Most first time LLC owners think taxes are simple:
- You form your LLC
- You earn money
- You pay taxes during the year and when you file your return
And yes, that is partly true, but it is not the full picture.
In reality, LLC taxes can get confusing fast. You might owe self employment taxes, income taxes, and sometimes state specific fees. Many new business owners don’t realize this until it is too late.
They miss deadlines, underpay taxes, or get surprised by penalties. The good news is that various LLC formation services help you get your EIN, understand your tax classification options, and stay on top of compliance deadlines. This sets the foundation for setting up your business correctly. This helps to handle the taxes confidently.
Let’s dive in what taxes you need to pay in the first year as an LLC owner.
1. Federal Income Tax
An LLC does not have its own special federal tax. The IRS taxes it based on how it is classified or how you choose to classify it.
- Single Member LLC: It is treated as a “disregarded entity.” This means you report your business income and expenses on your personal tax return.
- Multi Member LLC: It is treated as taxed as partnership. The LLC files Form 1065, and each member gets a Schedule K 1 showing their share of profits.
- Optional Elections: You can also choose to have your LLC taxed as a C corporation, or if eligible, an S corporation.
2. Self Employment Tax
The IRS uses Schedule SE for self employment tax. It generally applies to net earnings from self employment.
Schedule SE is required when qualifying net earnings are $400 or more.
That is why many first time LLC owners hear that they owe “more than income tax.” In many pass through LLC setups, the owner may owe:
- Federal income tax on profit
- Self employment tax on qualifying self employment earnings
3. Quarterly Estimated Tax
Unlike employees, most first time LLC owners don’t have taxes automatically taken out of their income.
This means you might need to pay taxes throughout the year instead of waiting until tax season.
The IRS expects individuals like single member LLC owners, partners, and S corporation shareholders to make estimated tax payments if they will owe $1,000 or more when filing.
For corporations, that threshold is $500.
These payments are split into four quarterly installments each with a set due date.
4. State Income Tax, Franchise Tax, Annual Report Fees
Federal taxes are only part of the story. Your LLC may also owe state level taxes and fees. These vary depending on where you are located.
Some states impose income tax, franchise tax, or similar entity-level or owner-level taxes. Others require initial reports, or annual/biennial reports with fees.
And some states add other compliance filing costs you might not expect.
For first time LLC owners, this means your first year costs can look very different
depending on the state.
Two LLCs making the same income could end up paying very different amounts simply because of where they are formed.
5. Sales Tax
If your LLC sells taxable products or taxable services, you may need to collect and remit sales tax at the state or local level. This is not a tax paid out of nowhere at year-end like income tax; it is usually part of ongoing compliance tied to what you sell and where you sell it. State and local tax rules vary, so first-time owners need to verify whether their business activities create a sales tax obligation.
This often applies to businesses such as:
- Online stores
- Retail businesses
- Food and beverage businesses
- Certain service-based businesses, depending on the state
6. Payroll Taxes
If your LLC hires employees, payroll taxes become part of your first-year responsibilities. The IRS explains that employers generally must deposit federal income tax withheld from employees, along with employer and employee Social Security and Medicare taxes, and FUTA taxes when applicable. Employers also have reporting responsibilities, including wage reporting and filing required employment tax forms.
So if your new LLC has employees, you may need to handle:
- Federal income tax withholding
- Social Security and Medicare taxes
- Federal unemployment tax (FUTA)
- Related state employment taxes (Internal Revenue Service)
For many first-year owners, this is the point where DIY stops being simple.
7. Excise Taxes
Most new LLCs will never owe excise tax, but some do. The IRS says excise taxes apply to certain goods, services, and activities, and taxpayers can include manufacturers, retailers, importers, and others, depending on the tax involved. (Internal Revenue Service)
This is more likely to matter if your business deals with:
- Certain fuel, transportation, or highway-use activities
- Certain manufactured or regulated products
- Specific industry-based taxable activities
Conclusion
The biggest mistake the first time LLC owners make is that they assume there is one simple LLC tax.
In reality, your first year obligations may include:
- Federal income tax
- Self employment tax
- Estimated tax payments
- State taxes and fees
- Sales tax
- Payroll tax
If you are unsure, you can get help from a qualified tax professional or business compliance partner.
