By Mark Oldberg: October 25, 2017: Video



By default an LLC is as a pass-through entity.

What does that mean? It means the IRS disregards the entity.

Umm ok what does that mean? Ok well it means that the IRS ignores the fact that an LLC exists and if the business has one owner they tax you like a sole proprietorship or if there is more than one owner they tax you like a partnership.

They call these pass through entities because company profits pass through the entity level and straight onto the 1040 tax returns of the owners. So take the company income for the year and subtract the company deductible business expenses for the year, and then distribute that out to the owners however your operating agreement says or if there is no operating agreement then how default rules of your state say.

So if your LLC only has one owner then it is pretty simple. Your profits for the year are reported using a Schedule C attached to your 1040 and you are going to pay income tax on those profits as well as Payroll taxes (SS, Medicare). If there is more than one owner, then it is more complicated. You have to follow the partnership tax rules which means the company will have to file an informational tax return and then pass on the appropriate amount of tax obligation to the owners through a K-1 statement.

In addition to the yearly filings, each owner is going to have to file what are called quarterly estimated taxes. So, 4 times a year you to have to send ¼ of what you expect to pay in taxes to the IRS and your state govt if you have state income tax. Think about it, when you have a normal job they always deduct taxes out of your paycheck, right? As a business owner there is nobody to do that, so it is your responsibility to send the money in. Especially in your first year you should be setting aside around 30% of your profits to pay your taxes.

Taxes get complicated quick and is something a lot of new business owners mess up. This information should get you started, but keep learning and make sure you are paying all your taxes because they will come for you.  

  • Taxes


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