31. How to File Taxes for Your LLC

Do you have an LLC but are confused about how to file your taxes? This week's podcast episode is just for you.

April 15th is less than a month off, which means you need to get those LLC taxes done. Tax laws can be complicated and overwhelming., but whether you are doing your own or hiring a pro, it's important as a business owner to know the basics. 

Quite simply, informed business owners make better decisions.

In this week's episode of Purposeful Profit I break down how to file your taxes if you are a single member LLC or if you are a multi-member LLC. I also explain the 2 components of the taxes on your LLC's earnings and explain what you can deduct and what you can't. 

🎧 Tune into this week's episode and be ready to get those taxes done.

Learn:

• How single and multi-member LLC’s report their taxes
• What self employment taxes are and how they are calculated
• 3 tax deductions to not forget about

Mentioned in this episode:

Want more help on your taxes? Tax planning and literacy is part of what I do with my clients in my financial mentoring and coaching program. Book a call to continue the conversation.


Other resources:

• S Corp Tax Savings Calculator
• Get your Simple Financials Bookkeeping template
• Get Your 30 Days of Money Mindset Prompts

DISCLAIMER: The information in this podcast is for informational purposes only and does not constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, we assume no liability or responsibility for any errors, omissions or regulatory updates.

Transcript

Welcome to Purposeful Profit, where I help you take your business to the next level. I'm Carla Moats, Finance and Strategy Coach, and Fractional CFO for high-achieving female entrepreneurs. I'm here to empower women to build wildly profitable businesses that give them the freedom to live their dream lives. I'll use my more than 30 years of finance and consulting experience to take the mystery out of your finances, help you make more money, and go after your next big thing.

Hi there, and welcome back to the Purposeful Profit Podcast. I'm your host, Carla Moats, and I'm a financial mentor and coach, and a financial whisperer for female founders. My mission is to help you get your finances in order and put more profit in your pocket.

So, today we're going to talk about taxes. Here in the States, the US individual tax deadline is just a few weeks away. Many of you listening to this podcast have an LLC and today's podcast is really for you. I'm going to give you a primer on how to file your taxes for your LLC. When I get inquiries from listeners, from clients—prospective clients, I often get a lot of questions around, “I'm not sure how to file my taxes”. Today we're going to answer those questions for you. Just a little disclaimer I'm going to put in place here, this is being recorded in March of 2024. Tax laws change frequently and they can be complicated. The podcast was recorded in 2024 and was based on current tax law but please consult your personal tax advisor for any changes. So, let's dive in.

First, before I go into the meat of today's episode, let's put something out there. US tax law is complicated. It can be overwhelming. Back when I was in public accounting, we were referred to the US tax system as the “Accountants Full Employment Act”. If it wasn't for how complicated our tax system was, we would have a lot of unemployed accountants. I do think as a business owner, it is really important to understand the basics even if you hire a preparer.

I see a lot of people who start their business and they hire somebody, a tax advisor up front, and they just completely delegate it to that person. It's not that you need to have the knowledge to prepare your return yourself but I do think it's really important for you. Just like anything you outsource to have a basic knowledge that you can ask intelligent questions and you just to be curious. Informed business owners make better decisions and they ask better questions. Tax software and even better, a good tax preparer, is going to make your tax preparation easier and help automate your compliance. And please, for the love of God, under no circumstances should you complete your taxes manually.

When I came out of college (I'll age myself a little bit here), it was nearly as automated obviously as it is now. We still had what we called tax planners. It was this high on a 3 or 4-inch package of paper that would go to our clients each year that they would have to fill out manually with all of their different information. All this is automated now, so use tax software if you decide to do it yourself. Most tax software will take you through each question, like an interview format because the question that comes up is, “Can I do my own taxes?”

I always advise my clients to get a pro. In full disclosure, right now, I currently do my own taxes. This is probably the last year I will. They're getting complicated enough that I'll probably outsource it next year but I come from an accounting. A tax background, I took taxation classes in college. I keep up on tax changes, so I feel fairly confident. If I was an S Corp (which I'm not right now), I would definitely be hiring somebody to do it. But if you're an LLC, you're filing your taxes on a Schedule C—if you're a single owner, it can be done. But if you do, again, use tax software because it's just going to make your process a lot easier.

