I posted a few things I found online while researching my tax liabilities as a sole owner LLC. Pretty interesting stuff that could help you out too…I’ll keep posting tidbits here and do my best to keep it organized.
Single-Owner LLCs and Taxes
The IRS treats one-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the IRS.
As the sole owner of your LLC, you must report all profits (or losses) of the LLC on Schedule C and submit it with your 1040 tax return. Even if you leave profits in the company’s bank account at the end of the year — for instance, to cover future expenses or expand the business — you must pay income tax on that money.
If your California LLC will regularly need to retain a significant amount of profits in the company, you (and your co-owners, if you have any) may be able to save money by electing to have your LLC taxed as a corporation.
The self-employment tax rate for 2006 for business owners is 15.3% of the first $94,200 of income and 2.9% of everything over $94,200.
Expenses and Deductions – Taxes and California
As you no doubt already know, you don’t have to pay taxes — income taxes or self-employment taxes — on most of the money that your business spends in pursuit of profit. You can deduct (“write off”) your legitimate business expenses from your business income, which can greatly lower the profits you must report to the IRS. Deductible expenses include start-up costs, automobile and travel expenses, equipment costs, and advertising and promotion costs.
California exacts a hefty $800 “minimum franchise tax” per year from LLCs
Can Corporate Taxation Cut Your LLC Tax Bill?
If you will regularly need to keep a substantial amount of profits in your LLC (called “retained earnings”), you might benefit from electing corporate taxation (which you can do as an LLC). Any LLC can choose to be treated like a corporation for tax purposes by filing IRS Form 8832 and checking the corporate tax treatment box on the form.
Because the corporate income tax rates for the first $75,000 of corporate taxable income are lower than the individual income tax rates that apply to most LLC owners, this can save you and your co-owners money in overall taxes.