, with both employee and employer contributions.
The Medicare tax is 2.9% on all income and is paid by the employee only. Understanding and properly calculating these taxes is crucial for self-employed individuals.
Calculating Federal Income Taxes
When calculating federal income taxes, it's important to start with your Adjusted Gross Income (AGI), which serves as the baseline for state and federal income tax computations.
To determine your AGI, subtract your self-employed net earnings from any Self-Employment taxes paid.
For our LLC, the IRS offered us deductions such as the standard deduction and Section 199A (also known as QBI), which saved us money.
Additionally, long-term capital gains are taxed at lower rates than ordinary income, with rates of 0%, 15%, or 20% based on your taxable income and filing status, as outlined by the Internal Revenue Service (IRS).
On the other hand, short-term capital gains are taxed as ordinary income at your marginal income tax rate. Understanding these factors is essential for accurately calculating income tax liabilities [1].
Calculating The Estimated Income Tax
To calculate estimated income tax, determine if you'll owe $1,000 or more in business income taxes for the year. If so, make four quarterly payments throughout the year, one for each calendar quarter, as required by the IRS.
The due dates are April 15, June 15, September 15, and January 15.
If you don't make your estimated business tax payments on time, you may be charged interest and penalties.
To calculate your estimated business taxes, you'll need to estimate your income for the year and determine how much tax you'll owe on that income.
You can use the IRS' Estimated Tax Worksheet to help you calculate your estimated corporate income taxes.
How is an LLC Taxed?
An LLC is taxed as a pass-through entity, meaning it doesn't pay business taxes on its income. Instead, profits or losses are passed on to the owners, who report them on their tax returns.
Single Member LLC Taxation
The IRS considers a single-member LLC to be a disregarded entity for federal income tax purposes by default.
As a single owner of an LLC, you'll submit business income and costs to Form 1040, Schedule C, as a sole proprietor.
Multi-Member LLC Taxation
For federal income tax purposes, multi-member LLCs are considered pass-through entities.
For our company. each member paid taxes on the LLC's revenue in proportion to their ownership stake in the company, thus the LLC tax rate was determined by each member's tax bracket.
Most states have their own Form 1065 and K-1 forms, which are similar to Form 1065 and Schedule K-1 [2].
C Corporation Taxation
Your LLC can elect to be a C corporation by submitting Form 8832 to the IRS (your state may also demand additional forms for a tax status change) [3].
If you make this choice, your LLC will be subject to the 21% federal corporate tax rate. You'll file taxes using Form 1120, which is the form used for all US corporations.
C-corporations are subject to double taxation. This means that the company pays taxes on its profits, and then the shareholders—the owners of the C-corp—pay income taxes on their dividends and capital gains.
To avoid this, we recommend choosing to have your LLCs taxed as S-corporations.
S Corporation Taxation
To acquire the S-corporation tax status, submit Form 2553 to the IRS. An S-Corp is taxed like a pass-through entity, similar to an LLC, except that it is not taxed on salary or distributions from the company.
To submit taxes for an S-Corp, complete and file Form 1120S.
A corporation's business income is taxed differently than an LLC's, and corporations are entitled to greater deductions and tax breaks.
Additional LLC Taxes
From our experience as LLC owners, there are a variety of other taxes that an LLC might be liable for, depending on its location and industry.
LLC Payroll Taxes
To manage payroll taxes, LLCs with employees need to collect and pay various taxes, including unemployment taxes, social security contributions, and Medicare payments.
Both employers and employees share the cost of Social Security and Medicare, known as FICA charges.
The reporting of these taxes is done using IRS Form 940 for unemployment tax obligations and Form 941 for other payroll taxes.
LLC Self-Employment Taxes
The overall self-employment tax rate is 15.3%, with each portion having a separate name:
- $0 to $147,000: 12.4% social security tax on earnings.
- On all earnings, you'll have to pay the 2.9% Medicare tax.
- The 0.9% Medicare surtax applies to wages above $200,000.
LLC Sales Taxes
If you're a sole proprietorship or alone LLC, and if you sell taxable items or services, you'll need to collect sales tax from your clients and submit it to the state or local tax authority.
We recommend contacting an accountant or tax specialist to find out more about the specific taxes your LLC may be responsible for.
LLC Tax Tips for Business Owners
Drawing from my expert experience, here are some LLC tax tips that business owners can consider to lessen the tax burden and make tax filing less time-consuming.
The LLC tax filing tips include:
- Take advantage of any income tax deductions and tax credits that your LLC is entitled to.
- Keep track of income tax due dates in advance, and pay them on time.
- Hire a certified public accountant or tax lawyer to assist you with your corporate income taxes.
- If you intend to operate your business as an LLC, talk with your CPA or tax advisor about the advantages of choosing corporate status for your LLC.
- Understand your state and local tax laws.
FAQs
How Much Should I Set Aside for Taxes LLC?
The appropriate sum to set aside for LLC taxes varies based on factors like income, deductions, and filing status, influencing your overall tax liability.
How Does an LLC Avoid Paying Taxes?
An LLC avoids paying taxes by utilizing a pass-through tax system. The LLC itself is not taxed on its income.
Instead, the income is passed through to the individual members, who are responsible for reporting it on their personal tax returns.
Are LLCs Taxed Differently Than Other Business Entities?
LLCs are taxed differently. They pass income to owners' personal tax returns, with self-employment tax on self-employment income.
They can deduct business expenses. Use an LLC tax calculator or consult a tax professional for accurate tax calculations.
References:
- https://www.irs.gov/taxtopics/tc554
- https://www.irs.gov/pub/irs-pdf/f1065.pdf
- https://www.irs.gov/forms-pubs/about-form-8832
