Tax season looks a little bit different in 2021. The IRS has extended the federal income tax filing deadline from April 15, 2021 to May 17, 2021 as a result of the COVID-19 pandemic. This filing extension gives taxpayers a bit of extra time to file their taxes.
The federal income tax extension aside, all other deadlines for filing small business taxes appear to be on schedule for this year. Of course, the kinds of taxes small business owners pay will vary depending on its entity formation.
Let’s examine what small business taxes may look like for a limited liability company (LLC). What kinds of taxes can an LLC expect to pay and what are some upcoming deadlines to be mindful of in Q2 and beyond?
LLCs and “pass-through” tax treatment
There are several benefits that come with forming an LLC. An LLC provides its owners with limited liability. This separates and protects personal assets belonging to the business owner in the event of an unforeseen circumstance. In addition, you may be able to build credibility with customers faster as an incorporated business.
LLCs are what is referred to as a “pass-through” entity. This means that the profits of the business pass through to the owners (also known as members). An LLC’s members report profits and losses on their individual tax returns, and not at the business level. The flexibility of a pass-through entity ensures that the LLC is able to legally avoid double taxation. An LLC is taxed only once at the individual level, not twice as it might be under a different entity like a C Corporation.
LLCs and entity classification election
It’s important to note that while an LLC is a pass-through entity, it may be treated as a partnership by the IRS. This is the entity’s default federal tax classification. A single member LLC, for example, may also be treated by the IRS as a sole proprietorship.
However, this does not mean an LLC may be taxed as a partnership or sole proprietorship. The entity must specify how it would like to be classified for federal income tax purposes. In order to make this specification, an LLC must file Form 8832. This allows the LLC to elect to be classified as an association taxable as a specific entity, like an S Corporation.
S Corporation tax election
Typically, many small business owners will choose to have their LLC taxed as an S Corporation.
Why elect this status and what kind of impact does an S Corp have on small business taxes? An S Corporation is also a pass-through entity. Income passes through to the individual level to avoid double taxation.
However, LLCs face eligibility requirements before it can set up as an S Corporation. The business must be able to meet certain ownership and stock criteria. Some examples include that the business may not have more than 100 shareholders, that the shareholders are all individual personas, and the business only has a single class of stock.
Now you have an understanding of an LLC as a pass-through entity, how to elect a different tax classification, and why S Corporations are the preferred tax election. Let’s review some of the taxes an LLC needs to file and the suggested forms necessary for these filings.
Small business taxes for Q2 (and beyond)
For small businesses, tax season is not limited to one day each year. Do not focus solely on federal and state income tax deadlines. Consider these additional small business taxes and payments in Q2 and beyond.
- Income taxes. Remember that what an LLC pays is ultimately determined by the way it elects to be taxed with the IRS. Otherwise, an LLC pays income taxes through its default federal tax classification.
- Estimated taxes. This is for sole proprietors, S Corporation shareholders, and self-employed individuals that owe $1,000 or more in taxes. These taxes are paid through estimated tax payments. Typically, these payments are made four times throughout the year. The deadlines for the remaining 2021 quarters are April 15, June 15, September 15, and January 18, 2022. Use Form 1040-ES to determine your estimated tax payments.
- Self-employment taxes. This tax is paid by self-employed workers. It acts as a social security and Medicare tax.
- Employment taxes. Businesses that have employees will withhold payroll taxes in order to fund social security and Medicare. Employers also withhold FICA tax, federal income, and federal unemployment (FUTA) tax from employee wages. FICA taxes may be reported using Form 941.
Do you have more tax questions?
Do you think you might be missing out on any small business tax credits or deductions? Did your small business utilize COVID-19 resources and you have questions as to how this may impact filing small business taxes?
While I personally cannot provide tax advice, I do recommend getting the proper tax help. Reach out to a trusted tax professional. Seek out the right tax professional for your business, which may range from a CPA, bookkeeper, or accountant.
Some of the topics you address may include the following:
- Ask questions about tax credits and deductions you may be entitled to for a potential tax refund.
- Review tools that can help you better stay organized with your tax documents and deadlines.
- Look into which business records you should keep and why it’s good to hold on to these documents.
- Talk about your LLC. If you’re unsure of whether you should elect an S Corp filing or have any other questions that pertain to the business, a tax professional will be able to guide you.
You may also work with a tax professional to plan ahead for upcoming quarters in business. Look into upcoming deadlines for additional tax payments. Let your tax professional provide assistance year-round for your business.
The sooner you are able to meet with a professional ahead of the May 17, 2021 deadline, the more you’ll have the peace of mind in knowing you were able to file your taxes correctly and will be able to tackle upcoming tax deadlines with confidence and careful organization.
Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.