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Taxes are a pain. This burden can feel like it is amplified when you form an LLC.
Fortunately, this in-depth guide will explain everything you know about how LLC fees work, including tips and strategies for LLC fees.
Why LLC Fees Are So Important
Let’s start with the obvious – every LLC has to file and pay income tax.
Taxes are paid at the federal, state, and local levels, and there are a wide range of potential tax categories for which LLCs may be responsible. Examples include payroll taxes, VAT, self-taxation and more.
Failure to report, file and pay the appropriate taxes to the right agency can land your LLC in hot water. You may be subject to fines, penalties and run into other non-compliance issues.
For example, the state may not issue your LLC a good status certificate if your LLC taxes are not in order. This can prevent you from getting a loan, entering into a contract with a potential partner, securing financing from an external investor or restricting you from performing dozens of other business-related tasks.
The unique part of LLC taxation is that, unlike other business units, LLCs have flexibility in how they are taxed. Simply put, you have several options to consider.
By default, LLCs are treated as a “pass-through unit”, meaning that the LLC itself does not actually pay taxes. Instead, LLC members (owners) pay tax on their share of the profits on their individual tax returns. However, LLCs have the option of being taxed as a corporation rather than a through entity.
Each scenario has pros and cons, and the best solution really depends on the LLC in question. Whether you run a single member, multi-member LLC, which state or state you operate in, and whether you have employees or not, all are examples of factors that play a role in the best tax strategy for your LLC.
However, once you understand how LLC taxes work, it is relatively easy to find the best taxation strategy for you and your business. This will help reduce your tax burden and ensure that you remain compatible.
Here is an interesting case study on LLC taxes that shows how the right taxation strategy can save a lot of money on taxes.
The company in this particular example owns the rights to the computer software. It’s a partnership that expects to generate $ 900,000 a year with $ 300,000 in expenses, resulting in a net profit of $ 600,000 before the owners get paid.
After consulting with a CPA on the right tax strategy, they determined that it would not make sense to be taxed as a C company because the company’s net profit was too high and would ultimately result in higher taxes for the two partners. .
The CPA ultimately proposed a multiple LLC strategy where each partner would separately own their own LLC. Thereafter, these two LLCs would jointly own the original computer software company and provide each partner with the best liability protection and tax savings.
Quick tips for navigating LLC fees today
Follow these quick tips and best practices explained below to simplify your filings and save money on taxes. While it will always be in your best interest to consult with an accountant, these are reasonably easy to understand and implement, even if you are a complete beginner.
Tip # 1 – Take advantage of accounting software
The IRS and other tax agencies do not make it easy when it comes to calculating taxes. Trying to figure out how much you owe and when you owe it can feel like you are about to perform brain surgery.
Even if you manage to get everything right, it will probably take you a lot of time if you do this manually. Your time can be better spent working on other aspects of your business.
But accounting software really simplifies things for LLCs. Tools like QuickBooks help you prepare for tax time to maximize deductions.
While QuickBooks will not necessarily tell you which taxation method works best for your LLC, it does keep everything organized so you and your accountant can make that decision with confidence. You can use it to track expenses, automatically sort expenses into the right category and share reports with your accountant.
For those of you who run an LLC that is subject to VAT, QuickBooks also makes it easy to track this for you.
QuickBooks has an excellent standalone plan that is perfect for individual members. The software automatically calculates your quarterly tax estimates so you can pay your tax obligations with certainty.
They also offer advanced self-employment tax packages that include a state tax return, a federal tax return, an on-demand CPA, tax advice and more.
Self-employment plans start at $ 7.50 a month, and small business plans start at $ 12.50 a month. You can try QuickBooks for free with a 30-day trial period.
Tip # 2 – opt for C Corp taxation
Being taxed as a company can be beneficial for many different types of LLCs. Having a C-corps choice can also simplify things for you.
In terms of income tax, a C company is considered a separate entity from its owners. In this scenario, profits and losses from LLCs are not transferred to individual tax returns for each owner. Instead, LLC pays income taxes on the net profit for the year at the corporation tax rate.
After the law on tax breaks and jobs in 2017 came into force, the corporate tax rate fell from 35% to 21%.
The fixed rate of 21% is lower than four other tax rates imposed by the IRS. This makes it very appealing for LLCs to be taxed as a C company.
You do not pay tax on LLC’s earnings on your personal returns unless you actually receive compensation. This gives you a little more control over how much you are taxed on your individual returns.
The downside of this method is that you are faced with double taxation. This is because the income you receive has already been taxed at the LLC’s corporate rate, and then you pay tax back on your personal return. That said, this can still result in fewer taxes owed to LLC owners in certain tax amounts.
