If you became a member of a limited liability company (LLC) last year, and the LLC made money, you may have questions about how your portion of the income will be taxed. LLCs are popular business structures, primarily because of the benefits they offer, and here are the answers to some of the questions you may have.
How Are The Profits Divided?
When the LLC was formed, you would have signed an LLC agreement. In this agreement, you will find all the important details of how the LLC operates. This includes the names of all members, each person's responsibilities, and the percentage details about how profits are divided.
If you are the only member of the LLC, you would earn 100% of the income it made. If you are one member among several or many, you would be entitled to a certain percentage of the income. This might be 5%, 60%, or any other percentage.
How Is Income Calculated?
Income for the LLC is calculated in the same way as it is for any type of business structure. It begins with the income the LLC earned for the year. After that, all the expenses of the business are written off, which means they are subtracted from the income. This leaves you with the LLC's net profit, which is the amount divided between the members accordingly.
Once this amount is calculated, the LLC must file a Form 1065 directly with the IRS. This form states the income of the business and the amount each member individually earned. Each member is then issued a Schedule K-1, which is a tax document that states that member's individual income from the LLC.
How Do You Pay Taxes On It?
After receiving your Schedule K-1, you must bring it to your accountant. This form is considered self-employment income, because it has no taxes withheld from it. This means you will have to pay self-employment taxes on the income. You will also have to pay Social Security, Medicare, state, local, and federal taxes on the income.
The LLC itself does not pay any taxes. Instead, each member is responsible for paying taxes on their own portions. If you expect to receive a lot of income from your LLC, you may want to consider sending estimated tax payments to the government throughout the year. This would help you avoid having a large tax bill in the spring, and it may also help you avoid paying penalties on this income.
For more information, contact The Callen Accounting Group, PLLC or a similar firm.