How This LLC Tax Calculator Works
If your company has weathered a few tax seasons you know frustrating and confusing self-employment tax is. This guide will quickly teach you the major mechanics of how your taxes and this tax calculator work, how we calculated your tax rate, and where you can start saving.
Profitable LLC owners are taxed between 14% and 39% on their self-employment income. This includes both state and federal taxes.
We’ll discuss the major factors that impact your tax rate, so you’ll be able to start developing your tax strategy. However, first, we need to understand how your sole proprietor or partnership income flows through the tax system on its way to your bank account. We won’t get too technical, just enough detail to equip you with a “bird’s eye view” of how we estimated the total tax for a limited liability company, corporation, or entity.
Walkthrough of Estimated Tax
The first thing to know: your business income is considered “earned income” and passes through, from your LLC to your personal taxes. What you need to know about earned income is that it’s exposed to higher tax rates. Pass through simply means your LLC doesn’t affect how much you're taxed, at least not by default (more on this at the end).
How Does an LLC Get Taxed?
By default, an LLC is seen as a “disregarded” entity by the IRS. It’s ignored. All company profits pass through to your personal tax situation.
There’s one simple idea that will put you ahead of nearly all small business owners, in your tax knowledge. Your income is taxed twice. You read that right: you first pay Self-Employment taxes and pay again via income taxes. You might be surprised to learn Self Employment taxes are almost always more important.
Self Employment Taxes
Round one of your taxes is made up of Social Security and Medicare or an estimated 15%. Most people fixate on income taxation because of the higher rates, but they are missing the big picture. Because Self-Employment taxes are the first round of taxes they often are the larger amount you pay!
Take this example:
Your business earns $100k in revenue and has $50k in business expenses, that’s a $50k profit on your form Schedule C. You’re guaranteed only one deduction here, effectively making your Self-Employment tax 14.13% or $7,065.
Compare this to income taxation for this person at $5,235 (without deductions taken). That means even though we’ve heavily exaggerated things still they've paid far more into Self-Employment!
Bottom line: Social Security and Medicare taxes make up the bulk of most LLC's tax liability. To put it simply it’s a smaller percentage, but the pie is much larger. Now let’s learn about our second calculation.
Everything we’ve discussed so far can be thought of as “above the line”, now let’s move below to calculate income liability. To start we calculate this “line” also known as Adjusted Gross Income or AGI.
We use AGI as a starting point to calculate State and Federal Income tax. To calculate your AGI, take your self employed net income and subtract the total Self-Employment taxes you’ve paid.
The IRS allows many deductions below the line that help reduce what you pay. This calculator applies the following: standard deduction ($12,400 for 2020 single filers) and Section 199A (commonly called QBI). Be sure to add all your details in the “more accurate” section above to get the most accurate estimate.
State income expenses have far fewer deductions, however, we’ve taken all that apply to your marital status. Like Federal income taxes, states use your AGI as a starting point.
Your Effective Tax Rate
The effective rate you're taxed is the sum of all your taxes you pay on your personal tax return divided by your partnership, sole prop, or corporate income amount. This is a key figure to have when improving your overall tax strategy because it can greatly simplify your decisions. The effective tax rate estimator works because it’s a single amount that’s comparable across income levels, making it ideal to compare potential tax strategies.
Worst States For LLC Taxes
There’s generally two kinds of state-level taxes that your LLC profits may be paying: income and business taxes. The following are states that frequently find higher taxes for 1099's or a single member LLC:
|Oregon||5 - 9.9%||-|
|Hawaii||1.4 - 11%||-|
|Alabama||2 - 5%||$100 Min|
|Arkansas||2 - 6%||$150|
|Delaware||2.2 - 6.6%||$300|
|Iowa||0.33 - 8.53%||-|
|Virginia||2 - 5.75%||-|
|South Carolina||0 - 7%||-|
|California||1 - 13.3%||$800 Min|
|Montana||1 - 6.9%||-|
|Maine||5.8 - 7.15%||-|
|New York||4 - 8.82%||$25 Min|
|Idaho||1.13 - 6.93%||-|
|Georgia||1 - 5.75%||-|
|Minnesota||5.35 - 9.85%||-|
|Kansas||0.5 - 5%||-|
|Wisconsin||4 - 7.65%||-|
|West Virginia||3 - 6.5%||-|
|Nebraska||2.46 - 6.84%||-|
Generally states on this list are here due to expensive rates on income. However some states choose to levy business taxes directly on LLCs. Some of these can be particularly burdensome on newer businesses.
Take California’s LLC tax as an example. Even if your company had zero profits, being an LLC means you’ll have to pay an $800 fee to the California Franchise Tax Board! Coupling this with California’s expensive income liability makes it one of our worst states for LLCs.
Is an LLC Better for Taxes?
Unless you’re living in states with a special tax on LLCs (like California and Delaware) then becoming an LLC will not have an impact on your self-employed taxes. That said an LLC opens up new tax strategies (ie S or c corporation) to consider.
Best States for LLC Taxes
Contrary to high business tax states, more business-friendly states have low (or zero) income tax and business taxes. The majority of partnerships, sole proprietorship, or a pass-through corporation will find the following states more profitable:
|North Dakota||1 - 2.9%||-|
Note that some states have a “⚠️” icon in the business column. These indicate special taxes that can be unusually expensive if you’ve changed your LLC’s tax classification. However unless you’ve made any changes with an accountant, these likely don’t apply to you.
Average States for LLC Tax
The following are states that don’t particularly stand out for their tax incentives towards partnerships, 1099 contractors, and LLCs.
|Arizona||2.59 - 4.5%||-|
|Ohio||2.85 - 4.8%||Min $0|
|Rhode Island||3.75 - 5.99%||-|
|New Mexico||1.7 - 4.9%||-|
|New Jersey||1.4 - 10.75%⚠️||$150|
|Connecticut||3 - 6.99%||$125|
|Louisiana||2 - 6%||-|
|Missouri||1.5 - 5.4%||-|
|Vermont||3.35 - 8.75%⚠️||$250|
|Mississippi||3 - 5%||-|
|Oklahoma||0.5 - 5%||-|
|Maryland||2 - 5.75%||-|
Please be aware that states with more progressive income rates “⚠️”, can make them poor choices for high business income earners. This table is designed for small business owners with ~$80,000/year in income.
Now you know more about small business taxes than the vast majority of their owners. You’ve learned why Self-Employment tax is estimated to be larger than your LLC income tax in the tax 1099 calculator. Secondly, you’ve learned that the state you live in can have an impact on your estimated liability rate.
Now that you see how the “earned” business income will pay through 2 rounds on your personal tax return, it’s time to explore other options. LLCs taxed as S Corporations allow their owners to receive tax-advantaged income as distributions. You'll also be filing form W-2 to pay an employee salary, effectively becoming an employer paying payroll or employment tax. Unlike a C Corporation, an S Corp still enjoys the pass-through tax filing that partnerships pay.
If your company is taxed at a high level try our S Corp tax savings calculator. It will take into account any factors that can affect your savings. Then we’ll connect you with a CPA already successfully operating S Corporations in your state.
Updates & Changes
This calculator supports the years listed below. Additional years will be added as new rules get published so check back often to get your most up to date estimate.
- Support for the year 2019 added 11/18/2019
- Support for the year 2020 added 3/8/2020
- Support for S Corp vs C Corp added 1/20/2021
- Support for 2021 taxes added 4/2/2021
- Removed Below Line Self Employment Deduction 5/7/2021