LLC Taxes

Understanding LLC taxes is crucial for managing your business’s finances effectively. This article explores the various tax obligations for Limited Liability Companies, including federal, state, and self-employment taxes.

Whether you’re a new business owner or are just looking to optimize your tax strategy, this guide will provide you with the essential information you’ll need to help you navigate the complexities of LLC taxation. We’ll break down how LLCs are taxed, the options available, and tips for ensuring compliance.

LLC Tax Overview

By default, the IRS considers an LLC as a “pass through entity” — which means that it will only have its earnings taxed once as its profits and losses “pass through” to LLC owners.

These owners — which are also called members — must then report this information on their personal tax returns and pay the relevant rate for their tax bracket. The good news is the LLC itself doesn’t pay federal income taxes, though some states do charge an annual state tax for LLCs.

It’s important to note that, even within this default structure, the number of members your LLC can influence how it’s treated for taxation 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 treats single-member LLCs as a disregarded entity and taxes their owners like it does any individual.

You can pay yourself with a distribution from your personal income, but will have to pay self employment tax on this distribution. Be aware that because you already paid income tax on the LLC’s total profits, you won’t have to pay it again on this distribution.

It’s important to understand that you can’t pay less in taxes by leaving your money in the LLC’s bank account as all your business’s earnings must be reported to the IRS.

Forms Needed: Form 1040 tax return (Schedule C).

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, as each individual member must pay taxes on their distributive share of company profits according to your LLC’s Operating Agreement.

While the LLC itself isn’t taxed by the IRS, you may need to pay an annual tax depending 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.

Forms Needed: Form 1065 (Schedule K-1) and Form 1040 tax return (Schedule E).

How to File Taxes for LLC

LLCs can elect to be treated as one of several different business structures for tax purposes, including sole proprietorships, partnerships, C corporations, and S corporations.

Due to this flexibility, the way in which an LLC needs to file taxes will vary depending on the business structure it has elected.

We’ve broken down the rules for each of the different tax classifications an LLC can adopt in the sections below.

LLCs as Sole Proprietorships or Partnerships

For a single-owner LLC, you’ll file a Form 1040 tax return and attach Schedule C, while LLCs with multiple members will report their individual profits and losses on Schedule C as well.

If an LLC has two or more members, it will be treated as a partnership by default and must report its overall profit using Form 1065 and each member’s share of the profit using Schedule K-1 by March 15.

At the same time, each member of a multi-member must report their share of the profits on their Form 1040 tax return using Schedule E by April 15.

If your business generates earned income, all the profits are subject to self-employment taxes. However, if an LLC is taxed as a partnership but one of the partners isn’t active (e.g., they work very few hours or are just passive), their distributions may not be subject to self-employment taxes.

LLCs as S Corporations

LLC owners can also elect S corporation (S corp) tax status for their company if it’s making significant profits. This tax designation allows an LLC to maintain its pass-through entity status while saving on self-employment taxes as members are treated as salaried employees.

This means that the overall tax burden is reduced as only the salary is subject to self-employment taxes, while distributions are only subject to income tax. Under this structure, owners can then pay themselves a “reasonable salary”, tax that amount, and collect distributions as surplus income, often with significant savings.

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.

Forms Needed: Form 1120-S.

LLCs as C Corporations

With a C corp tax designation, an LLC is eligible to pay federal income taxes on its profits at an entity level and its members must also pay personal income tax on their distributions at an individual level.

While this “double taxation” may not seem like a good idea at first, if you plan to expand your LLC in the future and want to leave the profits in the business, it could save on taxes in the long run.

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.

Forms Needed: Form 1120.

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 form is used to report business income specifically from your LLC
• 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
• Schedule K-1: This is the form used to report each member’s percentage share of an LLC’s profit

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

• Form 1065: This is an informational report covering the LLC’s overall profits and losses
• Form 1041: This is the form that includes the reporting of a beneficiary’s share of income, deductions, credits, etc

Instead of Form 1040, LLCs taxed as corporations will need to file a corporate income tax return using one of the following:

• Form 1120: This is a Corporation Income Tax Return used to report the overall profits and losses of a domestic entity with a C Corp election
• Form 1120-S: This form is used to report the overall profits and losses of a domestic entity with an S Corp election

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 (i.e., to pay payroll taxes and medicare taxes). 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.