7 Common LLC Mistakes in Your First Year

Watch this video to learn about common LLC mistakes that happen in your first year of business so you can avoid common mistakes.

Let’s break out some of the LLC mistakes from the video so we can discuss them a little bit more.

1. Pass-through Taxation Explained

Pass-through taxation, also known as flow-through taxation, is a tax structure commonly used by small businesses such as Limited Liability Companies (LLCs). Under this structure, the business income is not taxed at the entity level, but instead, the income is passed through to the individual owners, who report it on their personal income tax returns.

For a business owner with an LLC, this means that the profits and losses of the business are reported on the owner’s personal income tax return, rather than on a separate business tax return. This can simplify the tax reporting process and eliminate the need for the business to pay corporate income taxes.

Additionally, LLCs offer the flexibility to choose how the business is taxed. An LLC can choose to be taxed as a partnership, which allows for pass-through taxation, or as a corporation, which may result in double taxation (taxing the business profits at the corporate level and again at the individual level when the profits are distributed to the owners as dividends).

One key benefit of pass-through taxation is that it allows small businesses to retain more of their profits, which can be reinvested in the business or used to pay the owners. Pass-through taxation also allows for greater transparency, as the business’s profits and losses are reported directly on the owner’s personal tax return.

However, it’s important to note that pass-through taxation does not provide the same level of liability protection as a corporation. LLC owners are still personally liable for any debts or legal issues of the business, and there may be some limitations on the amount of losses that can be deducted from personal tax returns.

2. Self-Employment Taxes Explained

Self-employment taxes are the taxes that self-employed individuals pay to fund Social Security and Medicare. As an employee, these taxes are automatically deducted from your paycheck. However, if you are self-employed, you are responsible for paying both the employer and employee portions of these taxes.

The self-employment tax rate is currently 15.3% and is calculated based on your net income from self-employment. If your net income from self-employment is $400 or more, you are required to pay self-employment taxes.

To calculate the amount of self-employment taxes you owe, you must first calculate your net income from self-employment. This is done by subtracting your business expenses from your business income. Once you have calculated your net income, you will owe 15.3% of that amount in self-employment taxes.

Self-employment taxes are paid quarterly through estimated tax payments, and any remaining taxes owed are paid when you file your tax return. It’s important to keep accurate records of your business income and expenses to ensure you are paying the correct amount of self-employment taxes.

When it comes to common LLC mistakes, taxes have to be at the top of the list. Be sure you’re saving profits for your taxes.

3. Estimated Taxes Explained

As a self-employed individual or LLC owner, you are responsible for paying estimated taxes on your income and self-employment tax on a quarterly basis. Estimated taxes are used to pay income tax, Social Security tax, and Medicare tax. Make sure to follow the dates so you can avoid any LLC mistakes.

To calculate your estimated taxes, you will need to estimate your total income for the year and determine your expected tax liability. You can then divide this amount by four and make quarterly payments. If you underpay your estimated taxes, you may be subject to penalties and interest.

The due dates for estimated taxes are typically April 15th, June 15th, September 15th, and January 15th of the following year. If the due date falls on a weekend or holiday, the payment is due on the next business day.

It’s important to keep accurate records of your income and expenses throughout the year to ensure you pay the correct estimated taxes. If your income or expenses change significantly, you may need to adjust your estimated tax payments.

While estimated taxes can be a bit daunting, they can help you avoid a large tax bill at the end of the year and ensure you are meeting your tax obligations throughout the year.

Common LLC Mistakes : Waiting too long to pay estimated taxes. As an LLC owner if you expect to owe more than $1,000 in taxes, you need to file estimated quarterly taxes.

irs.gov

4. Tax Extension for LLC owners

LLC owners who need more time to file their taxes can request an extension by filing Form 7004 with the Internal Revenue Service (IRS). This form must be filed by the original due date of the tax return (March 15th for most LLCs) and will provide an extension of up to six months (until September 15th).

Common LLC mistakes with filing for your extension are doing it too late, or thinking you don’t need to file for the extension.

To file for an extension, LLC owners will need to estimate their tax liability and pay any estimated taxes due by the original tax deadline. Failure to pay estimated taxes on time may result in penalties and interest.

It’s important to note that an extension only extends the time to file the tax return, not the time to pay any taxes owed. Any taxes owed must be paid by the original due date to avoid penalties and interest.

Filing for an extension can provide LLC owners with additional time to gather and organize their tax information and ensure they are meeting their tax obligations in a timely manner.

5. W-2 Filings for LLC Owners

As an owner of an LLC with employees, you are required to file W-2 forms for your staff with the Social Security Administration (SSA) and the employee by January 31st of each year.

To file W-2 forms, you will need to gather the necessary information, including the employee’s name, address, Social Security number, and earnings for the year. You will also need to calculate the appropriate federal, state, and local taxes withheld from each employee’s paycheck.

Once you have this information, you can either fill out the W-2 forms manually or use a payroll software program to generate them (we recommend Gusto for a payroll service). The W-2 forms should then be distributed to your employees by January 31st.

In addition to distributing W-2 forms to your employees, you will also need to file copies with the SSA. This can be done either by filing paper forms or electronically through the SSA’s Business Services Online (BSO) system.

It’s important to ensure that all W-2 forms are accurate and submitted on time to avoid penalties and interest. Filing W-2 forms for your employees is an important part of running your LLC and ensuring that you are meeting your tax obligations.

6. 1099 Filings for LLC

As an owner of an LLC, you are required to file 1099 forms with the IRS and send copies to any non-employee service providers who were paid $600 or more for services during the tax year.

To file 1099 forms, you will need to gather the necessary information, including the service provider’s name, address, and Social Security or taxpayer identification number. You will also need to calculate the total amount paid to each service provider for the year.

Once you have this information, you can either fill out the 1099 forms manually or use a tax software program to generate them. The 1099 forms should then be distributed to the service providers by January 31st and filed with the IRS by the appropriate deadline (typically the end of February for paper filing or the end of March for electronic filing).

Filing 1099 forms is an important part of meeting your tax obligations as an LLC owner and ensuring that you are accurately reporting your business’s expenses.

7. Renewing your LLC (common LLC Mistakes)

One of the most common LLC mistakes is forgetting to renew your LLC. Renewing your LLC with the state is a process that must be completed periodically to ensure your business remains in good standing. The specific renewal requirements will vary depending on the state in which your LLC is registered.

In general, LLC renewals involve filing paperwork and paying a fee with the state. The paperwork typically includes an LLC renewal form that may ask for updated information about your business, such as the names and addresses of the LLC members and managers. Some states may also require a current Certificate of Good Standing or a Tax Clearance Certificate.

The renewal fee may vary depending on the state and the type of LLC, but typically ranges from $50 to $500. It’s important to pay the renewal fee on time, as failing to do so can result in penalties, interest, or even the revocation of your LLC’s status.

Renewal deadlines can also vary depending on the state. Some states require annual renewals, while others may require biennial or even triennial renewals. It’s important to check with your state’s Secretary of State office to determine your LLC’s specific renewal requirements and deadlines.

Renewing your LLC with the state is an important step in maintaining your business’s legal status and protecting your personal assets. By staying on top of renewal requirements, you can help ensure that your LLC remains in good standing and can continue to operate legally.