Is there anything worse than paying taxes?
Obviously there are.
The question is meant in terms of running a business.
Maybe not getting paid is worse.
Or perhaps not having any clients at all.
But generally speaking, paying taxes sucks big time!
Oh, wait, I got it.
How about paying taxes you didn’t know you even had to pay!?
That’s much worse.
And it can happen to you if you’re not careful.
Of course you already know that.
In this case, however, I’m talking about something else entirely.
I’m talking about the state business tax you aren’t planning to owe for your Single-Member LLC and even worse…
The penalties you’ll likely be paying.
What you know about single member LLCs
The point of the single member LLC is to provide legal separation and protection versus a regular old sole proprietorship.
It creates a legal entity completely separate from its “owner” or member.
It also benefits you compared to other business formation options because it goes on Schedule C of your 1040 which streamlines the tax reporting process (since a separate return isn’t required).
That’s pretty much the extent of what the general public knows about this business entity type.
And that’s all correct.
What you don’t know about single member LLCsNot all states follow the IRS when taxing small businessesClick To Tweet
There is a very big piece of the picture that most people are missing.
It’s especially true of those who don’t work with an accountant or attorney to set up their Limited Liability Company.
Uninformed people giving “advice” on the subject–either on their own websites or on social media groups–only make matters worse.
The problem is the misconception that states follow the federal tax treatment of single member LLCs.
What this means is that there are some states which don’t treat single member LLCs as sole propreitorships for tax purposes.
Florida doesn’t have an individual state income tax, and follows the federal treatment of single member LLCs taxed as sole proprietorships. That means that type of business isn’t taxed at all in the state.
On the other hand, Texas doesn’t have a state income tax on individuals either, but does require single member LLCs that are federally taxed as sole proprietorships to file a franchise tax return (although up to certain earnings limits, no tax may be due).
The revised franchise tax does not apply to…sole proprietorships (except the tax does apply to single member LLCs filing as a sole proprietor for federal income tax purposes);…
Similarly, Tennessee only taxes interest and dividends over $1,250 ($2,500 for married filing joint returns). However, even if you are a single member LLC taxed as a sole proprietor, you have to register to pay franchise and excise taxes:
Entities disregarded for federal income tax purposes, except limited liability companies whose single member is a corporation, will not be disregarded for Tennessee franchise and excise tax purposes.
These are just a few examples of how states do or don’t follow the federal government’s lead.
Every state is going to be different so you need to pay attention to how yours operates.
How to avoid state tax troubleTax advice found online needs to be taken with a grain of salt & lots of verification.Click To Tweet
You don’t want to be in a position where you can’t pay your taxes.
You also don’t want to be in a position to pay unnecessary things such as penalties or interest.
There’s one simple way to to avoid both situations:
Pay attention and do your due diligence.
If you’re going to be starting a business, make sure to do your homework.
Don’t take the word of random people on the internet.
Don’t assume that something on a blog or magazine site is valid, because many times they only contain partial information (especially when it comes to tax-related info they only discuss federal tax advice)
Check your state’s Department of Revenue (or whichever division handles income taxes) to see what you are responsible for.
That way, you’ll be able to not only plan accordingly to hold aside money to pay taxes, but you’ll also avoid those unnecessary (and unsightly) failure to file or pay penalties.
Trust me, at some point you’ll get caught!
Just by registering, you leave a trail for the state to follow right to your bank account.
So if you set up an LLC but fail to file your earnings report or tax return, you’ll eventually get one of those dreaded letters in the mail.
Knowledge is power, and in this case, it’s also money–money kept in your pocket!
Do yourself the biggest favor you can and challenge everything.
If someone tells you you don’t need to file a report or pay taxes, ask them to show you the proof.
If someone says that your single member LLC is exempt from state income taxes because it is exempt from federal income taxes, tell them to back it up with documentation.
And, help others too!
When you see or hear someone elude to faulty assumptions like this, then set them straight so they don’t get into trouble themselves.
If paying taxes is one of the worst feelings, then knowing that you helped someone is one of the best.