LLC Sole Proprietorship

[RedBen]

I created an LLC (sole proprietorship) in October 2023 and had no income during the rest of the year.

I got my first payment in January 2024 but didn't pay any estimated taxes in Q1 thinking that everything was due by the end of the year. After doing some research I figured out that I have to make quarterly payments made up of self-employment taxes (SS and Medicare) and income tax.

Now I am trying to catch up on the missed payments. My questions are:

- Am I subject to penalties for the missed 2 quarters although it's the first year of my LLC?

- How do I make up for the missed quarters? Do I just pay the estimated total amount due for Q1 and Q2 in one transaction or should I proceed differently?

- How do I pay for the Social Security and Medicare portion? Should I add the 15,3% to the income tax and pay the full amount to the IRS in the same transaction or is there another link for this?

- I read somewhere that the quarterly estimated tax amount is usually the same for the 4 quarters based on last year's income. Since it's my first year, I did my calculations based on the actual income and expenses for each quarter, so the estimated taxes vary from Q to Q. Is that correct?

- Last question, what are the State tax obligations. Is there a self-employed quarterly filing at this level as well? I am in Arizona. 

Thank you!

[carolineb]

Hello @RedBen!

Congratulations on your first year in business! I will respond to your questions in the order asked: 

• You may be subject to penalties for the first two missed quarterly estimated payments. The amount you owe increases the longer you go without payment. The failure to pay penalty is 0.5% of the unpaid taxes for each month or part of a month you don't pay, up to 25% of your unpaid taxes, so if you make the  payments now the penalties might not be too bad, depending on your income during the first two quarters. 
• You can make your first two payments online at IRS Direct Pay. Choose Estimated Tax as the Reason for Payment, Apply payment to 1040 ES for Tax Period 2024. The sooner you make these payments, the lower the penalty amounts will be.
• You will calculate your net profit for the quarter (income less expenses) and pay the IRS 15.3% of the net amount to cover the Social Security and Medicare portion of the self employment tax, but don't forget about the federal income tax piece as well. You will add an additional 10% to the 15.3% amount as a federal estimated tax payment if you are in the 10% tax bracket, an additional 12% if you are in the 12% tax bracket, and so forth. Here is a link to the 2024 tax brackets based on your taxable income to help you to calculate your estimated payments: 2024 tax brackets 
• The TurboTax software will generate 4 equal quarterly tax payment vouchers for the following year based on your income during the current year, but these amounts are not set in stone (that's why they are called estimated tax payments). Using the method above will probably result in 4 varied amounts but will definitely cover your tax liability for each quarter. 
• And as for your last question, yes, you will want to make estimated state tax payments as well. Since the AZ income tax rate for 2024 is 2.5%, you will send 2.5% of your net earnings each quarter to the state of AZ at this link: AZ Individual or Small Business Tax Payments  Be sure to choose Small Business Payment Type140ES-SBI: Estimated Payments

Here is a link to an IRS resource which covers any additional questions that you may have about estimated taxes: Pay as you go, so you won't owe

If this post answers your questions, please give me a thumbs up! Thanks for reaching out! 

[lauracton]

Thank you for such a thorough response on this thread! can you please share the same info for the state of california (i am in california and am hoping to figure out what I'll owe for quarterly in my state. They way you answered this for arizona was super clear and easy to understand!). Thank you.

[carolineb]

Hi @lauracton, 

Thanks for your positive feedback. I was a teacher by day and tax preparer by night for many years before dedicating myself fully to tax prep, so I appreciate your response to my post 🙂

For the state of CA, it is a little more difficult (of course!) as CA has a graduated tax rate rather than a flat tax of 2.5% like AZ. Here is a link to the 2023 CA tax tables (2024 not yet available on the CA FTB website) where you will choose your filing status number at the top and your taxable income at the left to determine your tax liability for the year: 2023 CA Tax Tables

You can also use the 2023 CA Tax Calculator tool to estimate your liability.  Then simply divide by two (since there are only 2 estimated tax payment dates left for 2024) and pay online at CA FTB Payment Options

If you are a sole proprietor or a single member LLC, you will use the Personal choices, otherwise use the Business choices. 

If this post answers your question, please give it a thumbs up! Thanks again for reaching out! 

[lauracton]

Of course California is more confusing lol. 

I found my way to the pdf with all the tables. I know my general income amount, so I circled in yellow what I believe my numbers will be. Just so I'm super clear, those circled numbers ARE what I owe Ca in taxes? If I earn XX I owe that much, in dollars? 

Sorry it's a bit of a confusing table! Oh California... Thank you for the help!

[carolineb]

@lauracton, 

Nothing about taxes is simple, ever. So let's say you are Filing Status 1 (Single or MFS) and you earn $16000 for the year. Your CA standard deduction for Single or MFS is $5,363 (this amount of your income is non-taxable to the state because they know that you need to buy groceries, clothing and toothpaste), so your taxable income would be $10637. According to the chart, your taxable liability for the year would be $108, since your taxable income fell between $10551 and $10650. If you do not have any state taxes withheld on this income, you would make payments of $54 for each of the two estimated payment dates left in this year, since we are already close to September. 

If this makes sense to you, please give this post a thumbs up! Thanks again for reaching out! 

[lauracton]

Oh wow thank you for this answer! I now know that I read that chart wrong. I thought the 10k ranges was my total income earned, not my taxible income. For the year, we can guestimate that I'll make right around $10k even. So, with that in mind, I should be calculating the "CA Standard Deduction or MFS" and removing that, to figure out what my taxable income is. In your example, what got removed was about 33.5% if I did my math right. Can you confirm that the CA Standard Deduction is around 33.5%?

All said and done my amount will be even lower than your example. Which is great! Yay. 

Thank you so much for these answers I've been thumbs-upping and you're making this so much easier to understand. 

[carolineb]

I appreciate your taking the initiative to try and calculate the percentage of the CA standard deduction. The fact is, it is much simpler than that (finally, something simple!) Here are the 2023 CA standard deductions (2024 not yet available), which are not based on your income but rather are a flat amount that applies to everyone based on their filing status: 

Filing status	Enter on line 18 of your 540
Single or married/Registered Domestic Partner (RDP) filing separately	$5,363
Married/RDP filing jointly, head of household, or qualifying widow(er)	$10,726

Hope this helps! Thanks again for your feedback (and don't forget the thumbs up if this post answers your questions)

[lauracton]

Oh my gosh wow! Even better!!! Thank you so much for the clarifications and help on this it's bee super enlightening and I'm way less scared of tackling my payments now.