A well-liked business structure that protects its owners’ personal assets is a limited liability company (LLC). However, how an LLC will be taxed is among the most crucial factors to take into account when forming one. In this post, we’ll examine how an LLC is taxed, the federal tax rate for LLCs, how to pay Kentucky’s LLET tax, how an LLC can avoid paying taxes, and how to make money for yourself using an LLC.
An LLC is by default regarded as a “pass-through” entity for taxation purposes. This indicates that the business’s gains and losses are transferred to the individual owners or members, who then record them on their individual tax returns. In other words, the owners are the ones who pay taxes on the LLC’s income, not the LLC itself.
An LLC may, however, elect to be taxed as a corporation by submitting IRS Form 8832. When the LLC wishes to keep earnings for future expansion or when the owners want to lower their self-employment tax liability, for example, this may be advantageous. Rate of Federal Taxation for LLCs:
An LLC is not required to pay federal income taxes because it is a pass-through entity. Instead, the owners are “passed through” the earnings and losses, who are then reported on their individual tax returns. Individual tax rates vary according on filing status and income levels. For instance, in 2021, a single filer with taxable income between $40,401 and $445,850 will pay 22% in taxes.
LLCs must remit an annual Limited Liability Entity Tax (LLET) to the state of Kentucky. Rates for the tax, which is based on the LLC’s gross receipts, range from $40 to $2,500. The LLET must be paid by mail or online by June 15 of each year.
While taxes cannot be entirely avoided by an LLC, there are a number of ways that can help lower the tax burden. Rent, utilities, and supplies are a few examples of company expenses that the LLC may write off. In addition, the owners can lower their taxable income by funding tax-deferred retirement funds like a SEP IRA or 401(k).
You have various options for paying yourself as an LLC owner. A wage, a fixed payout, or an owner’s draw are the three most popular ways to pay. Payroll taxes apply to salaries, but not to guaranteed payments. Although an owner’s draw is not a business expense and does not lower the LLC’s taxable income, it is not subject to payroll taxes either.
In conclusion, it is critical for each business owner to understand how an LLC is taxed. Despite the fact that an LLC is a well-liked business form that enables personal asset protection, it is crucial to evaluate the tax implications and speak with a tax expert to ensure compliance with federal and state tax regulations.
Rent, utilities, office supplies, equipment, travel expenditures, advertising and marketing charges, professional fees, as well as employee pay and benefits, are just a few of the business expenses that an LLC may deduct. To maintain compliance with tax rules and regulations, it’s crucial to keep correct documents and receipts to substantiate these write-offs. You should also speak with a tax expert.