How exactly does taxation of an LLC work?

[Herdo]

Hello! Without going into too much detail I will try to give a quick rundown of the scenario I am in (or rather my significant other) to better explain the questions I have. My longtime girlfriends parents started a business several years ago hiring my girlfriend as an employee from the beginning. They quickly grew the business from the 3 of them to about 25 employees. My girlfriends parents recently got an offer to sell the company which they accepted, selling for a sum of money in the lower 8 figures. My girlfriend had no ownership in the company, and subsequently received none of the money from the sale of the company, which was a little upsetting to her. To our surprise, her parents approached her yesterday asking if she wanted them to help her start her own business (forming the LLC, working as temporary employees, etc), telling her that she knows as much if not more then them about the business. We talked about it last night and see it as an excellent opportunity, but I have a few questions regarding how taxing an LLC is handled. I know both of her parents have the answers to these questions, but we won't be talking to them until next week about this, so I wanted to get a bit of info on the subject before hand.

From what I've found, a single member LLC is not taxed like a corporation, but is taxed through the members personal income taxes. What I'm wondering is, what exactly gets taxed? Would total gross income get taxed, prior to any expenses such as employee pay? The best way I know to ask is through examples, so let me give one.

My girlfriend hires 1 employee to help her. She and this employee both work from home using their own equipment, and the total employee cost will be about $6000 a month with pay and benefits. (I'm not including any other costs or money set aside for the company in this example simply to make it more simple. Also, these figures were quickly made, and aren't accurate.)

The company brings in a total gross profit a month of $20,000. After paying her employee $6,000, she is left with $14,000. Is this $14,000 taxed or would the $20,000 of gross profit for the business be taxed? At the end of the year, she could be responsible for the taxation of $168,000 or $240,000.

Also, what is the tax percentage for an LLC? Are there separate tax brackets for an LLC or is she simply taxed based on federal income tax brackets? I should also note that we live in Arizona, and from I have read there is no special tax or fees for LLCs, you simply pay sales tax on your gross profits. And again with state tax, would she be taxed prior to or after paying employees, etc?

Thanks in advance, I hope this wasn't too long or hard to follow.

[Business Attorney]

My girlfriend hires 1 employee to help her. She and this employee both work from home using their own equipment, and the total employee cost will be about $6000 a month with pay and benefits. (I'm not including any other costs or money set aside for the company in this example simply to make it more simple. Also, these figures were quickly made, and aren't accurate.)

The company brings in a total gross profit a month of $20,000. After paying her employee $6,000, she is left with $14,000. Is this $14,000 taxed or would the $20,000 of gross profit for the business be taxed? At the end of the year, she could be responsible for the taxation of $168,000 or $240,000.

Only the taxable income is ever taxed (revenues minus deductible expenses). In your example, the taxable income would be $168,000.


Also, what is the tax percentage for an LLC? Are there separate tax brackets for an LLC or is she simply taxed based on federal income tax brackets? I should also note that we live in Arizona, and from I have read there is no special tax or fees for LLCs, you simply pay sales tax on your gross profits. And again with state tax, would she be taxed prior to or after paying employees, etc?

Assuming your girlfriend does not elect to have the LLC taxed as a corporation, the revenues and expenses of the LLC are reported on her Form 1040 on Schedule C. The net income flows through to page 1 of her 1040 and is added to whatever other income, losses, deductions, exemptions and credits she may have. The tax rate depends on whatever her personal bracket is at that point.

Presumably the true is same for Arizona state taxes, but I am not familiar with AZ taxes so you need to confirm the AZ tax treatment with someone who is.

[Herdo]

Only the taxable income is ever taxed (revenues minus deductible expenses). In your example, the taxable income would be $168,000.



Assuming your girlfriend does not elect to have the LLC taxed as a corporation, the revenues and expenses of the LLC are reported on her Form 1040 on Schedule C. The net income flows through to page 1 of her 1040 and is added to whatever other income, losses, deductions, exemptions and credits she may have. The tax rate depends on whatever her personal bracket is at that point.

Presumably the true is same for Arizona state taxes, but I am not familiar with AZ taxes so you need to confirm the AZ tax treatment with someone who is.


Thank you. This was my assumption, I just wanted to make sure.