General Question

scruffpuff's avatar

As the owner of an LLC, how are my taxes calculated?

Asked by scruffpuff (182 points ) December 27th, 2009

I haven’t owned my LLC for very long (just two years) and I’m still a little confused as to how my taxes get calculated. My tax guy tried to explain it to me but I just got confused so I’d like to give it another shot.

Right now I’m a consultant so I don’t sell a product or anything (no sales tax). The LLC tax liability is pass-through so it goes to my personal taxes.

So if I invoice my client for a project and the invoice is for $1,000 I put 30% in the business savings account for taxes leaving around $667 dollars in the business checking account. Then I do a draw for $100 dollars as my ‘paycheck’ which goes to my personal checking account.

So how are these taxes calculated. Based on what my company was paid in the invoice ($1000) or based on my draws ($100) ???

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8 Answers

faye's avatar

Questions like this are why I have a tax man. My brain is hardwired to shut down on this stuff.

scruffpuff's avatar

Me too unfortunately :/

HighShaman's avatar

I thought that the taxes are based on the GROSS income minus your legal expenses for the business….

proXXi's avatar

In the states favor.

rottenit's avatar

You are taxed on the invoice amount (gross). You are not taxed on what you pay yourself.
Thats one of the features of an LLC vs INC all gross LLC inconme rolls into your personal taxes, with the INC you have to file a sperate return. You can reduce the amout of income from the LLC you are being taxed for by deducting business expenses.

Turbo tax does a good job of dealing with this, but I started to use an accountant this year they can help navigate some of the grey areas.

scruffpuff's avatar

@rottenit That’s what I thought but for some reason I felt like my accountant was saying at some point that I was taxed on the money I draw out as well. That didn’t make sense to me though since that would be a form of double taxation. Thanks! New accountant coming soon…

rottenit's avatar

This is from wikipedia:

Income taxation
For U.S. Federal income tax purposes, LLCs are treated by default as a pass-through entity[2]. If there is only one member, it is treated as a “disregarded entity” for tax purposes, and the owner reports the LLC’s income on his or her own tax return on Schedule C. For LLCs with multiple members, the LLC is treated as a partnership and must file IRS Form 1065. Individual partners would receive a K-1 for their share of income or losses to be reported on that owner’s tax return.

As an option, LLCs may also elect to be taxed like a corporation by filing IRS Form 8832[3]. They can be treated as a regular C-corporation (taxation of the entity’s income prior to any dividends or distributions to the members and then taxation of the dividends or distributions once received as income by the members), or an LLC can elect to be treated as an S-corporation. Some commentators have recommended an LLC taxed as a S-corporation as the best possible small business structure. It combines the simplicity and flexibility of an LLC with the tax benefits of an S-corporation (self-employment tax savings)[4].

I would still get a good accountant that can set you on the right path.

scruffpuff's avatar

Hmm good point. I should look into this self employment tax stuff.

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