December 6, 2021

LLC Taxes

Written by: Mary Gerardine

    limited liability company (LLC) is not a separate tax entity like a corporation. LLC owners still must report their business income and losses on their personal income tax returns.

    In addition, your LLC taxes will depend on if you operate a single-member LLC or a multi-member LLC. LLCs also need to file both federal and state taxes, among others.

    At the time Wyoming created the LLC structure, those promoting the legislation asked just how the Internal Revenue Service (IRS) wanted this type of business taxed. The IRS didn’t know if it should tax LLCs as a corporation or partnership. But, technically, an LLC isn’t a corporation or a partnership. The IRS simply ruled that it would let LLC owners elect their company’s tax designation.

     

     

    Personal Income Tax Returns

    The IRS considers LLCs a “pass through entity.” That means the IRS only taxes an LLC’s earnings once. Profits and losses of the LLC “pass through” the business to the LLC owners. Those owners — called members — must then report this information on their personal tax returns. The good news is the LLC itself doesn’t pay federal income taxes. But, some states do charge LLCs an annual state tax.

     

     

    Self-Employment Taxes and the Number of LLC Members

    The number of members in your LLC also determines how the IRS treats it for tax purposes.

     

    Single-Member LLC Taxes

    If you’re the sole owner of your LLC, the IRS will tax you much the same as it would a sole proprietorship. The IRS considers single-member LLCs as “disregarded entities,” and taxes their owners like it does any individual. You can pay yourself with a distribution from your personal income. You’ll have to pay self-employment taxes on your distribution but, because you already paid income tax on the LLC’s total profits, you don’t have to pay income tax on the distribution.

    You must report all profits and losses from your single-member LLC on your Form 1040 tax return (on the Schedule C attachment). You can’t avoid taxes by leaving your money in the LLC’s bank account. You must report all profits in your LLC’s bank account.

     

    Multi-Member LLC Taxes

    If your LLC has more than one member, the IRS will tax you much the same as it would a partnership. Again, the LLC itself doesn’t pay tax on its profits. Individual members must report their share of the profits on Schedule E and attach it to their Form 1040 tax return. Each member pays taxes on their distributive share of company profits, as stated in the LLC Operating Agreement. While the LLC itself isn’t taxed by the IRS, there may be an annual state tax based on the state in which you formed your LLC.

    Also, similar to single-member LLCs, each owner of a multi-member LLC can take a distribution from their share of the LLC’s profits.

     

     

    LLC Tax Structures

    Before considering any type of business entity, you will want to consider your LLC tax structure that will work best for your business.

     

    LLCs as Partnerships

    If an LLC has two members, the default tax structure is a partnership. That means it must file the federal Form 1065 by April 15 each year. If your business generates earned income, all the profits are subject to self-employment taxes. If it’s taxed as a partnership and one partner isn’t active (e.g., they work very few hours or are just passive), their distributions may not be subject to self-employment taxes. Be sure to check with your certified public accountant (CPA) for guidance For a single-owner LLC, you’ll file a Form 1040 tax return and attach Schedule C.

    LLCs taxed as a partnership pay no federal income taxes. The IRS considers this type of LLC as a ”pass through entity.” This means that each member (owner) of the LLC reports his or her share of the profits and losses on their individual tax returns — regardless of the number of members. LLCs with multiple members will report their individual profits and losses on Schedule C as well.

     

    LLCs as S Corporations

    An LLC owner may elect S corporation (S corp) tax status for their company. The S corp tax designation comes with specific rules that can prove beneficial to your business if it generates significant earnings. Many LLC owners opt to elect S corp tax status because it enables them to pay themselves a reasonable salary, tax that amount, and collect distributions from the company as surplus income. This often results in substantial savings to the owners.

    To choose this tax structure for your LLC, you must file Form 2553 with the IRS. Your employer identification number (EIN) application isn’t enough to tell the IRS you want your LLC taxed as an S corp. In addition, you may need to file a separate form in your home state so make sure to check on that.

     

    LLCs as C Corporations

    If you decide to structure your LLC as a C corporation (C corp), you must file Form 8832 with the IRS. You’ll also need to amend or update your LLC’s Operating Agreement to specifically note the C corp election.

    With a C corp tax designation, your LLC will then pay federal income taxes on its profits. This may not seem like good business sense at first. But, if you plan to expand your LLC in the future and want to leave the profits in the business, you could save on taxes in the long run.

     

     

    Federal LLC Taxes

    Regardless of your LLC’s tax designation, you must still file a personal income tax return with the IRS each year.

    Each LLC member (owner) needs to fill out Form 1040 (an individual income tax return) and the relevant schedule attachment:

    • Schedule C: This is the form for reporting income specifically from your business.
    • Schedule SE: This is the form for filing and paying self-employment taxes.
    • Schedule E: This is the form for reporting income from rental properties and other investments.

     

    In addition to Form 1040, LLCs taxed as partnerships also must file the following:

    • Form 1065: This is the form that covers a partner’s share of income, deductions, credits, and more.
    • Form 1041: This is the form that includes the reporting of a beneficiary’s share of income, deductions, credits, etc.

    Tax laws are complex and evolve over time. When you form an LLC, consult a tax professional to help you decide which tax structure will work best for you and your business.

     

     

    State LLC Taxes

    Because the IRS considers LLC as “pass-through entities” for tax purposes, they don’t have to pay separate state income taxes. Individual members pay state income taxes, but not the LLC itself.

    However, LLCs may need to pay additional taxes set by individual state governments. Here are the most common forms of such state taxes:

    • Franchise Tax: This tax is based on how much an LLC earns per year.
    • Sales and Use Tax: If you sell physical products, consumers pay this tax to you, and then you pay this tax to your respective state or local governments.
    • Gross Receipts Tax: While similar to a sales tax, sellers — not buyers — pay a gross receipts tax.
    • Withholding Tax: This is income withheld from employee paychecks and paid to the government. States with no withholding tax include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
    • Unemployment Insurance (UI) Tax: States use UI taxes to cover unemployment benefits for their residents. Tax rates are set by state law.

     

    Here are some examples of states that charge such taxes:

    • California levies an annual minimum franchise tax of $800, which LLCs must pay within three months of their formation to the California Franchise tax Board. The state sends LLC owners a bill as a reminder.
    • Delaware levies an annual tax of $300. However, there is no requirement to file an Annual Report. The Delaware Division of Corporations will assess the annual taxes if the LLC is active in its records.
    • Texas levies an annual franchise tax for LLCs that have an annual revenue of more than $1.13 million along with the Annual Report. The Texas Comptroller of Public Accounts provides Texas LLCs to check their franchise tax account status.

     

     

     

    Frequently Asked Questions

    Is an LLC better for taxes?

    The IRS treats LLCs as “pass-through entities” for federal income tax purposes. The LLC itself doesn’t pay taxes on its business income. An LLC’s owner(s) must report their business income on their personal tax return(s).

     

    Do you have to file LLC taxes if you have no income?

    You’re not required to file your LLC’s income on Schedule C if you operate a single-member LLC. But, you’ll still need to file an individual tax return for self-employment income.

     

    How do LLCs get taxed?

    LLC owners have the option to choose the way the IRS will tax their business. They can elect to be taxed as a sole proprietor, a partnership, an S corp, or a C corp. To choose your LLC’s tax designation, file Form 8832 with the IRS.

     

    Do I file my LLC and personal taxes together?

    Unless you run a multi-member LLC, the IRS will treat single-member LLCs as sole proprietorships for tax purposes. This means the LLC itself won’t pay federal income taxes and doesn’t have to file an annual income tax return with the IRS.




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