How to Pay Estimated Taxes as a Single-Member LLC
Updated on Sept 17, with new information on paying taxes online.
I’m going to remind y’all that I am NOT A TAX PROFESSIONAL, so I’d suggest you consult with your own assortment of CPAs if you’ve recently formed an LLC of your own — which is how I learned how to do all of this. With that in mind, here’s what I now know about paying estimated taxes as a single-member LLC:
Your business’s income is your income. This is completely counter-intuitive, because when you start filing all of your LLC paperwork and setting up your business bank accounts and all of that, everyone will tell you to keep your business income/expenses separate from your personal income/expenses. Don’t let clients deposit paychecks into your personal bank account. Don’t put business expenses on your personal credit card; if you need to fund your business with personal income (and many new businesses do), transfer the money to your business bank account and record it as a capital contribution.
By keeping your business and personal finances separate, you help limit your liability (which makes sense, as you are now running a limited liability company). The theory is that if someone sues you or something like that, they can only go after your business income, not your personal income. This is, of course, not always the case — but it’s still a good business practice to keep your personal money out of your business money, while occasionally making distributions from your business account into your personal account because the whole point of starting a business is to create a structure through which you can increase your personal income, bonus points if the business is useful or helpful to someone else.
Here’s where it gets weird-and-fun: the money you pay yourself from your business account is called a distribution, and you can go into a single-member LLC assuming that your distributions are the only part of your business income that also qualifies as personal income. THIS IS NOT THE CASE! Because you are a single-member LLC, which the IRS treats as equivalent to a sole proprietorship with slightly more “limited liability,” every penny your business earns is technically your personal income. Even though you’re supposed to keep your business and personal finances separate!
Therefore, when it comes time to pay taxes (quarterly or annual), you have to treat the entirety of your business’s gross income as your personal income, even if you only took a portion of it as a distribution.
Make sure you are setting aside a percentage of your business’s income for taxes — and remember that your business income will be added to your personal income, so your overall tax burden might go up. I’ve been setting aside 25 percent of my gross freelancing income for taxes for years, and when I talked to my CPA team about what I needed to save for The Billfold LLC, they said that 25 percent of the gross was a good estimate. The Billfold will probably bring in between $45,000-$50,000 gross this year, so if your business earns significantly more or less than that you should talk to your own CPAs about how much you might need to set aside.
Now wait a minute, you might say. Can’t you deduct your business expenses from your taxable income? Couldn’t you use the money you set aside for paying taxes to, like, run a bunch of additional features on The Billfold, thereby increasing your business expenses and decreasing your tax burden? Also, aren’t small-business owners, including sole proprietors and LLCs, supposed to get a huge tax deduction this year thanks to the Tax Cuts and Jobs Act? Do you really have to set aside 25 percent of the gross?
Well! I, too, care about the answers to those questions — so I did the long-form math. I hauled out a tax worksheet and subtracted my business expenses and re-read Josh Fruhlinger’s Surefire Tax Estimating Process for Freelancers, in an attempt to figure out whether I was saving too much Billfold LLC money for taxes and whether I could use that money to pay more freelance writers instead.
It turns out that the money I had currently set aside using the “25 percent of the gross” method was almost exactly what I was scheduled to owe using the long-form math method. Like, within a couple hundred bucks. Sometimes the standard business advice is just as good as spending time hunched over tax worksheets!
I am going to ask my CPAs what might happen if I increased my business expenses, because that should decrease my tax burden a little bit — but I also have to be careful to not run my business at a loss, and I have to make sure that I have enough money left over after “gross minus expenses minus taxes” to give myself reasonable compensation (yes, that is an IRS term). Finding that balance is one of my goals for Q4 2018.
There are two more pieces required before I can ensure this whole thing is perfectly balanced:
- Since both The Billfold LLC and my sole proprietorship freelance work go on my personal tax return (on two separate Schedule Cs), I’ll end up getting pushed into the 24 percent tax bracket. (Yes, I know that means I only have to pay 24 percent on every dollar above $82,501, we don’t need to rehash how tax brackets work.)
- Since my income has increased (even though only a portion of this increase is getting distributed into my personal bank account), I will very likely have to pay back most, if not all, of my health insurance subsidy. That’s an extra $3,600 I could owe on my taxes, so I need to figure out where that money is coming from. Should I be setting aside more than 25 percent, and can that money pull from both my freelancing gross and The Billfold LLC’s gross? I’m going to be meeting with the CPAs this fall to discuss all of this, and I’m sure I’ll tell you everything I learn!
You can pay your single-member LLC estimated taxes in the same payment as your other freelancing estimated taxes. I assumed that you had to pay LLC taxes separately, maybe with the business legal name and TIN, but you don’t. Since a single-member LLC gets taxed on your personal tax return, you can hop on DirectPay.IRS.gov and pay your LLC estimated taxes using your own name and Social Security Number, and you don’t even have to separate your LLC estimated taxes from your other freelancing estimated taxes — you can make ’em all in the same payment.
UPDATE: as I recently learned, DirectPay.IRS.gov will not accept estimated tax payments from a business bank account. So if you’re doing estimated taxes this way, make sure you transfer your tax money into your personal bank account first. Also, reconfirm with your CPA that you should be making personal tax payments, not business tax payments. As a single-member LLC, I’m making personal tax payments.
Don’t forget about state estimated taxes, either — or any local business or city taxes you might owe!
So. That’s what I’ve learned so far about paying LLC estimated taxes, none of which I was expecting. If you have a single-member LLC and you do it differently, I’d love to hear how your taxes work — I’ve worked with enough CPAs by now to know that they often give different advice, so if you’re doing something wildly different, I could bring it up at my next CPA meeting (or you could, at yours).
Also, if you’re thinking about starting a business, be aware that this is at least part of what you’ll be getting yourself into. Fortunately — at least in The Billfold LLC’s case — it’s totally worth it.
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