Filing Taxes as an LLC Single Member: Everything You Need to Know
Filing taxes as an LLC single member requires the owner to obtain an EIN (Employer Identification Number) to file employment taxes. 3 min read updated on February 01, 2023
Filing taxes as an LLC single member requires the owner to obtain an EIN (Employer Identification Number) to file employment taxes. The EIN is a requirement because taxes are reported and paid through the business, not the individual owner.
The employment taxes for employees include FICA (Social Security and Medicare), federal unemployment taxes, and federal income tax. The LLC is also responsible for any excise taxes, not the owner.
If the LLC is a single-member business and doesn't have employees nor an excise tax liability, then an EIN is not required. An exception is if the single-member chooses to report taxable income and loss, an EIN is necessary. It may also be a requirement by some states.
Information for Paying Federal Income Tax as a Single-Member LLC
- The Internal Revenue Service (IRS) treats single-member LLCs (SMLLC) as a disregarded entity. What this means to an LLC owner is the IRS does not consider the SMLLC separate from the single-member owner when it's time to file taxes.
- The same way a sole proprietorship pays the business taxes as part of their personal taxes, so, too, does a single-member LLC.
- As part of a single member's tax reporting, a Schedule C Profit or Loss from Business form must be completed and attached with the federal tax return. The form contains the SMLLC's profit or loss, annual income, and business expenses.
- It is recommended that a single-member LLC owner maintain complete records associated with the income and expenses of the business. This includes the ability to track deposits made to the LLC bank account and keeping receipts of all business-related expense transactions.
- For a single-member LLC with a home office, keep thorough records that pertain to home expenses. This information is used to complete Form 8829, Expenses for Business Use of Your Home, and explains your home office deductions.
- Whether the LLC has a profit or loss it is included on Schedule C.
- Since the LLC is considered a disregarded entity by the IRS, you, the owner, are required to pay taxes on the LLC's profits whether the profits were distributed to you or not. The reason it's this way is due to the IRS assuming the SMLLC owner will receive any and all profits of the LLC whether the profits are accumulating in the business bank account or the owner has withdrawn the profits.
- The IRS approaches profits this way to deter SMLLC owners from withdrawing different monetary amounts out of the business annually in an effort to lower an owner's annual taxes.
- Should a single-member LLC owner choose to have their business classified as a corporation, income tax is paid differently to the IRS.
- An LLC is more formal than a sole proprietorship but not as formal as a corporation, which involves shareholders and a board of directors.
Benefits and Disadvantages of a Single-Member LLC
- As an LLC, the business shares the benefits of limited liability of a corporation and potential tax benefits as a disregarded entity.
- Each state has its own regulations that determine the eligibility of a single-member LLC.
- A single-member LLC provides the owner with more control of the business.
- A downside for a single-member owner can be the informality of the LLC that may hinder an owner from establishing credit.
- Single-member LLC owners can opt to be taxed as a corporation or a sole proprietorship.
- One of the main benefits of an LLC versus a sole proprietorship is an LLC provides limited liability. This means an SMLLC owner is not typically liable for business debts. Limited liability also protects the owner's personal funds if the business goes bankrupt or is unable to pay its debts.
- Some states do not allow single-member LLCs.
- LLC's have the benefit of "pass-through" taxation.
- With pass-through taxation, profits are "passed" to the members who are then responsible for reporting the income on personal tax returns.
- A single-member LLC owner is the same as a sole proprietor in that the owners of both are in complete control of the daily operation of the business. The member also makes all decisions without input from other members and the owner receives all the LLC's profits.
- An LLC requires much more paperwork than a sole proprietorship along with interaction with the state and at the federal level.
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