Self Employed LLC: Everything You Need to Know
A self employed LLC has a number of advantages. 3 min read
Self Employed LLC
A self employed LLC has a number of advantages. First, you do not have go to a physical office or answer to another person. With that, self employment does have some downsides, most notably the payment of self employment taxes. Newer business owners, consultants, and freelancers tend to be surprised on how much of their income becomes susceptible to self employment taxes. Depending on the situation, you can reduce the tax balance through the creation of an LLC or corporation.
If you work for another person, your boss would have to pay half of all Medicare and Social Security taxes, and the remaining half would be deducted from your paychecks. However, you must pay all taxes if you are self employed, otherwise called a self employment tax. As of 2014, SS tax was 12.4 percent of all income, and Medicare taxes amounted to 2.9 percent of the income. You would pay SS taxes on incomes that stretches to $117,000, and there is no SS tax on the part of your income that is over the threshold. For Medicare, you would pay taxes on all income, and you must pay an added 9 percent tax on wages surpassing $200,000.
Overall, you will be taxed if you are the owner of the following legal entities:
Moreover, you need to calculate self employment taxes and make quarterly payments to the IRS, or you may face penalties and fines.
The LLC is a business that affords owners certain liability protections. Essentially, it provides the same liability protections as a corporation, but it is not considered a corporate entity. Also, such an entity uses pass-through taxation, where profits and losses pass from the business to individual members. Members would then report losses and profit on their individual tax returns. This allows members to pay taxes at lower rates. The LLC itself does not pay business income taxes.
When it comes to an LLC structure, LLCs can have one or multiple members, and there is no limit on how many members can own shares in the business.
Sole-owners pay taxes as a sole proprietorship, while multi-member LLCs pay taxes in the form of a partnership. Sole-owner LLCs must report profits and losses on Schedule C with a 1040 tax return. Even if you leave all profits in the LLC bank account at end of a year, you must still pay taxes on the money.
Co-owner LLCs also do not pay business income taxes. Rather, they use Schedule E to note profits and losses on their individual tax returns.
All members get a share of the losses and profits based on the amount invested in the LLC, or as laid out in an operating agreement. Operating agreements should outline distributive member shares that’s relative to his or her investment in the business.
- Example: Jimmy owns 60 percent of the business, while Anna gets the remaining 40 percent. Jimmy must receive 60 percent of all losses and profits, while Anna gets 40 percent of such business activity. To allocate distributions in a non-equal manner, you must use special allocation, and it comes with certain IRS guidelines.
Further, the IRS designates LLC members as if they receive the shares every year, meaning that all members must pay taxes regardless of whether they actually received the money. Even if the money is used to expand the business, or used to purchase equipment, members must still pay taxes on the distributive shares.
Since LLC members are not employees, but act as self-employed owners, they cannot be subject to tax withholding. Rather, each member must set aside enough to pay taxes on profit shares. Members must determine how much taxed owed for that year and pay the IRS accordingly every quarter. You would pay throughout the following months in a year:
When speaking of limited coverage, this means that your personal funds are safeguard from business liabilities and debts. This places a divide between your personal and business assets, and creditors cannot seize your personal assets to pay for business debts. An LLC provides such a safeguard, and you stand the risk of risking your personal assets if you conduct business without an LLC entity.
If you have more questions on a self employed LLC, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s attorneys will provide greater insight into how you can maximize tax advantages so you can save as much money as possible. In addition, they will help you choose the right legal entity for your business endeavors.