Tax Guide for Start-Ups Expanding to the US
When it comes to start-ups there are a lot of things that need to be considered and tax implications are certainly on the list. New entrepreneurs can be in the dark about the tax issues in the US that come with running a business.
Well, no worries. Inlea is here to give you some light and help you on this. Let’s review some of the tax considerations when starting a business in the US.
Taxes for an LLC in the U.S
According to the Internal Revenue Service (IRS), there are over 25.5 million sole proprietorships in the US. A limited liability company, commonly referred to as an “LLC”, is a type of business structure commonly used in the United States. LLCs can be seen as a hybrid structure that combines features of both a corporation and a partnership. Like a corporation, LLCs provide their owners with limited liability in the event the business fails. But like a partnership, LLCs “pass through” their profits so that they are taxed as part of the owners’ personal income.
Limited liability companies are taxed differently from corporations. In the case of a corporation, profits are first taxed at the corporate level and are then taxed a second time once those profits are distributed to the individual shareholders. This “double taxation” can be quite inefficient from an investor’s point of view. Limited liability companies, on the other hand, allow the profits to be passed through directly to the investors so that they are taxed only once, as part of the investors’ personal income.
Default Tax Status
When it comes to paying income taxes for your LLC; the IRS don’t actually recognize LLCs as an entity – You can create and register an LLC in a state, but as far as the IRS is concerned, there’s no income tax form for an LLC.
That doesn’t mean you get to skip paying taxes. The IRS will assign a default tax status based on whether the LLC is run by just one person or multiple people. A business owner can choose how to have their LLC taxed. It can either be taxed as a sole proprietorship (one owner), partnership (two or more owners), or corporation (any number of owners).
If you don’t make a choice, by default your LLC will be taxed as a sole proprietorship or partnership. Let’s cover the income tax requirements for all three types.
1. HOW TO FILE AS A SINGLE-MEMBER LLC
If you are the one and only member of your LLC, the IRS will treat your tax status as a disregarded entity (unless you elect otherwise). Therefore, your tax status will look very similar to a sole proprietorship. Any profits or losses pass through to you as the owner.
To submit taxes as a single-member LLC you’ll file Schedule C with your personal income tax return. On Schedule C you’ll report the income and expenses from your business. That amount will then be included as income or loss on your personal tax return Form 1040.
There is an exception here: If your LLC owns rental properties, the information would be included on Schedule E, rather than Schedule C.
These tax returns are due by May 17, along with your personal tax return.
2. HOW TO FILE AS A MULTI-MEMBER LLC
If more than one person owns the LLC, the default tax status is to be treated as a partnership. Filing gets a little more complicated with a multi-member LLC. The LLC will need to fill out a partnership information return, Form 1065. It will also need to submit form K-1 for each member of the LLC, which includes each partner’s share of income, deductions, and credits.
On your Form 1040, you’ll include the information from your K-1 on Schedule E, supplemental income.
Form 1065 and Schedule K-1 are due by March 15. Reporting that information on your Form 1040 and Schedule E are due by May 17.
3. HOW TO FILE AS A CORPORATION
As an LLC you do have flexibility with your tax status. You can stick with the default options listed above, or you can elect to file as a C corporation or an S corporation. This election doesn’t change your business structure—it will still operate as an LLC. It just changes how the IRS expects you to file and pay your taxes.
- HOW TO FILE AS A “C” CORPORATION
If you want the IRS to tax your LLC as a C corporation, you’ll need to complete and submit Form 8832 to make this election with the IRS. You’ll then file Form 1120 annually for your business tax return.
- HOW TO FILE AS AN “S” CORPORATION
You’ll need to complete and submit Form 2553 with the IRS. You’ll then complete form 1120 S annually for your S corporation tax return. But an S corporation is a pass-through entity, meaning it doesn’t actually pay taxes itself. Any income and expenses flow through to your personal tax return. So that means there are more forms to fill out. Each LLC owner will receive Schedule K-1 and will report that information on Schedule E of Form 1040.
Quarterly estimated payments
If you complete your LLC taxes using the default tax status (default single-member or multi-member LLC) you will need to make estimated income tax payments. These tax payments are due four different times a year: April, June, September, and January.
You can make estimated tax payments using Form 1040-ES.
