Opening Own LLC

[kurthjulie]

I recently opened my own LLC for outpatient mental health therapy. How do I know how much to set aside for taxes each month? Am I able to know how much taxes to set aside just once a year?

[kurthjulie]

I am also unsure if I need to open a business bank account as I will still be receiving pay-checks from the private practice I am working with. Since I am the only owner of the LLC I wondered if my taxes will be filed together with the LLC or separately?  

[tsmeadow]

Hello @kurthjulie, 

I hope you are doing well today.  Congrats on opening your own business.  There are a lot of benefits to being self employed as well as new responsibilities.  One of the new responsibilities is calculating and making estimated tax payments. 

There are two methods most self employed individuals use to determine the amount of estimated tax owed.  The first method is to use your income and expenses from a prior year and calculate the estimated tax payments based on those numbers.  The second method is calculating/estimating your expected adjusted gross income, taxable income, taxes, deductions, and credits for the current year.  The first method may not be the best method for a new business.   Therefore, it may be best to try to calculate your current year income/expenses and use the prior year deductions/credits as a reference.   

The IRS has an excellent form that can help your calculate your estimated tax amounts owed.  The form is called the 1040-ES, and you can find a link to the form below:

Link: https://www.irs.gov/pub/irs-pdf/f1040es.pdf

Estimated tax payments consist of both self employment tax as well as individual income tax.  The self employment tax rate is 15.3%.  It consists of 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).  If you are W-2 employee, then your employer will pay half of the self employment taxes.  You will pay the remaining half.  As a self employed individual, you are responsible for the full amount.  The good news is that you are allowed a self employment tax deduction for half of the 15.3% you pay on your income tax return.

To calculate your individual income tax, I would recommend using the 2022 Estimated Tax Worksheet on the Form 1040-ES.  Please note, the adjusted gross income used to determine your individual income tax amount includes all income...not just the self employment income.  Please find below links to information regarding the 2022 Income Tax Brackets, Estimated Tax Payment Information, and self employment tax.  

Link: https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-how-to-determine-what-to-p...

Link: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022

Link: https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-an...

Link: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

To summarize, your estimated tax payment amounts should be 15.3% (self employment tax) plus your individual income tax rate based on your overall adjusted gross income.  You can make the estimated tax payments online or submit a paper check with the vouchers included with the Form 1040-ES.  Estimated tax payments are due quarterly, and their due dates for this year are: 1st Quarter - April 18, 2022, 2nd Quarter - June 15, 2022, 3rd Quarter - September 15, 2022, and 4th Quarter - January 15, 2023.  If you started your business during July of 2022, your first estimated payment would be for 3rd quarter 2022.  

Link to IRS Direct Pay: https://www.irs.gov/payments/direct-pay

Finally, you may also owe estimated tax payments to your State of residency.  This depends on if your State collects Individual Income tax.  If you live in a State that collects individual income tax, I would recommend researching the taxing authority's website.  They will generally have a form similar to the 1040-ES to help you calculate your estimated taxes owed.   Please let me know if you have any questions.

Thanks,

Taylor, Tax Attorney, 12 Years

[tsmeadow]

Hello @kurthjulie,

To answer your second question, I would definitely recommend opening up a business bank account specifically for the new LLC.  Also, I would recommend paying for any expenses through the business bank account/business credit card.  This will allow you to keep track of the business expenses and avoid any commingling of personal/business expenses.  If you have not already, you will need to acquire an employer identification number (EIN) from the IRS in order to obtain a business bank account.  You can do so at the link below:

Link: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-n...

Second, since you are a single member LLC, you are considered a disregarded entity by the IRS for tax purposes.  What this means, in layman's terms, is that you do not have to file a partnership/tax return for the LLC.  You will report all of the income and expenses from the LLC directly on your individual income tax return, Schedule C.   

Thanks,

Taylor, Tax Attorney, 12 Years