Calculating LLC Taxes
If you’re an entrepreneur, freelancer, 1099’s, or small business owner looking for a fast and effective answer about how much you’ll likely owe in taxes: you're in the right place! Timely answers are critical for business owners that need to start saving for taxes and improving their strategies before tax time. While TurboTax can help your business stay compliant, it's not usually helpful for planning and discovering rewarding tax strategies.
The majority of users of this calculator find that they pay between 14% and 39% in annual taxes. This includes both state and federal tax expenses.
This calculator prioritizes speed and accessibility over accuracy. To achieve high levels of accuracy takes time, bookkeeping, financials, and research into your unique situation. If you’re needing to file your taxes you need accuracy, which tax software and CPA’s can help with. For those of us planning the growth of our business we need timely and effective answers. This calculator is for those people.
Who This Tool Is For
Quickly understanding your tax expenses is tremendously important to business owners looking to save for and improve their taxes. A strong ballpark estimate of what you can expect to pay in taxes will help you start saving enough for your quarterly estimated tax payments. Secondly effective estimates can help you compare tax strategies and start plan changes to save thousands in taxes! The key is to be able to start planning today, not when taxes are already due.
This calculator isn’t really intended for rental property owners. Your taxes depend heavily on how your activity with your rental is classified, depreciation, and amortization. This estimate does not take into account those key factors needed to calculate rental taxes.
This tool is a perfect fit for small businesses that sell products and/or services. If you’re a consultant or running your own eCommerce business, all these calculations are 100% relevant to your situation. For holding companies and rental properties your results may vary due to some important tax differences. If you're interested in a calculator for real estate and rental properties, please get in touch!
How This Calculator Works
High level this calculator takes your LLC and small business income and opposes it to all major taxes you’re likely to encounter. For most business owners your profits are treated as “ordinary income” and subject to 2 major rounds of taxes: Self Employment and Income. This is broken down in the section Full Details results above. We’ll also be explaining how we calculated these taxes shortly.
Self employment taxes include Social Security and Medicare and usually consume about 14% of your business income. Federal and state income taxes vary far more depending on your income level, personal situation, and what U.S. state is doing the taxing. In some cases other small taxes can apply based on state and tax classification, which are listed in the calculations above.
In calculating these taxes we also applied the biggest and most common sense deductions pass-through entities (such as LLC’s) can take advantage of. The big deductions specifically for business owners include: Self Employment and QBI, which we’ll discuss in more detail below. In the spirit of timely answers we’ve assumed you’re taking the standard deduction, which most taxpayers do. Please note for those of you itemizing, your federal income tax results will likely vary from what’s calculated.
Step 1: Calculating Income
Business Net Income or BNI is one of those ideas that seems simple at first, however can quickly become perplexing. Single member LLC and sole proprietors will find this the most straightforward: revenues - expenses = business net income. Partnerships and Multi-Member LLCs will need to add an extra step: (revenues - expenses) x (your share of ownership).
Adjusted Gross Income
Adjusted Gross Income or AGI is a fundamental metric used to calculate almost all your taxes. To find your AGI you take your business net income and subtract “above the line” deductions. We automatically took one of these deductions all business owners enjoy: the employer portion of Self Employment tax. We calculate all your Self Employment taxes and subtract the employer portion of them to arrive at your AGI. For most of us this is simply 92.35% of business net income.
Step 2: Self Employment Taxes
Self Employment is the 1st major round of taxes and one that every business owner should understand well. This is a group of taxes including Social Security and Medicare, which costs most entrepreneurs 14.13% of their income. For many business owners Self Employment is not just your largest tax, but possibly even the largest single expense you face all year. Understanding how it works will be key to fully understanding the savings calculations S Corps can offer. More details on S Corps below.
This is usually the largest portion of Self Employment, which is 12.4% of your Adjusted Gross Income. Fortunately there’s a cap on Social Security, however this usually only benefits high earners. That said you can still be considered a high earner by including your W2 (or regular job) income. So if you have a job, in addition to your business, it’s important to add your W2 income in the form to ensure you’re not overestimating your Social Security tax.
Medicare & Added Tax
Medicare can be thought of as 2 separate taxes: 2.9% of AGI and an additional 0.9% tax on high income levels. Most self employed people don’t need to worry about that additional tax. High income earners may find that Medicare is a larger tax because, unlike Social Security, it’s uncapped. However like Social Security it’s affected by your W2 income, so please be sure you’ve included your job’s income so you don’t underestimate your Medicare expense.
Step 3: State Income Taxes
All 50 state’s income taxes are supported by this calculator including all state level deductions. Similar to federal deductions we’ve made some assumptions that may cause your actual state income tax to differ from the calculations above. For more accurate information on your state income taxes please speak with your tax preparer.
There are 9 states that don't have an income tax: Alaska, Florida, Nevada, Tennessee, Texas, Washington, Wyoming, South Dakota, and New Hampshire.
States that have their own deductions for income taxes ignore well known federal deductions. In every possible case we’ve taken the standard deduction at both the state and federal level. Your filing status usually has a large impact on the duction you can claim so be sure you’ve selected if you’re filing as married by clicking “show advanced” and selecting from the dropdown.