If you are thinking about doing it on your own, here are some things to think about. How good are your records and what's your time worth? I can do my individual taxes because I've been doing it for so many years. I can do them, probably, in about a third or fourth of the time, that it's going to take the average non-accountant to do their taxes. So, how much is your time worth? How sure are you that you'll capture all possible deductions? Again, these tax software have questionnaires and interview-type styles built into them to try and capture them. But even then, you need to know what the question is asking.

How comfortable are you that you're going to capture your deductions?
How knowledgeable are you on what's considered a legitimate business expense? Where were you preparing your taxes before you had a business?
Have you been doing your taxes before?
Are you a single-member or multi-member LLC?

I never advise people to file more specialized returns like a partnership return. And we're going to talk later that if you are a multi-member LLC, you have to file a partnership return. I never advise clients to do that. The most I would ever advise a client to do is a Schedule C, and again, how complicated is the rest of your tax return? If all you have is your business or maybe a day job or maybe a spouse has a job and then you have your business, that's really not all that complicated. But when you get into having investments that you're selling capital gains taxes, rental properties, second homes, things get a lot more complicated.

So, let's talk a little bit now and get into our primer on LLCs. First off, one of the key features of an LLC is that its status is what's called a “pass-through” entity. For tax purposes, a “pass-through” entity is just a term we use in the accounting and tax world. It means that the LLC itself does not pay taxes on its income. Instead, all of the income and expenses pass through to the owners of the LLC who are going to report it on their individual tax returns so, there is no federal LLC return. Everything that you have, your revenue and expenses is going to pass through, and it's going to get reported on your personal return. This can result in some tax advantages for LLC owners because they avoid the double taxation that can occur with what's called a C Corporation.

A C Corporation pays taxes on its income, and then the shareholders get taxes on their dividends received. So think about it this way, if you have stock—let's just say Apple, Apple Corporation pays taxes on its income and then, they distribute dividends to you and you then turn around and pay taxes on those dividends. This is what they call “double taxation”.

LLCs aren't the only “pass-through” entity out there. S Corporations are also a pass-through entity. But again, it just means that it is the entity that is not following its own taxes. It's passing through to the individual. By default, an LLC that is a single member is going to be taxed as a sole proprietor. So essentially, if you have an LLC, you're going to pay taxes and report your taxes the same way as if you did not have an LLC—if you are the only owner.

So for a while, I was in sole proprietor and did not have my LLC. I reported them and then, the same way that I report them once I have my LLC. An LLC can also elect to be taxed as an S Corp by filing form 2553. S Corp taxes are more involved and they're not part of this episode. I did a recent episode on the differences between LLC and S Corp taxation. You can go back and take a listen to that if you want. I'll drop the link in the show notes.

There are two basic parts of federal taxes for an LLC. You have self-employment taxes. Self-employment taxes are taxes paid by individuals who work for themselves, including LLC owners or sole proprietors. This tax is similar to the Social Security and Medicare taxes that are paid by employees and are used to fund these programs. When you pay your self-employment tax, this is funding your future Social Security and your future Medicare.

If you were a W-2 employee or your kid is a W-2 employee of a business, when you get your paycheck, the business is paying half of the Social Security and Medicare, and then they are deducting the other half from you. So each half is 7.65% in total. So if you have a paycheck for $1,000, they're going to deduct 7.65% of that out as Social Security and Medicare. They'll also take out your federal and state income tax but then, the company is going to pay 7.65% as well. You don't even see this and I think a lot of times that's why when people get into the self-employment tax and they see the rate, they're shocked at how high the rate is because they don't think about the fact that as a W-2 employee, they're only paying half of the federal government's total requirement for Social Security and Medicare. 

