first-year-tax-withholding

Purpose

This guide addresses tax withholding requirements for LLC owners who created their LLC in 2025 and are now in January 2026, covering what needs to be done immediately and throughout the year.

IMPORTANT DISCLAIMER: This is general information only. Tax situations vary based on LLC structure, state, income, and elections made. Consult a CPA or tax professional for advice specific to your situation.

Critical Understanding: LLCs Don’t Have Traditional “Withholding”

Key Point: As an LLC owner, you typically don’t have traditional tax withholding like W-2 employees do. Instead, you make quarterly estimated tax payments.

Why LLCs Don’t Use Withholding

No employer: You don’t have an employer withholding taxes from your paycheck
Self-employment: LLC owners are typically self-employed
Estimated payments: You’re responsible for paying your own taxes quarterly

Exception: If you elect S-Corporation taxation and pay yourself a W-2 salary, you’ll have withholding on that salary portion (but not on distributions).

Immediate Action Required (January 2026)

1. Fourth Quarter 2025 Estimated Tax Payment - DUE JANUARY 15, 2026

What: Final quarterly estimated tax payment for income earned October-December 2025

Deadline: January 15, 2026 (Wednesday)

Form: Form 1040-ES (Estimated Tax for Individuals)

Who must pay:

You expect to owe $1,000+ in taxes for 2025
Your withholding and credits are less than 90% of 2025 tax liability

Exception: You can skip this payment if you file your complete 2025 tax return by February 2, 2026 and pay the entire balance due.

How to calculate (first year): Since you have no prior year to reference, estimate:

Total 2025 net income from LLC
Multiply by combined tax rate (income tax + self-employment tax ≈ 30-40% for most)
Divide by 4 for quarterly amount
Pay Q4 portion (October-December income)

2. 1099-NEC Forms for Contractors - DUE JANUARY 31, 2026

If you paid contractors $600+ in 2025:

What: Issue Form 1099-NEC to independent contractors you paid Recipient copy deadline: January 31, 2026 IRS filing deadline: January 31, 2026 (paper or electronic)

Who gets 1099-NEC:

Independent contractors paid $600+ for services
NOT corporations (except law firms)
NOT employees (they get W-2s)

Filing requirements:

10+ forms: Must file electronically with IRS
Fewer than 10: Can file paper or electronic

3. W-2 Forms for Employees - DUE JANUARY 31, 2026

If you had employees in 2025 (including yourself if you elected S-Corp):

What: Issue Form W-2 to all employees Recipient copy deadline: January 31, 2026 IRS/SSA filing deadline: January 31, 2026

Who gets W-2:

All employees (traditional employment relationship)
LLC owners who elected S-Corp taxation and pay themselves salary

Understanding LLC Tax Structure

Single-Member LLC (Default: Disregarded Entity)

Tax treatment: Treated as sole proprietorship Tax return: Report on Schedule C of personal Form 1040 Filing deadline: April 15, 2026 (for 2025 tax year)

Taxes owed:

Income tax: Based on profit after expenses
Self-employment tax: 15.3% on net income
- 12.4% Social Security (on first $176,100 for 2026)
- 2.9% Medicare (all income)
- Additional 0.9% Medicare on income over $200K

Withholding: None - you make quarterly estimated payments

Multi-Member LLC (Default: Partnership)

Tax treatment: Taxed as partnership Tax return: Form 1065 (Partnership Return) Filing deadline: March 17, 2026 (for 2025 tax year) Individual returns: Each member files Schedule K-1 on personal 1040

Member compensation:

Guaranteed payments: For services, similar to salary (reported on K-1)
Distributions: Share of profits (reported on K-1)
Both subject to self-employment tax (no withholding)

Withholding: None - members make quarterly estimated payments

LLC Taxed as S-Corporation (Election Made)

Tax treatment: S-Corporation (requires filing Form 2553) Tax return: Form 1120-S Filing deadline: March 17, 2026 (for 2025 tax year)

Owner compensation:

W-2 salary: Must pay yourself reasonable salary
- Withholding applies to salary portion (FICA, income tax)
- Subject to payroll taxes (employer + employee portions)
Distributions: Additional profit distributions
- No self-employment tax on distributions
- No withholding required

Advantage: Distributions avoid self-employment tax Risk: IRS scrutinizes “reasonable salary” - too low triggers penalties

LLC Taxed as C-Corporation (Election Made)

Tax treatment: C-Corporation (requires filing Form 8832) Tax return: Form 1120 Filing deadline: April 15, 2026 (for 2025 tax year)

Double taxation:

