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Let's say I am an LLC owner in California, with annual profits equal to $1M USD. The business is an online business that makes B2B software sales nationally, but is based in CA.

My understanding is that LLC's are "pass through" meaning that the owner(s) treat the profits as income, for tax purposes.

My math estimate is:

1) CA LLC Annual Fee: $6000~

2) Federal income tax: 39.6%

3) CA State income tax of: 12.3%

4) CA Self-employment tax of: 15.3% on the first $118,500 ($18,130), then 2.9% of anything above 200,000 ($23,200). Total according to the calculator I cite at the bottom of this post, is actually $54,160, so something in my math for this one was about $13k short.


Post-Tax Income = Net Income - LLC Fee - (Net Income * Federal Tax) - (Net Income * State Tax) - (Calculated CA Self Employment Tax)

so,

Post-Tax Income = 1M - (6000) - (1M * .396) - (1M * .123) - (41330)

Post-Tax Income = 433,670$

(Taxes paid = $566,330, or roughly 56.6% of profits)

Is my math sound?


Sources (in order):

1) http://www.taxes.ca.gov/income_tax/limliacobus.shtml

2) taxfoundation.org/article/2016-tax-brackets

3) bankrate.com/finance/taxes/state-taxes-california.aspx

4) https://www.calcxml.com/calculators/self-employment-tax-calculator?skn=#results

  • The CA LLC fee is based on gross receipts, not net profit. You could also elect to be taxed as an S corp, avoid the gross receipts tax, and instead be subject to (1%?) S corp tax. – Rocky Oct 24 '16 at 22:20
  • The "Self-employment tax" is a federal tax, not a California tax. Also, you describe the rules incorrectly. It's 15.3% up to $118,500, 2.9% from there to $200,000, and 3.8% thereafter. The federal income tax is not 39.6% -- that's the top marginal rate. It doesn't start until $415,050. Taxes below that will be $120,529.75 according to the IRS. I don't know all the correct details, but I can see that those are off. – Brythan Oct 25 '16 at 0:34
  • I used the number of 39.6% because that's, as you said, what starts at $415,050 and my example number for income/"gross receipts" bwas $1,000,000. Could you clarify where I am off? Thank you for the self-employment tax clarification, I think that must be the cause of my math error. – xijixxijiy Oct 25 '16 at 1:11
  • 2
    Tax brackets do not work that way. You're presuming that ALL your income is taxed at the highest bracket. Your first 9275 dollars are taxed at a mere 10% or $927.50. If you make one more dollar ($9276), you go into the 15% bracket, but only that one dollar is taxed at 15%, the rest is still at 10%. So your tax bill is $927.50 + $0.15. Follow? This continues all the way up the brackets. – Harper Oct 25 '16 at 3:31

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