First time business owners have a long road of challenges and exciting opportunities ahead of them. Filing business taxes for your limited liability company (LLC) for the first time might feel more like a challenge than an opportunity, but it doesn’t need to. Your first experience filing taxes is an opportunity to learn how to efficiently maximize your deductions and make accurate predictions for estimated tax payments in the year ahead. Each year may be easier than the previous year.
If you have questions about tax registration and common compliance issues, Mosey is here to simplify your first LLC tax preparation experience by state. This is what you should know before you file.
Do You Have To Pay Taxes in Your First Year?
You’ll likely need to file state and local taxes in your first year despite not having estimates from the previous year for your estimated quarterly tax payments. It’s not unusual for a new business to lose money in the first year due to making all of their initial investments.
The IRS won’t be alarmed to see a loss due to your startup costs, and you may not need to pay any taxes. Filing taxes shows that you’re carefully managing your finances and making an effort to comply with laws that govern your business, which is the most important thing for state and local governments to see.
How Much Money Do You Need to Make To File Business Taxes?
Any business that generates more than $400 is required to file taxes. This includes business entities where someone “works for themselves,” like an LLC. People who are considered self-employed are required to pay self-employment taxes. Social Security taxes and medicare taxes are used to fund programs and benefits that you may collect when you retire.
Most businesses must file taxes even if they don’t generate a profit. Tax statements show how your money was spent and prove that a business either lost money or failed to generate a profit.
How Much Money Should I Set Aside for My Business Taxes?
There is no set amount a business should earmark for taxes. Your tax liability depends on your total deductions, your business expenses, the tax structure of your business, and sales tax laws in the state where you operate.
Business taxes come in various forms, including income taxes, which are levied on business profits, and sales taxes, imposed on goods and services sold. Additionally, payroll taxes cover employee wages and employer contributions for programs like Social Security and Medicare.
Other types include property taxes on business assets and excise taxes on specific products. Also, there may be franchise taxes, which are periodic fees levied by some states on businesses for the privilege of operating under a specific legal structure, such as a corporation or LLC.
Some states, such as Arizona, have flat taxes for corporations. In other states, businesses aren’t required to pay any state income tax at all. Certain businesses are required to collect and remit sales tax depending on the type of goods and services they provide, even if they don’t have to pay state tax.
Corporations use a 21 percent flat tax rate. This tax rule doesn’t apply to LLCs who do not file a corporate tax return. As an LLC, you’ll likely pay slightly more in taxes if you don’t have a significant amount of tax credits and/or deductions. If your business is a sole proprietorship or single-member LLC, you’ll be taxed at the same rate as an individual. Single-person business ventures aren’t usually taxed as a corporation.
It’s a safe choice to set aside about 30 percent of your LLC income for taxes. If you don’t need the full amount after your deductions and credits, you can always store the remainder for the next tax year or invest it into the growth of your business.
Do Businesses Get Money Back on Their Taxes?
You’re likely familiar with the process of filing a personal income tax return. You send away your return and often find out you’re entitled to a refund for certain deductions, tax credits, or eligibility for economically beneficial programs. Your refund is the return of tax money you paid that the government decides that you should get back.
It isn’t entirely unheard of for a small business to get money back on their taxes, but it seldom happens. The event is so rare that it’s best to assume your tax money won’t be returned to your business.
Pass-through entities, like S corporations, LLCs, and sole proprietorships, may receive a refund addressed to the owner who overpaid. If a C corporation should overpay their taxes, the refund will be addressed to the C corp rather than a member of the corporation. As the owner of an LLC (officially called a member), your refund will be addressed to you and you’re able to utilize it as you see fit.
Does Every State Have a State Income Tax?
Most states have a state business tax. Six states do not currently have a corporate state income tax, significantly reducing tax liability for businesses registered in those states.
- Nevada
- Ohio
- South Dakota
- Texas
- Washington
- Wyoming
South Dakota and Wyoming are the only states that don’t have a corporate income tax or a gross receipts tax. Nevada, Ohio, Texas, and Washington impose a gross receipts tax instead of a corporate income tax.
Some states have low flat rate state income tax for certain types of businesses. States like California and New York have some of the highest state income tax rates in the country.
Do LLCs File as a Sole Proprietor?
LLCs with one member are slightly different from other types of companies or corporations. Single-member LLCs are usually treated as a “disregarded entity” for tax purposes. The LLC is a way of registering a business, but it doesn’t necessarily impact your taxes if you are the only member of that business. You may be treated as a sole proprietor for tax purposes.
If you would rather file taxes as a corporation, you have the option to do so. If you elect to change your tax status, you’re required to file IRS Form 8832 to confirm your tax preferences. This option is rarely utilized because choosing to file as a C corp creates a situation of double taxation. The corporation itself is taxed, and earnings are taxed again when distributed to the owner (or owners) of the LLC.
Electing to change your tax classification is a decision you should consider very carefully because it can become a long-term commitment. Under most circumstances, you’ll need to adhere to the tax status you choose for five years before you can change it again. Electing to file as a corporation and changing your legal entity tax status is not easily reversible.
How Do Taxes Change If Your LLC Functions Like a Partnership?
If you have a multi-member LLC that you prefer to treat as a partnership for tax purposes, your earnings are still passed through to partners by default. Passing earnings through to partners creates a partnership tax requirement where your LLC must file Form 1065 as an annual partnership return.
A partnership return is purely for informational purposes. Partnership returns are used to indicate how the income was divided among the partners. Information on your partnership return is used to verify and validate the information on each partner’s individual income tax return.
Individual partner earnings are reported on a Schedule K-1 form. Earnings are LLC taxable income, minus tax deductions, divided among partners.
What Happens If You’re Late Filing Business Taxes?
You can face a tax penalty if you’re late filing your business taxes. This penalty can be hefty if your taxes are very overdue. If you begin preparing your taxes at the very end of the fiscal year, you can avoid running late and missing deadlines.
If you think you’re running behind, filing a business tax extension with the IRS is best. Extensions aren’t usually difficult to obtain, and businesses are often awarded a few extra months to get their documents in order. Remember: It’s better to request an extension and not need one than to need an extension when it’s too late to make the request.
Mosey Can Help You Comply with State Tax Rules
Every state has different rules for the way LLCs should be taxed. You’ll need to comply with state income, sales, and business tax laws to be allowed to operate in good standing within your state. An overdue state tax bill can hinder your ability to grow and thrive.
Mosey’s automated business compliance platform makes it easy to keep track of state business tax requirements for your LLC. Focus on getting your taxes in order while Mosey keeps track of your state tax rules. We won’t let you miss any important steps.
Schedule a demo with Mosey to learn how we can help you meet state business compliance requirements.