Tip # 3-Use S Corporation tax status to save on self-taxes
Self-employment taxes are a significant burden for many LLC owners nationwide. The self-employed tax rate is 15.3%, which consists of two parts-12.4% from social security and 2.9% from Medicare.
Ordinary employees pay Social Security and Medicare taxes, but they pay these taxes at a lower rate as their employer matches contributions. Self-employed people are responsible for paying as much as 15.3%.
The difficult part about self-taxation is that the figure is based on net income — not taxable income. So by default, LLC members are responsible for paying independent taxation of net profits received from the company.
If you run a single member LLC and the company has $ 100,000 net profit per year, you owe $ 15,300 in self-employment taxes with the standard LLC tax structure. Then you still owe additional federal, state, and local income taxes.
The simple solution? S-corp tax choices for LLCs.
This allows you to control which part of your compensation is subject to self-taxation.
Let’s stick to the same example of $ 100,000 net profit to explain how this works. You can pay yourself a $ 50,000 salary and an additional $ 50,000 as dividends. In this case, you only pay self-taxes on the salary of your income, and reduce your self-taxes by half.
There is a small risk associated with this as the IRS is looking for signs of potential abuse in the system. Let’s say your LLC earned $ 500,000 in net profit, but you only paid yourself a $ 20,000 salary. The IRS is likely to say that is unreasonable.
While there is a gray area in terms of what is considered reasonable, you should be fine as long as your salary drops in an average of other people with your job description.
Long-term strategies for LLC fees
In addition to the quick tips mentioned above, there are a few long-term strategies to help you save money on LLC taxes. These require a little more effort on your part, but the payout will ultimately be worth it.
Strategy # 1 – Invest in your own business
This strategy works really well if you are an LLC that is being taxed as a C company. In this case, you pay a fixed corporation tax rate on corporate income, and your personal tax liabilities are subject only to your actual compensation.
If you want to grow your business over time, you can keep money in the business instead of paying them out to yourself.
Pay yourself a modest salary, and put everything else back in the business. You can use all business expenses to lower LLC’s net income and you have more control over the taxes due on your individual return.
As long as the money remains in the company, it is taxed only once with the corporation tax rate. Continue to reinvest in the business over time if you are focused on growth. As the business scales, you can increase your salary year by year and then reevaluate your tax strategy at a later date.
This is also an appealing strategy if you are planning to build the value of your LLC and ultimately sell the business.
Strategy # 2 – Prepare for quarterly estimated taxes
This is a really common mistake made by new LLC owners. If you are used to being an employee, you do not worry too much about income taxes. Taxes are withheld from your paychecks, and you may owe a little more or get a return in April.
But LLCs have to pay quarterly taxes.
So even though the balance on your business checking account may increase for each deposit, recognize that not all of this money is yours to keep – taxes have not been paid yet.
Quarterly estimates are due on the following dates each year:
April 15 – For January 1 – March 31 income June 15 – For April 1 – May 31 income September 15 – For June 1 – August 31 income January 15 – For September 1 – 31. December income
Lack of scheduling of quarterly estimates can put you in a position where you fall behind on tax payments.
Let us e.g. Say your LLC earns $ 50,000 in the 1st quarter. You are in an LLC partnership and your share of the profits is $ 25,000. If you spend as much as $ 25,000, you have nothing left to pay the quarterly taxes you owe before April 15th.
Quarterly tax planning can be challenging for variable income LLCs. That’s why it’s so useful to use accounting tools like QuickBooks, as the software automatically calculates your quarterly estimates.
Strategy # 3 – Start with the standard LLC tax structure before making changes
If you are just starting an LLC, it can be tempting to dive right into one of these tax strategies from day one. But there is nothing wrong with starting using the standard LLC tax structure in your first year or two.
While this may not give you the best tax benefits right away, it keeps things simple and lets you evaluate a clear path forward.
It is difficult to estimate net income and profits if the business has just started. But after a few years, an accountant will have a lot more information to work with before recommending a tax plan.
Choosing to be taxed as an S company or C company does not automatically result in tax savings. For some of you, the standard implementation structure will be fine. So wait it out before making a decision.
The first thing you need to do is talk to an accountant. We are not CPAs here at Crazy Egg and we cannot provide you with actual tax advice for your specific business unit.
While the tips and strategies mentioned in this guide can certainly help you learn, use an accountant to check the best practices for your LLC.
One thing we can recommend with confidence is accounting software. QuickBooks and other tools on the market will make your life easier when it comes to navigating LLC’s treasures. See our guide to the best accounting software for the best options on the market.