Most taxpayers satisfy their tax payment requirements when their employer withholds state and federal taxes from each salary paycheck. When you’re self-employed and starting a business, taxes are 100% on your own. Most self-employed taxpayers satisfy their tax payment requirements by making estimated tax payments quarterly online or via the mail.
If you also work as an employee for another business in addition to your self-employment, you may be able to satisfy your required tax payments by increasing the amount of withholding from your wages.
Should you fail to make your required payments, you may be subject to an underpayment penalty. The penalty can be avoided if you meet certain specified exceptions or waivers.
Self-employment tax
Whether you have one member in your LLC or multiple, when you earn income from business activities, the IRS requires you to pay self-employment tax on your earnings.
The net profit from your business will be subject to this additional tax. Self-employment tax pays for contributions to both social security and Medicare. Currently for 2021, you will pay self-employment tax at a 15.3% rate on your net earnings from self-employment of up to $142,800, and Medicare tax only at a 2.9% rate on the excess.
An additional 0.9% Medicare tax will be imposed on self-employment income more than $250,000 for joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.
If you choose to put your small business into a corporation you will not be subject to self-employment tax on your earnings. However, you will then be subject to payroll taxes as shareholders who perform services for their corporations are required to be paid Form W-2 wages subject to social security and Medicare withholding.
State Taxes
You’ll also need to file taxes with your state. Check your state requirements for due dates, forms required, and any fees. In some states, you may even need to pay annual filing fees.
For example, a LLC in California. The state charges an annual filing fee of $800. And if your business earns more than $250,000, you’ll have to pay the state of California additional tax.
Tax Return Due Dates
There are many ways that LLC taxes are paid. And because of this (and all the different forms), there are several different due dates. Here’s a breakdown:
Single-member LLC: Your Schedule C and Schedule SE are due May 17*
Multi-member LLC: Form 1065 and Schedule K-1 are due March 15. Schedule E and Schedule SE are due May 17*
S corporation: The 1120 S and K-1 are due March 15**
C corporation: The 1120 is due April 15**
*On March 17, 2021, the IRS announced that the individual tax return deadline is now extended to May 17, 2021.
**Those due dates are based on the business using a calendar year (when the business year ends on December 31).
If you can’t get your taxes done by those due dates, you can file an extension. Knowingly ignoring a deadline will only lead to failure to file penalties. Note that this gives you an extension to file your taxes, but you’ll still need to pay your taxes by the original due date.
Claim startup tax deductions for eligible expenses
Startup costs are amounts you’ve paid or incurred while creating your business or even in investigating the creation your business. If you started the business, you can elect to deduct up to $5,000 of eligible costs in your first year. Additionally, you’re eligible for the full amount of this startup tax deduction if your costs don’t exceed $50,000.
Income of the year is taxable even if you reinvest it into your business
Any profit your business makes each year will be taxable regardless of whether you withdraw it or reinvest it into growing your business. However, you’ll want to keep this startup business tax tip in mind — any deductible business expenses can be used to directly offset that income.
Filing requirements
Individuals with taxable income under certain amounts are not required to file a tax a return for the year. Generally, for 2021 taxes a single individual under age 65 only has to file if their adjusted gross income exceeds $12,400.
However, if you are self-employed you are required to file a tax return if your net income from your business is $400 or more. This is true even if the $400 is your only income and you are thus far below the normal filing threshold. In other words, you may need to file taxes as a startup when you might not have met the threshold as an individual.
LLC Get a Tax Refund
Once you’ve filed correctly, you may wonder if the IRS will send your LLC a check for any over-payment. Aside from the C corporation, all other tax statuses are pass-through entities, meaning the individual pays taxes and receives taxes. Only C corporations can get a refund. For any other LLC filing types, the business owner will receive the refund.
So yes, you will get your excess tax payments back, but it will be you receiving the money personally, rather than your LLC getting a refund check.
File LLC Taxes Separately
It really depends on your LLC tax structure. If you’re a single-member LLC, a partnership, or an S corporation, these are all pass-through entities. That means any profits and losses flow through to your tax return.
But if you’re being taxed as a partnership or an S corporation, you need to send in separate returns as well as include the income and losses of the LLC on your 1040 individual tax return.
If you elect to be taxed as a C corporation, you will complete your tax return separately—income and losses from the business don’t flow through to your individual income tax return.
With this guide you will be able to better understand how US Tax Management works, however we always recommend having the experience and supervision of an expert in it.
