June had loved starting her LLC. She loved having the identity, structure, and excitement of a business. She had done well, too, selling more of her craft products than she had expected. But along with the extra revenue came extra expenses ... and extra taxes. It was the taxes that really surprised and disappointed her. Without planning adequately to minimize those taxes and to estimate and prepay them, June really struggled to make her final tax payments. The experience shook her enough that she decided either to make significant changes or not to continue the business. She wasn’t going to go to all that time and trouble just to pay the government.
Taxes
Tax obligations can surprise new business owners. Consider your LLC’s full tax exposure when planning your LLC and budgeting to pay its expenses. Government agencies have unusual powers to enforce tax obligations, not just preemptive liens, penalties, and interest but also fines and even criminal charges for deliberate tax fraud and evasion. If an LLC manager cannot pay all obligations, tax obligations are generally a priority to pay. Paying the government first ahead of other creditors can be a wise strategy. But lawfully reducing tax obligations to their reasonable minimum can be even wiser.
Assistance
Given the tax delinquency and enforcement risks, LLC managers and members should get skilled and experienced tax advice and representation when necessary to ensure proper treatment of tax obligations. You or your other LLC manager may have the bookkeeping and accounting software, and consulting services, to properly manage tax obligations. If not, then bookkeepers the LLC employs or retains as independent contractors may have the training and experience to do so. Accountants have the formal education and certification to properly advise your LLC as to tax obligations or to handle their payment for you. Tax lawyers have the knowledge and education to interpret tax laws, advise LLC managers and members as to the proper treatment of tax obligations, and represent LLCs in resolving tax disputes with government authorities. Use your best business judgment to determine how to handle tax issues responsibly. Get qualified help when you need to do so.
Employment
Employment taxes are a first tax obligation for your LLC’s manager to consider. If your LLC employs any individual, the LLC must withhold the employee’s portion of federal, state, and local income taxes, match the employer’s share of FICA taxes, and pay over those tax amounts quarterly to the relevant taxing authority. Payroll software, payroll services, bookkeepers, or accountants may help your LLC do so. Failure of LLC managers or controlling members to pay payroll taxes can result in personal liability and penalties. Handle employment taxes with special care. Your LLC is a fiduciary entrusted with the employee’s own compensation when withholding income taxes to pay over to the taxing authorities.
Sales
Sales taxes are a second tax obligation for your LLC’s manager to consider. Five states do not impose any sales tax on goods or services. The other forty-five states impose sales tax on goods and on some services. Of those forty-five states, four states impose taxes on services generally but then exempt certain services. The rest of the states imposing a sales tax impose taxes on certain categories of service. Those categories vary widely and have varying definitions but may include professional services, business services, personal services, services to personal property, services to real property, or recreational services. States generally impose sales taxes on retail sales of goods to end users, not on wholesale supply of goods for manufacturing or resale. But states vary in their interpretation of those definitions. Investigate whether your LLC must pay sales taxes on goods or services. An LLC may charge customers or clients for sales taxes. But the obligation to turn over the tax to authorities is on the LLC, not on the customer or client.
Property
Property taxes are another concern for your LLC’s manager. If your LLC owns real property, then it likely owes real property taxes to the local authority, whether a city, township, county, or other municipal body. Real property tax obligations can be substantial, requiring payment twice a year. Failure to pay real estate taxes can result in tax foreclosure, sale, and loss of the real property. Some municipalities also charge business property taxes on furniture, equipment, technology, and other tangible business assets, based on value. Investigate your LLC’s property tax obligations and budget to pay for those obligations.
Income
Income taxes are a different concern for LLC managers and members. Recall that one of the primary purposes for an LLC is not to have the business entity taxed at its own level and its owners taxed a second time on distributions. Unlike a C corporation, your LLC does not pay income taxes on its profits. But if your LLC profits, its members receiving the pass-through distribution of those profits will pay individual income taxes. Those members receiving distributions may also owe self-employment taxes on those LLC profits passed through to them, increasing the overall income tax obligation. If instead the LLC loses money, it may be able to pass those losses through to its members, who may be able to use the losses to offset other income to reduce their overall tax bill.
Treatments
When managing your LLC’s tax obligations, consider the income tax obligations of members on their pass-through income or losses. LLC managers have different ways of helping members deal with income taxes on distributions. Instead of distributing profits, the LLC may prefer to pay bonus compensation to key employees, including employed members, thus reducing or eliminating its profits to pass through to members. The LLC may alternatively be able to expend profits on additional advertising, technology, or other goods and services, effectively reinvesting profits back into the business to avoid taxation. The LLC may also be able to make a charitable donation of net income, reducing its funds to distribute and thus reducing member income tax obligations on distributions. One way or another, the LLC and its manager and members may prefer that the LLC expend profits rather than distribute them to members for the members to have to pay income and self-employment taxes. Consult experienced advisors for the best tax strategies.
Key Points
An LLC with employees is responsible for employment taxes.
Your LLC may have to collect and pay sales taxes on sold goods.
Your LLC may have to collect and pay sales taxes on sold services.
Your LLC may owe real property and business property taxes.
Your LLC’s members must pay income taxes on distributions.
Tax strategies may reduce income taxes on member distributions.