How to File Business Taxes for LLC
Learning how to file business taxes for LLC is an important part of knowing how to run your business and avoid complications with the IRS.3 min read
2. LLC's classified as Corporations
3. Pass-through Businesses
4. How to File Taxes for an LLC
Learning how to file business taxes for LLC is an important part of knowing how to run your business and avoid complications with the IRS. An LLC is a popular business structure choice since they provide limited liability protection for the owners and the owners can avoid double taxation. An LLC is a non-entity when it comes to taxation so all profits will pass through the company to the individual members who will be taxed at their personal tax rates.
There are two ways that the IRS will allow an LLC to be taxed. They can choose to be taxed as:
- A partnership - This option is allowed for multi-member LLCs.
- A sole proprietorship - In single-member LLCs the IRS will simply treat the company the same as the individual for tax purposes. You will be required to fill out a Schedule C to track your business income and expenses.
When you form a multi-member LLC, you will pay income taxes similar to how a partnership would. While the company will still not pay taxes directly to the IRS, each individual partner will pay their portion of taxes based on their share in the company. You will need to file an information Form 1065 to report the profit that the company has earned. From these numbers each partner will receive a Schedule K-1 which will indicate the amount of profit that was their share. The information on the Schedule K-1 is then included on each partner Form 1040 personal return.
LLC's classified as Corporations
You may also seek other designations when forming your LLC that will determine how your taxes will be filed. You can elect to be classified by the IRS as either a corporation or an S corporation. These designations are often used for LLC members that may be in a higher tax bracket so that the tax burden is lower overall.
To elect either of these classifications, you will need to file a Form 8832, or Entity Classification Election, with the IRS. Once the election is filed, the LLC will need to pay taxes based on the new tax status including the state income tax. The company will continue to operate per their operating agreement but will file taxes in a different manner.
If the LLC is not taxed as a corporation, it will be deemed a pass-through tax business. In pass-through taxation, the profits of the company will pass through to the owners where their portion will be reported on their individual 1040 tax return. These portions will be determined based on the outlined operating agreement. Take for example an LLC that has two equal owners and makes $80,000. Each owner will need to report $40,000 on their personal tax return as income.
With pass-through taxation, the profit each member earns from the business as well as their income and their spouse's income will be used to determine the tax bracket and tax liability that the owner will have. It is important to note that if profits are made by the company, they will be subject to a self-employment tax.
How to File Taxes for an LLC
Filing taxes for an LLC can be an easy process as long as you are organized. Before you begin filing your taxes, you will need to gather all of your records for your business, including all documentation of both your business's income as well as the expenses.
- Complete your Schedule C - Your Schedule C form is a report of your business's profit and losses. Once you complete the form, you will need to file it with your personal tax return.
- Complete your informational Form 1065 - You will need to complete and file an informational Form 1065 if you are part of a multi-member LLC so that each member can receive a Schedule K-1 which will indicate the portion of profits that they will need to report on their personal tax return. The Schedule K-1 will serve as each members' W-2.
- Fill out and file a Form 1120 with the IRS - If you have elected to designate your company as a corporation, you will need to fill out a corporate tax return. When you file a Form 1120, your corporation will pay taxes that are calculated on this form. Only your dividends from the company will be reported on your personal tax return.
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