Limited Liability Companies are a popular business structure due to their flexibility and their liability protections. However, a limited liability company (LLC) can also face a number of tax issues. If you own an LLC, it’s important to ensure your business remains compliant with the state and federal tax laws. The following are five common mistakes and pitfalls that LLC owners should be aware of when it comes to tax matters.
1. Failure to Pay Payroll Taxes
An LLC may be a single-member LLC and treated as a sole proprietorship or may have multiple members and be treated as a partnership. No matter if the Limited Liability Company has one or one hundred members, the LLC may have an unlimited number of employees. An LLC is required to pay state and federal taxes. Even if the members of the Limited Liability Company are the only ones working in the LLC, the Member or Members will still need to file quarterly estimated tax payments on the LLC’s profits.
If employees are working for your LLC, you are required to collect, report, and pay payroll taxes, including Social Security, Medicare, and unemployment taxes. These taxes must be withheld from employee wages and those funds need to be turned over on a regular basis to the Federal and State governments. A lack of funds does not excuse a business from compliance. An employer who fails to pay payroll taxes may incur monetary penalties, be subject to a property lien, and have to pay interest on back taxes owed. They can also face civil and criminal sanctions, including jail time in certain cases.
2. Not Using a Payroll Company
Staying on top of payroll matters can be a major challenge for a busy business owner. While misfiling payroll taxes can lead to severe penalties — and harm your bottom line — it’s best to work with a payroll company to help you remain compliant with the legal and regulatory requirements. A good payroll company can reduce errors, save you time, and ensure payroll taxes are calculated and withheld correctly.
Don’t be a hero here – I have an accounting degree, a law degree, and a Masters in Tax from a prestigious institution. I use a payroll company.
3. Not Keeping Good Records
Proper record-keeping is important to remain compliant with the Internal Revenue Service (“IRS”) and state tax authorities. Failure to maintain accurate financial records can result in tax filing errors and result in interest and penalties. Such records are necessary to prepare detailed financial statements, keep track of deductible expenses, and prepare your tax returns. If your company is audited by the IRS, you may be asked to explain the items reported — good records can help streamline the audit process and ensure a successful outcome.
4. Failure to File Tax Returns
Not filing a timely tax return for your LLC can result in penalties for both failure to pay and failure to file. If you fail to file by the due date, the IRS can charge you a penalty of five percent (5%) of the unpaid taxes for each month the return is late, not to exceed twenty-five percent (25%) of the unpaid taxes. A tax return filed over sixty (60) days after it is due will also be subject to a penalty of the lesser of four hundred fifty dollars ($450) or one hundred percent (100%) of the tax owed.
Failing to pay penalty can be imposed by the IRS if an LLC fails to satisfy its tax obligations — or if a return is filed and all taxes owed are not paid on time. This penalty is one-half of one percent (1.5%) for each month the tax remains unpaid from the due date, up to twenty-five percent (25%) of the unpaid tax amount until the tax is paid in full. If the IRS issues a Notice of Intent to Levy Property, the one-half of one percent rate increases to one percent if the levy is not satisfied within ten days.
5. Not Having a Good Accountant
Having a trusted accountant by your side is critical for an LLC. Not only can they help you with preparing your tax filings, but they can also assess your finances, help you manage your financial statements, and provide strategic tax advice when necessary. An accountant will have the knowledge and experience to help ensure you are compliant at every stage of your company’s development.
A good accountant will prevent you from having to hire someone like me to get you out of an expensive jam.
Contact an Experienced New York Tax Attorney
IRS compliance can be stressful for an LLC owner and it’s essential to have capable counsel by your side to advise you regarding these matters. Offering skillful representation, the attorneys at Brinen & Associates assist LLCs and business owners with a variety of tax issues at both the state and federal levels. Call (212) 330-8151 or send us a message to learn more about how we can assist you.