Your self-employment tax rate is 15.3%. It's equivalent to both the employer and the employee shares. I just said that as a W-2 employee, your half that got deducted was 7.65%. Double the 7.65%, which is the employer and the employee share combined, and you get 15.3%. That's what you're going to pay in self-employment taxes as a self-employed person. It gets applied against your net earnings from your business, so take your revenue unless all of your eligible expenses, and based on that number, you're going to pay self-employment tax. You report your self-employment taxes on Schedule SE of your 1040. Again, don't get too caught up in the form number. I'm giving them here again to educate you but if you are doing your taxes yourself and when you go to use your automated software, it will calculate and it'll put it on the correct form for you.

You also then pay your income taxes on your net earnings. I mean this isn't news to anybody, right? The federal government takes a piece of your income. LLC owners do get to deduct half of their self-employment taxes from their taxable income. So let's say, for instance, you have $100K and net earnings or net profit. You're going to have $15,300 in self-employment taxes but then, you're going to deduct $7,650 of that from the $100K, and that difference is what you're going to pay income taxes on it, whatever your income tax rate is.

This deduction gets reported on Schedule 1 of your additional income and adjustments to the income form on the 1040. Again, don't worry too much about the form number. Your tax preparer will do this for you or if you're doing your taxes yourself, you'll enter your information and the tax software will put it on the correct form for you.

So that's just the basics. You're understanding that you're paying taxes in two pieces. The income taxes are a surprise. It's the self-employment tax that often leads to small business owners, especially as their profit gets higher and higher, and that 15.3% becomes a much larger amount. Because again, if you think about it, if I have $100,000 in profit, I'm paying $15,300 in self-employment taxes whereas if I were collecting $100,000 in salary, I'd be paying $7650, Social Security, and Medicare. So that's usually where the sticker shock comes in when people have their own businesses, they start looking at their taxes.

Now let's talk about specifically how you file your taxes. If you're a single-member LLC, then you're going to report your business income and expenses on Schedule C, which is profit or loss from a business of your 1040. There are different lines on this form. There's a line that says revenue and there's a line that says discounts and refunds. There are categories for advertising and auto expenses. There are a bunch of different categories and then, there's another miscellaneous category, which is where you capture anything that doesn't fall into one of the other categories. And you need to report all of your income from your business. If you get paid in cash, it's your responsibility as a taxpayer to report that income.

One of the things I'll bring up here too is that I see a lot of discussion around, “If I didn't get a 1099, do I have to report that income?” Yes, absolutely. The 1099 is just for the IRS to try to catch people under the reporting income. But whether you get a 1099 or not, it's your responsibility as a taxpayer to report your income on your tax return.

Then you're going to deduct expenses in accordance with IRS guidelines. IRS has all kinds of articles out there you can find. Most of your business expenses are going to be fully deductible. If there are certain transactions like meals and entertainment, for the most part, they are only partially deductible. For instance, meals. Generally speaking, if you're just going out to lunch, I talked to somebody the other day who was like, “I'm going to go to the coffee shop and work, and I'm going to have a snack and some coffee.” That's not deductible because you do not have a business reason to go there. You would have had to eat anyway. Now, had she been meeting with an associate and been discussing business there and had a meeting there, then she could have made the case that that it was a legitimate business expense, but even then it would only be 50% deductible.

We went through a period a few years ago during Covid where they made almost all meals and entertainment, 100% deductible. That was a temporary thing. The restaurant industry was in the toilet and they were trying to encourage people to go out and spend more money in the restaurants during Covid because it was causing a hit on the economy. We had a lot of restaurant workers, unfortunately, who lost their jobs. I have a brother who works in the restaurant industry and they were slammed really hard. But it's always historically been that meals and entertainment are 50% deductible, and that goes back to when I was taking taxes in college.

Typical expenses you can deduct include your business coach. Training and education, conferences, workshops, office supplies, office rent, advertising. Sometimes I'll get the question, “Can I do that coaching expenses?” Most definitely if it's business coaching. It's helping you in your business. Things you really can't deduct is when you're stretching it. When you say, “Well, I'm going to hire a weight loss coach, and if I lose weight, I'll have more energy for my business.” That's a personal coach and it isn't deductible unless you can tie it to a business purpose. This is where your tax advisor can come into play and give you some guidance on this and as to what's deductible and what's not.

