Single Member LLC Taxes: Here’s What You Must Know

Single-Member LLC Taxes: Here’s What You Must Know

Forming a business can be complicated. That is why some people choose to do it on their own. Being your own boss and calling all the shots can be exciting. However, you may have to think about which of the different types of business entities you will choose.

How A Single Member LLC Works

A limited liability company (LLC) is among the structures that startup businesses prefer. It separates the business from the owner, which means you will have some liability protection. Having only one owner is also not an issue as you can choose to form a single member LLC (SMLLC). As the name suggests, this type of business refers to an LLC that has a single owner. 

An LLC owner has two main activities that differentiate it from a corporation owner. First, the owner is not an employee. However, you can pay yourself by taking out money from the profits of the LLC. As an owner, you can take money out of the company. Second, the owner can put money into the business. One can make a capital contribution from one’s personal funds.

Understanding The Taxes

When it comes to taxes, a Single Member LLC is like a sole proprietorship. The Internal Revenue Service (IRS) considers a Single Member LLC as a disregarded entity when talking about income tax. Thus, the IRS collects the company’s taxes on the owner’s personal tax return. 

Single Member LLC’s are also subject to various kinds of federal and state taxes as a business entity. Some of these taxes are the same as the ones other types of businesses pay. However, the method of payment is different. 

  • Federal Income Tax

For the federal income tax, you will need to file Schedule C Profit or Loss From Business with the IRS. Attach it to your Form 1040 Individual Income Tax Return.

In this form, report your Single Member LLC’s annual income, expenses, and profit or loss. The net profit or loss that you put on Schedule C will be a part of the total income or loss on your Form 1040.

  • State Tax

The classification of LLCs for income tax purposes varies in each state. Some states tax LLC profits like the IRS. However, others tax the LLC based on the income it makes. This tax payment will be in addition to the income tax that the owner pays.

Some states also impose an annual fee for LLCs. It is either called a franchise tax, a renewal fee, or an annual registration fee. It is not related to the LLC’s income. Research whether your state charges a separate LLC tax. You may find this information on the website of the Secretary of State.

  • Self-employment Tax

As stated earlier, a Single Member LLC owner is not an employee. Thus, you are under the self-employed category. You should pay self-employment taxes, such as Social Security and Medicare, annually. The amount will depend on the net income from your company.

What You Should Do

The best thing you can do as a business owner is to open a separate bank account for your Single Member LLC. Deposit all your business income here and use it for your company expenses. This way, you will have a record of the money that goes in and out of your business. Having a record can help you during tax season.

Some people think that paying taxes is pricey. However, you can save some bucks if you understand how it works. There are hidden deductions that allow businesses to save money. Use these deductions on your Schedule C and reimburse them by writing checks to yourself using the business bank account. Do not worry. Doing this will not get you in trouble. The IRS came up with these regulations to make tax records for home businesses simpler.

  • A standard $1,500 home-office deduction
  • Reimbursements at a standard mileage rate of 54 cents per mile if you use your car for business activities
  • Deduction from monthly charges on cell phone bill if you use it for business
  • Promotional events conducted at your house or somewhere else, including payment for food and beverages, and room rental fee
  • Subscription cost for magazines related to the business
  • Licensing fees you used for the conduct of your business
  • Payment for a person’s assistance in conducting a business event

Paying taxes is a responsibility that every Single Member LLC owner has. Make sure you follow all tax regulations and file on time to avoid problems. Before forming your LLC, it is best to understand how taxes for single member LLC works.