First, you need to understand how your LLC is taxed.
By default, an LLC is considered a “pass-through” entity for tax purposes.
This means that the profits and losses of the business pass directly to the owners, who report them on their individual income tax returns.
There’s no separate federal income tax for the business itself, which helps you avoid the double taxation issue that’s common with traditional corporations.
However, it’s essential to note that while the LLC itself doesn’t pay income taxes, you, as an owner, will be on the hook for self-employment taxes.
These taxes are calculated based on the LLC’s total net earnings rather than your actual distribution from the profits.
This can sometimes lead to a hefty tax bill, especially for profitable LLCs.
But don’t worry, that’s where the S Corp election comes into play. But more on that later!
Stay with me; we’re just getting to the good stuff!
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