Corporation pays tax on profits (21% federal rate)
Owners pay tax on dividends/distributions

Withholding: Applies if you’re a W-2 employee of the corporation

2026 Quarterly Estimated Tax Payment Schedule

If you continue operating your LLC in 2026, make quarterly payments:

Quarter	Income Period	Due Date
Q1 2026	Jan 1 - Mar 31	April 15, 2026
Q2 2026	Apr 1 - May 31	June 15, 2026
Q3 2026	Jun 1 - Aug 31	September 15, 2026
Q4 2026	Sep 1 - Dec 31	January 15, 2027

How to calculate (now you have prior year data):

Choose the lesser of:

90% of 2026 tax liability (estimated), or
100% of 2025 tax liability (110% if AGI > $150K)

Safe Harbor Method

To avoid underpayment penalties, pay the lesser of:

90% of current year’s tax
100% of prior year’s tax (110% if high income)

Self-Employment Tax Explained

Rate: 15.3% of net income (up to $176,100 for Social Security portion)

Breakdown:

12.4% Social Security tax
2.9% Medicare tax
Additional 0.9% Medicare tax on income > $200K

Key difference from W-2 employees:

Employees: Pay 7.65% (employer pays other 7.65%)
Self-employed: Pay full 15.3% yourself

Deduction: You can deduct 50% of self-employment tax as a business expense

Form 1040-ES: Making Estimated Payments

How to Calculate

Worksheet method:

Estimate 2026 adjusted gross income
Estimate deductions and exemptions
Calculate estimated tax liability
Subtract withholding and credits
Divide by 4 = quarterly payment amount

Safe harbor method (simpler for second year):

Pay 100% of prior year’s total tax ÷ 4 each quarter
Ensures no underpayment penalty

Payment Methods

IRS Direct Pay: Free, direct from bank account (irs.gov/payments)
EFTPS: Electronic Federal Tax Payment System (eftps.gov)
Credit/Debit Card: Through approved processors (fees apply)
Mail: Check/money order with Form 1040-ES voucher

Recommended: Set up EFTPS for scheduled automatic payments

Annual Tax Return Filing (2025 Tax Year)

Due Dates by LLC Type

LLC Structure	Form	Due Date
Single-member (disregarded)	1040 + Schedule C	April 15, 2026
Partnership	1065	March 17, 2026
S-Corporation	1120-S	March 17, 2026
C-Corporation	1120	April 15, 2026

Extensions Available

Automatic 6-month extension: File Form 4868 by April 15
Extension deadline: October 15, 2026
Important: Extension to file ≠ extension to pay (pay estimated tax by April 15)

State Tax Obligations

In addition to federal taxes, you may owe:

State income tax: Most states have their own estimated payment schedules
State LLC fees: Annual fees/franchise taxes (varies by state)
State unemployment: If you have employees
Sales tax: If you sell taxable goods/services (register for permit)

Action: Check your state’s Department of Revenue website for specific requirements

Payroll Tax Obligations (If You Have Employees)

Quarterly Payroll Taxes

Form 941: Filed quarterly if you have employees

Deadlines for 2026:

Q4 2025: January 31, 2026
Q1 2026: April 30, 2026
Q2 2026: July 31, 2026
Q3 2026: October 31, 2026
Q4 2026: January 31, 2027

Taxes withheld and deposited:

Federal income tax withholding
Social Security tax (6.2% employee + 6.2% employer)
Medicare tax (1.45% employee + 1.45% employer)

Deposit schedule: Typically monthly or semi-weekly (depends on tax liability)

Annual Payroll Forms

Form 940: Federal Unemployment Tax (FUTA)

Due: January 31, 2026 (for 2025)
Rate: 6% on first $7,000 per employee (0.6% with state credit)

W-2 and W-3: Employee wage statements

Employee copies: January 31, 2026
SSA filing: January 31, 2026

Penalties to Avoid

Underpayment Penalty

Triggered when: You owe $1,000+ and didn’t pay enough estimated tax

How to avoid:

Pay 90% of current year’s tax, OR
Pay 100% of prior year’s tax (110% if high income)
Make payments on time each quarter

Late Filing Penalty

Rate: 5% of unpaid tax per month (max 25%)

How to avoid: File on time or request extension

Late Payment Penalty

Rate: 0.5% of unpaid tax per month

How to avoid: Pay by deadline, even if filing extension

Failure to Withhold (If You Have Employees)

Rate: 100% of taxes not withheld + penalties

How to avoid: Withhold and deposit payroll taxes properly

Tax Planning Strategies

1. Track Income and Expenses Meticulously

Use accounting software (QuickBooks, FreshBooks, Wave)
Separate business and personal finances
Keep receipts for all deductible expenses
Track mileage if you use vehicle for business