Travel is deductible when it's necessary and ordinary, but that trip to Costa Rica so you can work on the beach while you have one in-person meeting is probably not going to be deductible. But again, ways you can work with your tax advisor is there are ways to structure trips so that at least parts of the trip can be deductible. Again, work with your tax advisor on that. So if I'm going to Costa Rica for ten days and I'm spending two days of that in meetings or on a business conference, I can deduct those two days, but I'm not going to be able to deduct the entire ten days of the trip and again, you're going to report your self-employment tax on Schedule SE. You're going to report your revenue expenses on Schedule C and based on that, you're going to calculate your 15.3% and that's going to go up on Schedule SE.

If you are a multi-member LLC—you've formed your LLC with one or more people, you're treated as a partnership for federal tax purposes. A multi-member LLC needs to file a Form 1065, which is a partnership return. This form reports the LLC's income deductions and other relevant information. It's similar to the 1120 S, which is the tax return for an S Corp. Again, everything's still going to flow through to your personal return but, you do have a federal return you have to file and this is why I don't suggest if you have a multi-member LLC, get a tax consultant to do your tax return.

That LLC will also issue a schedule K-1 to each member, and a K-1 reports each member's share of their income and deductions or income and expenses. Let's just say I have an LLC with $300,000 in income and $200,000 in expenses, and I am a 50% member of the LLC. I'm going to get a K-1, and I'm going to report $150,000 of the revenue, and I'm going to report $100,000 of the expenses. I'm going to end up reporting $50,000 of the profits that are going to flow through to me, $50,000 is going to flow through to my business partner. Then, you're going to report your income and expenses on Schedule E, which is supplemental income and loss of the 1040. Kind of similar to Schedule C. If you're multi-member, instead of your revenue and expenses going on Schedule C, they're going to go on Schedule E. 

Usually, if you're hiring somebody to do your 1065, they're going to do all of your returns. You're not going to have to worry about it. But if for some reason you hire somebody just to do your 1065, you get the K-1 and then you're going to do your personal return, same kind of thing. The interview format is going to take you through and answer your questions, and it's going to put it in the right form. And like a single member, you're also going to file self-employment taxes on form SE.

Let's talk about state taxes. So this is one of those things that you need to get curious about because some states will have required filings or taxes for LLCs as LLCs are covered by state statutes. So for instance, here in Illinois, I don't have to file an LLC return. I don't have extra fees other than any type of registration fees I have to do. I don't have a specific tax on analysis. I don't have to file an informational return, but that's not the case in every state. So make sure that you understand your state tax laws and consult your state tax authorities or your tax advisor if you have questions. 

Another thing I want to talk about is some other deductions. These are deductions that aren't necessarily going to be in your bookkeeping system. I use QuickBooks, and the three things I'm going to talk about here are not things that I would capture inside my bookkeeping system.

One is mileage for 2023. It was 65.5 cents per mile back in the day. When I took tax classes back at my college, I went to Virginia Tech as an accounting major, it was 27.5 cents per mile. So it's gone up quite a bit. Trips to and from your main place of business aren't deductible. So if you have an office, your trip to and from your office is not deductible. But other trips travel to other locations or clients is.

For example, one of the main applications of this for lifestyle businesses is service business owners. Many of us work from home, you deduct your mileage for your networking events. I will travel to networking events both within my own town where it's maybe only a few miles. I've also driven to another town 20 or 30 miles away, and I can deduct my mileage for that and it adds up. I think last year, I had a deduction for almost $800 in mileage. So it does add up. Keep track of it. There are different apps out there that you can use to track your mileage. If you are in QuickBooks, you can download the QBO app and you can track your mileage right within the QBO app, which is what I do.

