Figure out the taxes you are paying
When you prepare your LLC Operating Agreement or file articles of organization with your state to start up your LLC, unless you take an additional 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, your LLC is taxed as a sole proprietorship. If you are starting an LLC with at least one other person, 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 must petition the IRS to change the tax status of your LLC. The IRS must approve your request before the change takes effect. Filing under the wrong tax status can result in penalties, which vary based on the difference between the taxes you actually paid and the taxes you should have paid.
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 apply to 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 compensated.
Self-employment tax for LLC owners is calculated at the same rate as self-employment tax for sole proprietors and partners. Even if you have employees and must calculate payroll taxes, you still have to pay self-employment taxes for yourself.
Your quarterly estimated taxes are based on what you anticipate earning as taxable income for your LLC. Ideally, the payments should be even—meaning that if you expect to owe a total of $4,000 in taxes for the year, the IRS expects four equal payments of $1,000 each quarter.
Underpaying can lead to penalties. It’s important to calculate and pay estimated taxes accurately 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 are governed by individual state and local governments. You could end up being liable for taxes in two or more states if you operate in multiple states or if you incorporate your LLC in a state different from where your business is actually located.
As an individual, you typically file your taxes in the state where you are a resident. But if your LLC is incorporated or doing business in another state, you may owe taxes there as well. Check your state’s department of revenue or taxation website for specific filing requirements and multi-state tax rules.
Please note: This page offers general legal information, not but not legal advice tailored for your specific legal situation. Rocket Lawyer Incorporated isn't a law firm or a substitute for one. For further information on this topic, you can Ask a Legal Pro.