2. Maximize Deductible Expenses

Common LLC deductions:

Home office (if used exclusively for business)
Business equipment and software
Professional services (legal, accounting)
Marketing and advertising
Business insurance
Vehicle expenses (actual or mileage)
Health insurance premiums (self-employed deduction)
Retirement contributions (SEP-IRA, Solo 401k)

3. Consider Retirement Contributions

SEP-IRA: Up to 25% of net self-employment income (max 69,000 total ($76,500 if 50+)

Tax benefit: Contributions reduce taxable income

4. Quarterly Tax Review

Review profit/loss quarterly
Adjust estimated payments if income changes significantly
Prevents large surprise tax bills

5. Evaluate S-Corp Election

Consider S-Corp if:

Net income > 80K consistently
You can justify reasonable salary
Payroll administration costs are worth self-employment tax savings

Tax savings: Distributions avoid 15.3% self-employment tax

Trade-offs: More complex, payroll costs, reasonable salary requirement

January 2026 Checklist

Use this checklist for immediate action:

2026 Tax Calendar

January

Jan 15: Q4 2025 estimated tax payment
Jan 31: 1099-NEC, W-2, Form 941 (Q4), Form 940

February

Feb 2: Alternative to Jan 15 payment (file complete 2025 return)

March

Mar 17: Partnership (1065) and S-Corp (1120-S) returns due

April

Apr 15: Individual (1040) and C-Corp (1120) returns due
Apr 15: Q1 2026 estimated tax payment
Apr 30: Form 941 (Q1 2026)

June

Jun 15: Q2 2026 estimated tax payment

July

Jul 31: Form 941 (Q2 2026)

September

Sep 15: Q3 2026 estimated tax payment

October

Oct 15: Extended return deadline (if filed Form 4868)
Oct 31: Form 941 (Q3 2026)

Tools and Resources

IRS Resources

Accounting Software

QuickBooks Self-Employed
FreshBooks
Wave (free)
Xero

Professional Help

When to hire a CPA:

First year in business (get set up correctly)
Complex tax situation
Multiple income streams
Employees or contractors
Considering S-Corp or C-Corp election

Common Questions

Q: I just started my LLC in December 2025. Do I owe Q4 estimated tax?

A: If you had net income in 2025, you likely owe estimated tax. Calculate based on actual income earned. If minimal, you may not owe if your total tax liability is under $1,000.

Q: Can I pay myself a salary from my LLC?

A: Depends on tax structure:

Single-member/Partnership: No salary, only owner draws (distributions). Not subject to withholding.
S-Corp: Must pay yourself reasonable salary (W-2) subject to withholding, plus distributions.
C-Corp: Can pay yourself salary as employee.

Q: What if I can’t afford the estimated tax payment?

Pay what you can by the deadline
Set up payment plan with IRS
Penalties/interest will apply but less than not paying at all
Consider reducing Q1 2026 business expenses or increasing revenue

Q: Do I need to collect sales tax?

A: Only if you sell taxable goods or services. Requirements vary by state. Register for sales tax permit if applicable. This is separate from income tax.

Q: Can I deduct my health insurance?

A: Yes, if you’re self-employed and not eligible for employer-sponsored coverage. Deduction goes on Form 1040 (not Schedule C). Reduces income tax but not self-employment tax.

Q: What’s the difference between gross income and net income?

Gross income: Total revenue before expenses
Net income: Gross income minus business expenses
Taxes calculated on: Net income

Q: Should I elect S-Corp status?

A: Consult a CPA. Generally beneficial if:

Net income > 80K/year
You can justify reasonable W-2 salary
Savings on self-employment tax exceed added costs (payroll, accounting)

Next Steps

Immediate (before Jan 15, 2026):
- Calculate and pay Q4 2025 estimated tax
- Or plan to file complete return by Feb 2
Before Jan 31, 2026:
- Issue 1099-NEC and W-2 forms
- File forms with IRS/SSA
February-March 2026:
- Prepare 2025 tax return (hire CPA if needed)
- File by deadline (Mar 17 for partnerships/S-Corps, Apr 15 for sole props/C-Corps)
Ongoing:
- Set up quarterly estimated tax payment system
- Implement bookkeeping system
- Track deductible expenses
- Make Q1 2026 payment by Apr 15
Annual review:
- Evaluate business structure (S-Corp election?)
- Review estimated payment amounts
- Maximize retirement contributions
- Meet with CPA for tax planning