Everybody has to pay taxes. It’s fair to say that nobody understands every law at all times, and yet when tax time cometh, we must payeth. Whether you’re a sole proprietorship, a partner, a corporation, or an LLC, you will have to pay taxes, and what you are expected to pay will change depending on which form your business entity takes. There are benefits to operating as a corporation or as a sole proprietorship, but the most appealing business structure for entrepreneurs starting a new company is often the LLC.
What is an LLC?
Similar to a corporation or a partnership, a Limited Liability Company (LLC) is a business entity that offers protections for personal assets as well as flexibility when it comes to taxation. When you start a business, you want to ensure that your personal assets are protected. An LLC offers the limited liability protection you need while also providing the ability to elect how you are taxed. The default state of an LLC changes depending on whether it is a single-member or multi-member LLC. Whether or not there are multiple owners to an LLC, the initial treatment is that of a sole proprietorship or a partnership. This means that the LLC is treated as a pass-through entity, and instead of being taxed itself, the owner(s) of the LLC are taxed directly based on personal earnings.
How are Limited Liability Companies Taxed?
Whether or not there are multiple owners to an LLC, the initial treatment is that of a sole proprietorship or a partnership. This means that the LLC is treated as a pass-through entity, and instead of being taxed itself, the owner(s) of the LLC are taxed directly based on personal earnings. There are also state and local rules to follow that will change based on where your business is located. Some states like Wyoming and Nevada limit how much a business is taxed. New York, on the other hand, imposes tax regulations based on how much a company earns in a year.
Essentially, an LLC will either be treated as a corporation, or a disregarded entity, depending on how the members elect to be taxed. This is the case whether an LLC has a single or multiple owners. In New York, state taxes are paid on top of federal taxes and are generally due the same day. Here’s a brief rundown on the differences between multi and single member LLCs.
Single Member LLCs
If you are in charge of a business entity solely and you have limited liability, then you’ve got yourself a single member LLC. The IRS by default recognizes this as a disregarded entity, meaning the business is separate from the owner when it comes to personal risk, but the sole owner is responsible for taxes owed. Basically, the responsibility on taxes owed passes through the LLC to whoever makes money in that business. This is what is known as “pass-through” taxation, and for tax purposes the LLC is disregarded. This is covered by filing a Schedule C tax return alongside the tax returns of the individual who owns the business.
Multi Member LLCs
While a single member LLC is treated as a sole proprietorship for tax purposes, a multi member LLC is treated as a partnership. A partnership is also treated as a pass-through entity for tax purposes, and each member is expected to pay taxes based on their personal earnings. When they file taxes, they will have to attach a Schedule E with their personal federal income tax form.
Part of the draw of an LLC is the ability to protect your personal assets operating as a business, while also gaining the best tax advantages possible. A sole proprietorship or a partnership might not offer the best advantages, and that’s where the flexibility of an LLC comes in. New York tax laws are numerous, and for every tax imposed on a business, there’s a potential tax law offering a deductible. Sorting through these laws takes some research, but if you run a business with employees, it might be more beneficial to be taxed as a corporation, while maintaining your status as an LLC. To do so you just need to update your tax status by filing Form 8832. This also applies if you decide to switch again in the future.
What is-Tax Deductible for an LLC?
The items that end up being-tax deductible for an LLC are those which can reasonably be associated with the workings of the business. New York has an online website to assist with finding deductions and filling out the form associated with it: Form IT-196. Depending on the nature of your business and whether or not you have employees who you pay salary and benefits, there are many things that can be deducted in New York:
- Startup Expenses
- Office Supplies
- Gas and Traveling
- Business Loan Interest
- Bank Fees
- Taxes you pay
- Use of your home for business
- Daycare costs
- Depreciated property costs
- Education costs
- Legal and Professional Fees
There are many other possibilities. Talking with a tax accountant can be a helpful resource in learning what else might apply to your business.
Your business might also be eligible for a tax relief benefit granted by the Tax Cuts and Jobs Act passed and put into effect in 2018. Your pass-through entity might be able to deduct up to 20% of its net income, up to an annual amount.
Other LLC Taxes
Having an entity formed in New York means adhering to the rules implemented by the state. States like Texas don’t impose state income taxes, but New York does.
If you sell goods in New York then you will need to register as a sales and tax vendor. If you’re uncertain as to whether or not this applies to your business, you can double-check the info on TB-ST-275. After you determine whether or not you’re responsible for paying sales tax, the next step is to register online or submit a Form DTF-17. You will then periodically (depending on how much you earn in sales) be expected to submit a Form ST-100, or a Form ST-101, to the Department of Taxation and Finance (DTF)
Since a member of an LLC isn’t considered an employee generally, it’s up to the individual to pay Medicare and social security taxes. Normally those wages would be withheld, but since everything passes through, it’s up to the owner to pay the IRS these taxes each year.
How do LLCs Pay State Income Tax?
State income taxes are generally due when federal taxes are paid. New York has a resource center for gathering information on taxes owed, including changes from year to year. New York also has a filing fee associated with operating an LLC that can change from $25 - $4500, depending on net income. Stay informed by consulting with a business lawyer!