Step 4: Federal Deductions
The last round of deductions are known as “below the line” deductions and reduce your federal income taxes. There are many that could apply (especially if you are itemizing rather than taking the standard approach) but we’ve taken the largest and most common for business owners. These major deductions include: Standard, Self Employment, and QBI.
The standard deduction was increased recently in the 2017 Tax Cuts and Jobs Act to $12,400 (2020) for single filters. This increase made it far more attractive so itemizing deductions became less common. For this reason we’ve assumed you’re taking the standard deduction instead of going with the more complex itemized approach. That said you may be able to lower your income taxes by itemizing, so speak to your tax preparer to see if itemizing is worth the extra effort.
Higher earners are more likely to itemize than take the standard deduction. For example State income taxes can be included as itemized deductions up to $10,000, which puts it fairly close to the single filter standard deduction.
Like state level deductions your filing status can have a major impact the size of this deduction. For example taxpayers filing as married can double their deduction to $24,800 (for 2020). So be sure you’ve selected the married option under the “show advanced” form to get your full deduction.
Self Employment Tax Deduction
This is a separate below the line deduction, different from the “above the line” deduction of a similar name used to calculate AGI. Business owners are allowed to deduct 50% of their total Self Employment tax expense. This deduction is not taken by S Corps, which explains the federal income tax difference seen in the savings calculations above.
The Tax Cuts and Jobs Act gave business owners a major deduction: Qualified Business Income or QBI. QBI comes from LLCs, sole proprietorships, partnerships, and S Corps. We’ve assumed you’re eligible to take the maximum 20% deduction, however there are exclusions and limitations.
QBI is probably one of the most complicated deductions to calculate, so yours may likely differ from the calculator. Accurately calculating your QBI deduction can be done by an experienced small business CPA.
An important assumption of this calculator is that you are not a specified trade or business, which can limit how much QBI you claim. If your business is in the fields of health, law, accounting, insurance, performing arts, consulting, athletics, financial services, and others this deduction may be less than what’s shown above. Lastly, QBI is phased out for high income earners, which is factored into the calculator for you.
Step 5: Calculating Taxable Income
Taxable income is a slightly confusing term since all your business’s income is technically taxable. That said the term “taxable income” is the amount used to calculate your federal income taxes. To calculate it simply take your AGI and subtract all your below the line deductions: Standard, Self Employment, & QBI. At last it’s time for the final level: federal income taxes.
Step 6: Federal Income Taxes
Now that we have your taxable income, our final task is to calculate your federal income taxes. While usually not as large as Self Employment taxes, this tax is still a major expense for business owners. Income tax is charged on chunks of your taxable income above specific thresholds as this 2020, single filer, table shows:
|$0 - $9,875||10%|
|$9,876 - $40,125||12%|
|$40,126 - $85,525||22%|
|$85,526 - $163,300||24%|
|$163,301 - $207,350||32%|
|$207,351 - $518,400||35%|
As you can see your income tax rate grows progressively as your taxable income does. So basically your first dollar of taxable income will pay the lowest rate of 10%, while any taxable income over $518,400 will owe the highest 37% rate. Please keep in mind that this calculator does not include income taxes on sources outside your business such as a regular job.
The term “income tax bracket” can be slightly misleading. It refers to the highest income tax rate your subject to, but not your effective tax rate. We discuss your effective tax rate next.
Step 7: Your Effective Tax Rate
Your effective tax rate is the sum of all your tax expenses divided by your income from self employment. This is a key figure to have when improving your overall tax strategy because it can greatly simplify your decisions. Because your total tax expense can vary based on your income, it’s a difficult metric to use to gage your tax strategy. Your effective tax rate works because it’s a single number that’s comparable across income levels, making it ideal to compare potential tax strategies.
Finding Your Tax Savings
We search for tax savings by comparing your situation had your business been classified as an S Corporation. An S Corporation a special tax status you can opt your LLC into, in order to avoid Self Employment taxes. We may not have recommended this tax strategy to some business owners, because of potentially costly trade offs.
In the savings calculations section above you’ve likely noticed quite a few smaller taxes S Corps have to pay. Each of these taxes comes with their own paperwork and compliance along with the actual financial cost. So even if some savings were found for you, we may recommend you wait until your business grows before changing your tax classification to an S Corp.
This calculator aims to help you accomplish 2 important goals: set aside money for taxes and make plans to improve your tax strategy. If your tax rate is around 25%, setting aside ~30% of your profits for quarterly estimated payments is generally a good idea. In addition, now that you have an estimate of your tax rate you’re able to start effectively considering how to improve your tax strategy.
If your potential tax savings from becoming an S Corp are large enough, then it’s time to talk with a small business accountant or CPA. A qualified CPA will not only help you determine if your business can support an S Corp, but can help you setup and operate one as well. Running an S Corp without the guidance of an expert is not only hugely time consuming, but could expose your business to unnecessary legal issues.
You are now equipped with the information to start making serious improvements in your business. As your business grows, keep checking back with this calculator to see how your tax expenses change and what new savings it can discover for you. We’ll be keeping this calculator up to date with the latest taxes and strategies for your business, so check back again soon!