If you’re an LLC owner, paying your taxes four times a year can seem like an unnecessary chore. But if you estimate your LLC quarterly taxes correctly, it can actually ease your tax burden – when tax season arrives, you will have already paid your tax liability.
In this guide, you’ll learn how to pay estimated quarterly taxes for your LLC and how estimated taxes work.
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How do LLC taxes work?
The IRS typically considers Limited Liability Companies (LLCs) as pass-through entities or flow-through entities. A pass-through entity is a type of business structure where income generated by a business is treated as the personal income of the business owner. Basically, the profit your business generates is exempt from corporate income tax.
Incorporated businesses, on the other hand, typically have to pay corporate income tax before distributing earnings to their owners. The owners will then report the dividends they receive as personal income when they file their taxes.
Unfortunately, if you run an incorporated business, you’ll have to pay taxes twice on the income your business gets. And that’s the benefit of being a pass-through entity – you avoid double taxation.
Another benefit is that you can receive extra deductions that aren’t offered to owners of incorporated businesses. For instance, you can take advantage of the Tax Cuts and Jobs Act’s 20% deduction on Qualified Business Income (QBI).
Also, if your business suffers a loss, the IRS will pass through the loss, and your overall taxable income will reduce.
Aside from LLCs, other types of pass-through entities include:
- Partnerships
- Sole proprietorships
- S-Corporations
That said, the default tax status that the IRS assigns to your LLC is determined by whether your business is run by a single person or multiple people. You can choose your LLC to either be taxed as a sole proprietorship, partnership, or corporation. If you don’t decide, then the IRS will tax your business as a partnership or sole proprietorship by default.
Single-Member LLCs
The IRS treats LLCs as ‘’Disregarded Entities”. What this means is that the IRS simply ignores the structure of your business and taxes it like a sole-proprietorship. Just like sole-proprietors, you’ll report whatever income your LLC gets on your personal tax returns.
You can pay yourself with monthly distributions, but you won’t pay income tax on them as you’ve already paid income tax on your LLC’s profits. Note, though, that you’ll need to pay self-employment tax on the distributions you receive.
Read our resource about a LLC vs sole-proprietorship.
Multi-Member LLCs
Naturally, filing returns is a bit complicated for multi-member LLCs compared to single-member LLCs.
If an LLC is owned by multiple people, the IRS typically treats the business as a partnership.
If you’re one of the owners of a multi-member LLC, you’ll have to fill out Form 1065. Each owner will also receive a Schedule K-1 that’ll include each owner's share of credits, income, and deductions.
To understand how this works, let’s use an example. Let’s say you own 50% of a business and your partner owns the remaining 50%. In such a situation, both you and your partner will have to pay taxes on half of the LLC’s profits. You can also get 50% of the tax deductions available to your LLC and you’ll be able to write off half of the losses your business incurs.
If an limited liability company is taxed as a single member or partnership, the LLC can receive a 1099.
Self-employment tax for LLC owners
LLC owners have to pay taxes similarly to independent contractors, freelancers, and self-employed individuals. Normally the IRS withholds Social Security and Medicare taxes from W-2 employees' paychecks. But since LLC owners are not W-2 employees, these taxes are not usually withheld from what they earn. Instead, they have to pay these taxes – called self-employment taxes – directly to the IRS.
The rate for self-employment tax is 15.3% – the sum of Social Security tax that’s 12.4% and Medicare tax that’s 2.9%. When you’re a W-2 employee, this rate is split in half between you and your employer – your employer pays 7.65% and the remaining 7.65% is withheld from your paycheck.
But as an LLC owner, you pay the entire 15.3%. The good news, though, is that you can write off half of the self-employment tax when you file your annual tax return.
What Exactly Are Estimated Quarterly Taxes?
The IRS requires you to pay self-employment taxes throughout the year in installments. These installments are referred to as estimated quarterly taxes, and they’re due four times a year. Note, though, that these quarterly payments are due only if your earnings exceed a certain amount. So, depending on how much you earn, you might end up paying taxes on four “Tax Days” throughout the year.
You need to report quarterly taxes using Form 1040-ES. To figure out if you’ll be using Form 1040-ES to make estimated payments in the 2022 tax year, do the following:
- Determine the tax amount you paid last year
- Calculate 90% of the tax you think you’ll pay this year
- Compare the two figures and take the smaller amount
- Compare the total amount of the withholdings and credits you expect to this figure
Let’s say, for instance, you paid $700 in taxes last year. You estimate you’ll pay $1,200 as tax this year, and 90% of that is $1,080. So the smaller amount is $700. You need to figure out the credits and withholdings you’ll get this year and compare them to this $700.
If you estimate you’ll be paying at least $1,000 in taxes after you’ve taken out all the deductions, and the amount of your expected withholdings and credits is lower than the number you’ve calculated – in this case, $700 – then you need to report your earnings on Form 1040-ES and pay quarterly tax payments.
Because these are “estimated” taxes, chances are high that you can overpay them. Luckily, if you do overpay quarterly taxes, then you can request a refund from the IRS at the end of the year.
How to calculate your estimated tax payments
Again, Form 1040-ES can help you calculate your estimated LLC quarterly estimated tax payments. Here is a simple process you can follow:
- Figure out the adjusted gross income (AGI), taxable income, and deductions you expect. If you normally itemize your deductions, determine the total amount of deductions you expect to receive this year
- If you’re can’t figure out your expected self-employment income for the year, you can use last year’s income and deductions as a starting point
- Get Form 1040-ES and use its worksheet to determine your estimated taxes and pay quarterly tax payments
- If you find out you’ve estimated your income wrongly, then fill out another Form 1040-ES to recalculate your payment for the upcoming quarter
Typically, most self-employed taxpayers pay estimated taxes in 4 equal installments. But this may not be the case in some circumstances. For instance:
- You unexpectedly earn a lot of money in a specific quarter
- You determined your estimated taxes after the first quarter’s deadline has passed
- You had an overpayment in the prior year and the IRS credits the amount to this year’s quarterly tax payments
Note that underpayment isn’t an option as the IRS will likely charge you a penalty if you don’t pay enough in LLC estimated taxes throughout the year. Even if you expect to get a tax refund, the IRS can still penalize you for underpayment.
But there are some specific occasions where you can get a break on penalties failing to file quarterly taxes. They include:
- You’re aged 62 or older, retired, or became disabled recently, and your underpayment has a “reasonable cause” and it wasn’t due to “willful neglect”
- An unusual circumstance, disaster, or casualty occurred during the year
When are LLC quarterly tax payments due?
Making quarterly tax payments late can also attract penalties from the IRS, that’s why it’s important to make each payment on time. Here’s when you need to pay quarterly taxes in 2022:
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1st Quarter:
- The income you earned between January 1st and March 31st
- Your payment deadline is April 18, 2022
2nd Quarter:
- The income you earned between April 1st and May 31st
- Your payment deadline is June 15, 2022
3rd Quarter:
- The income you earned between June 1st and August 31st
- Your payment deadline is September 15, 2022
4th Quarter:
- The income you earned between September 1st and December 31st
- Your payment deadline is January 17, 2023
If the payment deadline falls on a weekend or holiday, then the quarterly payment due date changes to the following business day
