If you’re going to form or have already created an LLC, you must learn about how to file taxes for an LLC.
LLC tax filing isn’t a simple topic, mainly because the IRS doesn’t recognize LLCs for tax purposes, and they have no LLC tax return. If you own an LLC, you could be taxed in one of four ways: as a sole proprietorship, a partnership, an S corporation, or a C corporation. We’ll go through each method so that you’ll know how to file taxes for an LLC.
A limited liability company (LLC) is a popular business type that combines the personal asset protection of a corporation with the tax benefits and flexibility of a sole proprietorship. But filing business taxes for an LLC for the first time can be intimidating. First, you should understand some basics about small business taxes.
Unless you tell the IRS otherwise, your LLC will be taxed as a sole proprietorship if you’re the only owner; owners of an LLC are called “members.” If your LLC has more than one member, you’ll automatically be taxed as a partnership. Whether your LLC has one or multiple members, though, you’ll also have the option of being taxed as a corporation if you submit the proper forms.
Before you file LLC taxes for the first time, we highly recommend consulting a professional tax preparer for guidance.
The IRS considers a single-member entity a “disregarded entity.” Basically, that means that they don’t recognize the business for tax purposes, only the owner. So, the LLC is taxed as a sole proprietorship.
The nice thing about this is that sole proprietorships and partnerships have “pass-through taxation,” meaning that the business itself isn’t taxed on its income, just the owners. A typical corporation has “double taxation,” meaning that the business’s profits are taxed twice, first at the business level and again when they’re distributed to the owners.
In most cases, a single-member LLC’s profits would be reported on Schedule C (“Profit or Loss From Business”) and included with the owner’s personal tax return, Form 1040. One possible exception to this would be money made from rental property, which is often reported on Part 1 of Schedule E. See the IRS’s instructions for Schedule E for more specifics.
It’s important to know that, as a single-member LLC or a multi-member LLC, you need to report all income from the business, even if you leave it in the business instead of taking it as a personal draw. So, even if that income is still in your business bank account, you still need to report it.
A multi-member LLC also has pass-through taxation by default, so (unless you choose to be taxed as a corporation) the business itself won’t pay federal income taxes on its profits. The difference is that the LLC must file an informational return with the IRS letting the government know how much each LLC member has profited or lost from the business.
The multi-member LLC will need to file Form 1065, U.S. Return of Partnership Income. The LLC will also need to issue a Schedule K-1 to each member of the LLC to report the member’s income or losses from the business. Each member will then report the information from the K-1 on Part II of Schedule E and include it with their personal tax return.
Again, remember that each member must pay federal income tax on their share of earnings, regardless of whether they’re distributed to the members or not.
Some LLCs choose to be taxed as an S corporation in order to save on self-employment taxes (the taxes that pay for Social Security and Medicare). Having your LLC taxed as an S corp has pass-through taxation like a single-member or multi-member LLC, but you’ll first need to make sure you meet the IRS’s requirements for S corp election and file Form 2553, Election by a Small Business Corporation.
If the IRS approves your LLC for S corp election, each year you’ll be required to file Form 1120-S, U.S. Income Tax Return for an S Corporation, for the business. Like a multi-member LLC or partnership, the LLC will need to issue a Schedule K-1 to each member of the LLC to report the member’s income or losses from the business. Each member of the LLC filing as an S corp will then report the information from the K-1 on Part II of Schedule E on include it with their personal tax return.
A C corporation is the default form of corporation. One of its main disadvantages is “double taxation,” meaning that the corporation’s profits are taxed twice, once at the business level and again when distributed to the individual business owners. A C corporation pays corporate taxes on its own federal tax return, and each owner (shareholder) also pays taxes on their share of the profits on their individual tax return.
Most LLCs, especially when they’re starting out, won’t opt to be taxed as a C corporation so as to avoid the double taxation and complexity of filing corporate taxes. Still, certain larger LLCs sometimes find it to their advantage to file as a C corporation for a variety of reasons. For example, C corporations have the widest range of possible deductions, meaning that things like employee health insurance premiums may be deducted.
An LLC wanting to file taxes as a C corporation will first need to file Form 8832, Entity Classification Election, to make C corp election. Then, it will need to report the business’s taxes annually on Form 1120, U.S. Corporation Income Tax Return. The individual owners of the LLC will also need to report their income from the business on their individual tax returns.
Learn more about C corp vs. LLC.
A single-member LLC will need to file taxes (Form 1040 and Schedule C) by April 15. A multi-member LLC will need to file Form 1065 and Schedule K-1 by March 15. An LLC filing as an S corp has the same March 15 deadline.
LLCs filing as C corporations can use either a fiscal year or the calendar year for its tax due date. The corporate tax return would be due on the 15th day of the fourth month of the corporation’s tax year.
When you’re working for yourself as an LLC taxed as a sole proprietor or a partnership, you need to pay self-employment taxes, which are the taxes that go toward Social Security and Medicare. These total 15.3%. If you were working for someone else, they would pay half of them, and the remaining half would be deducted from your paycheck.
You’ll need to figure out how much you’ll owe in self-employment taxes by using Schedule SE. The IRS does let you deduct half of what you pay in self-employment taxes on your annual personal tax return.
Being self-employed as an LLC owner means you’ll have to make estimated tax payments every tax quarter. If you have an LLC filing as a sole proprietorship, a partnership, or an S corporation and you expect to owe more than $1,000 when you file your return, you’ll have to make estimated tax payments using Form 1040-ES.
If your LLC is filing as a C corporation, you’ll need to make estimated tax payments if you expect to $500 or more on your return.
Estimated quarterly taxes must usually be paid by April 15th for quarter 1, June 15th for quarter 2, September 15th for quarter 3, and January 15th of the following year for quarter 4.
Learn more about estimated taxes.
This article is only covering LLC taxes at the federal level. Not all states treat LLCs the same way the federal government does when it comes to state taxes. You’ll need to research your LLC’s state of origin and your local tax authorities to determine what taxes you’ll be responsible for.
Although not always referred to as a tax, most states require LLCs to file either an annual report or biennial report with the state, accompanied by a fee. The purpose of the report in most states is to keep the state updated on your LLC’s basic information, such as contact person, address, registered agent, etc.
The annual report fees vary wildly by state. Some states have no fee, while a state like California charges $800 annually. Some states have substantial penalties for not filing the report and paying the fee, which could include fines or dissolving your LLC altogether.
We can help you with this task with our annual report filing service.
Filing taxes as an LLC or any business can get complicated, so it helps to stay organized. Our ZenBusiness Money app can help you track income and expenses with a few simple clicks, allowing you to track, categorize, and manage all your expenses and small business tax deductions.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Unless you’re filing as a corporation, a single-member LLC would report income from the business on the owner’s personal tax return with Schedule C, while multi-member LLCs would need to submit a separate informational return, Form 1065, and distribute K-1s to each LLC member showing their income from the business.
A single-member or multi-member LLC filing as an S corporation would need to submit a separate tax form, Form 1120-S, while an LLC filing as a C corporation would need to file Form 1120 as a separate filing.
By default, single-member LLCs are taxed as sole proprietorships, and multi-member LLCs are taxed as partnerships. Both function as pass-through entities where profits and losses are reported on members’ personal tax returns. LLCs also have the option of being taxed as a C corporation or an S corporation.
No, a single-member LLC that isn’t being taxed as a corporation wouldn’t need to file a separate tax return for the business. Earnings and losses for the LLC would be reported on Schedule C.
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