What are my tax obligations?
Ok, let's get to the interesting part: taxes
LLCs pay income taxes at the corporate level instead of passing on the income to LLC members.
Based on the earnings, the LLC pays income tax via Form 1120 (U.S. Corporation Income Tax Return). Corporate income tax rate is at 21% on the LLC's profits.
This way members don't have to pay LLC's income tax. They only have to worry about their personal taxes.
Taxes to be paid by members
- 01If members are paid dividends from company profits: There will be double taxation— first at the corporate level(21%), second at the members' personal level(23.8%). To avoid this, members are usually hired by the LLC.
- 02If members are hired as employees: There will be no double taxation. Their salaries are deducted as business expenses and are only taxed once at their personal level(32-37%).
Note
For LLCs that have not elected to be treated as a corporation, it is not possible to hire a member as an employee.Tax reporting
There are more filing formalities here as compared to regular LLCs.
Some of them are:
- 01Form 1120(U.S. Corporation Income Tax Return): This is the main tax return filed by the LLC.
- 02Form 1099-DIV(Dividends and Distributions statement): If the LLC has issued dividends during the year, it has to send Form 1099 to every member. Members include this on Interest and Ordinary Dividends schedules (Schedule B) which is attached to their personal tax returns (Form 1040)
- 03Form 1040, US Individual Tax Return*: When the member-employees of the LLC has received salary or dividends, they will individually have to file their personal tax returns.
- 04Form W-2(Annual Wage and Tax Statements): If there are employees or when you have a member as an employee, LLC is required to send Form W-2 to each of them.
Employment taxes
Since an LLC that's elected to be treated as a corporation will most certainly have their members as employees, it will have to pay employment taxes.
It is not just for member-employees. Employment taxes are to be paid for every employee in the LLC.
Payroll tax
Social Security tax, Medicare taxes and unemployment insurance are collectively referred to as 'payroll taxes'.
Half of the amount for payroll taxes is collected from the employee's paycheck. And the other half is contributed by the LLC. The employee's share is withheld by the LLC when issuing paychecks.
FICA tax(Social Security & Medicare) - Employer portion is 6.2% for Social security and 1.45% for Medicare. LLC withholds the same amount from the employee's paycheck as well
FUTA tax - It covers unemployment insurance. Of the total amount of 6%, states usually have a 5.4% credit. The other 0.6% is paid by the employer.
For non-residents
LLC members who don't reside in the US don't have to pay payroll taxes. If however, you have an employee residing in the US, you will have to pay payroll taxes for that employee.
How to pay all these taxes?
Income taxes and employment taxes are paid as estimated taxes to the IRS.
What's this estimated tax?
Estimated tax is a method of splitting up your total annual tax amount and paying them as 4 quarterly instalments.
You'll have to estimate your income ahead of time and pay them at the end of every quarter in April, June, September and January.
If your LLC is estimated to pay more than $500 income tax annually, you will have to pay them as quarterly payments.
Can't I just pay all taxes in one shot at the end of the year? Nope. IRS won't buy it.
IRS charges a penalty if you fail to pay an instalment or pay it late. So, keep this in mind.ou're just starting up or if you haven't earned any income during a quarter, you can skip an instalment entirely.
