Have you formed a Limited Liability Company (LLC) within the current year? If so, you're to be congratulated on your entrepreneurial efforts. However, as you are likely already well aware, your nascent business creates additional responsibilities in many areas. This includes paying your taxes. How does a new business owner pay their income tax obligation? Here are a few steps to take to avoid trouble with the IRS.
1. Look at Last Year's Taxes
The first step is to look at last year's taxes. A single-member LLC is generally treated like a sole proprietorship for tax purposes, so your income tax forms from last year are an important gauge. If you received a refund and many of your tax credits and payments are similar this year, you may not be required to pay additional estimated tax payments.
2. Estimate Your Tax Bill
The next step is to look at your earnings and expenses from your current business enterprise. Are you starting slowly, or perhaps not actually making a profit yet? Then this income may not affect your tax bill very much. In fact, losses from an active business may reduce your taxes due. However, if your LLC is ramping up quickly, it's time to make some estimations based on trends for the remainder of the year.
3. Set Aside Self-Employment Tax
The self-employment tax trips up many new business owners. This tax is comparable to the withholding that employers must do for Social Security and Medicare contributions. However, as both owner and employee, entrepreneurs pay the full tax amount. In 2022, this is 15.3%. Because this tax may be new to you, it's good to set aside the full amount from your income.
4. Make Estimated Payments
In general, if you expect to owe more than $1,000 in taxes when you file your return, you are required to send quarterly estimated tax payments to the IRS. Each payment is due by a specific date and should represent at least 1/4 of your expected overall tax amount that will remain due.
5. Meet With a Professional
The best way to ensure you meet your minimum tax payment requirements — or understand why you may not have any — is to meet with a qualified income tax preparation service in your state. They can also help you with reminders to send the money each quarter or even assist you in setting up the methods to physically make the payments.
Where to Learn More
Obviously, it's difficult to gauge your tax obligations during your first year in business. You have no income or expense history to turn to, after all. So begin by working with an experienced income tax preparer today. With their guidance and your vision, your new business will avoid tax problems and continue thriving.
Reach out to a tax preparation services company for more information.