And then let's talk about home office deductions. This is a deduction for the portion of your home that is used regularly and exclusively for your business purposes. And those two words are really important. It needs to be used regularly. If you just use it once or twice a year, that doesn't count. It's got to be regular. It's got to be exclusive. That means if you do work at your dining room table and your kid also does his homework, it doesn't qualify. But you can deduct expenses related to that portion such as mortgage, interest, insurance, utilities, and repairs. The deduction can be calculated using the simplified method, which for 2023 was $5 per square foot of the home, up to 300ft² to a max of $1,500, or the regular method, which is what most people are going to use because it's going to be higher, and that's based on the percentage of the home used for business.

The only caveat I will put is a home office with home office deductions. Historically, this has been what I call an “audit trigger”. The way the IRS system works is they have an algorithm out there that looks for certain things that they believe are abused, and those things are more likely to trigger an audit. Home office deductions are one of them. The person who builds an addition onto his house. It's got a bedroom and a kitchen and, it's a cabana for the pool, and it's got this little tiny spot in it that's an office—that he doesn't even use exclusively for an office, and he tries to deduct additions to his house, those kinds of things. The home office is it's just historically been something that the IRS finds gets abused. So just make sure that you've dotted your I's and crossed your T's if you're going to do a home office deduction. By all means, take it if you meet the requirements. But just make sure you understand the rules before you take that deduction.

Then, of course, retirement contributions. You can deduct contributions made by a retirement plan such as a SEP IRA, a simple IRA, or a solo 401K. These contributions can help reduce your taxable income. You can put it into Roth IRAs as well. Deduction limits and rules vary depending on the type of retirement plan but, if you are somebody who is thinking that your tax bill is going to be a “big bill” this month, this year, it's too late for 2023, but you can be planning that for 2024. You can talk to somebody about setting up a SEP IRA, or make monthly contributions to an IRA or a Roth IRA so that you can save some money in taxes at the end of the year.

This is not an exhaustive list, and this is where a really good tax advisor can come into play—the work I do with my clients as well. We do a tax strategy session as a part of our work together, where we go through and identify potential tax savings moves that they can make.

In most software packages, again, we'll take you through a series of questions to help you identify these and it's not the same as a human. And the other thing is, to take advantage of a lot of these, particularly like the retirement contributions. You need to plan ahead. You can't be waiting until February to find out, “Oh my God. I got this huge tax bill”, because at that point it's too late to make the retirement contributions.

I always advise people minimally in Q4 to be having a meeting with your tax advisor, to start to take a look at what your tax bill is going to be like. This is one of the reasons it's important to keep your books throughout the year and not wait until February, March, or April to figure out how much revenue and expenses you had, because, at that point, it's too late to do anything about the prior tax year be. Going into Q4, work with your tax advisor and start to get a feel for,

“Here's my revenue and my expenses.”
“Here's my profit.”
“What's my tax bill likely going to look like?”
“What are the things I can be doing in Q4 to save some money on taxes?”

At the same time, I'll tell people, don't just load up on expenses to avoid taxes. That's not a good financial strategy. One of the best ways to know if you are being successful is that you are paying taxes. If you're not paying any taxes, avoid taxes in a legitimate way. But I will sometimes see people just wanting to spend, spend, spend at the end of the year to avoid taxes. And if there's a legitimate reason like you're pulling expenses from one year into the preceding year, that makes sense. But if you're just spending money to spend money, you're defeating the purpose.

So I hope this helped you understand how to get those LLC taxes filed. Consult a good tax professional. Make sure you understand your financials. Have good records. Don't wait until the end of the year to be looking at your numbers. If you want some support with that, I invite you to book a free financial health assessment at www.carlamoats.com/workwithme and we can continue this conversation. And I will see you next week.

Thanks so much for listening to the show. Remember that your finances deserve some love. Finance doesn't have to be complicated or overwhelming, and you do not have to do it alone. I'd love to talk to you about your business, so please come on over to www.carlamoats.com to learn more. Or if you're ready for financial and strategy support that will uplevel all your business, go to www.carlamoats.com/workwithme to book your free financial assessment. And the last favor I'll ask is for you to help me get out the word. Tell your friends about this podcast and share it on your favorite social media. Until next week. Go create some purposeful profit.