How to File Taxes for LLC: Everything You Need to Know
How to file taxes for an LLC depends on whether your LLC is treated as a sole proprietorship, partnership or corporation by the IRS for tax purposes. 8 min read
How to File Taxes for an LLC
How to file taxes for an LLC depends on whether your LLC is treated as a sole proprietorship, partnership or corporation by the IRS for tax purposes. LLCs are state created business forms and the IRS does not recognize them as a distinct form of taxable entity. For tax purposes, an LLC is treated like a sole proprietorship, partnership, or corporation.
By default, the IRS treats LLCs as partnerships or if there is only one owner, as sole proprietorships. However, LLCs can elect to be taxed like a corporation. This treatment is for tax purposes only and does not impact other aspects of the business entity.
Determining How the IRS Recognizes Your LLC
The first step in filing your LLC’s small business taxes is to determine how the IRS views your LLC. How the IRS, recognizes your LLC depends on whether or not you have filed an IRS Form 8832 with the IRS. Form 8832 is a form that allows LLCs to elect whether they would like to be taxed like a disregarded entity, a partnership or a corporation.
LLCs with one owner have the option of being taxes as a disregarded entity, the same way a sole proprietorship is taxed, or as a corporation. LLCs with multiple owners can elect to be taxed as a partnership or as a corporation. If no Form 8832 is filed, single owner LLCs will automatically be treated like sole proprietorships, and multi-owner LLCs will automatically be treated like partnerships by the IRS for income tax purposes.
If you want your LLC to be taxed as a corporation, you must file a Form 8832 as soon as possible. You must also file a Form 8832 if you want to change the way your LLC is taxed. You can only change how your LLC is taxed once every five years. Eligible LLCs that want to be treated like an S-Corporation rather than a C-Corporation must be eligible under IRS rules and file a separate election to be taxes as an S-Corporation in addition to the Form 8832.
LLCs Taxed as Sole Proprietorships
If your LLC is taxed as a sole proprietorship, your LLC is considered a “pass through entity” for taxes. “Pass through entities” report their income on their owner’s tax returns. In other words, the LLCs profits and losses “pass through” to its owner and you have personal responsibility for paying taxes and filing with the IRS. LLCs that are treated as sole proprietorships taxed only once by the IRS at the level of the individual owner; they do not pay taxes at the entity level. However, these types of LLCs may still have tax reporting and payment obligations at the state level.
LLCs Taxed as Partnerships
Like one-owner LLCs, LLCs with multiple owners that are taxed as partnerships are “pass through entities” and do not pay separate taxes on business income to the IRS. Each owner reports and pays the taxes associated with their share profits on their individual tax return.
The LLCs operating agreement should set out each LLC owner’s distributive share, their percentage share of profits and losses. Usually, but not always, each owner’s distributive share is equal to their percentage ownership in the company. For example, an owner that has a 65 percent ownership interest in the LLC will usually have a 65 percent share of profits and a 65 percent share of losses. Occasionally, the distributive share for tax purposes will not be equal to the ownership interest or an owner will share in different percentages of profits and losses. If there is no operating agreement, state law usually supplies default rules for profit/loss sharing.
Every year, the IRS treats each LLC owner as though they received their entire distributive share even if the member did not actually receive the share. For example, if the LLC agrees that some profits should be left in the LLC’s account to expand the business and each member receives only a small disbursement of profits, the LLC members are still taxed on their distributive share as though they had received their full share.
LLCs Taxed as Corporations
LLCs treated as corporations for tax purposes are treated as separate entities by the IRS unless an S-Corp election is filed. In other words, both the LLC and the individual must pay taxes to the IRS. The business pays taxes on its profits, and the owner pays taxes on the dividend payments it received from the corporation. The business and the individual’s reporting and tax payment obligations are separate. If an S-Corporation is filed by an eligible LLC, that LLC is treated as a “pass-through entity,” much like a partnership for taxes.
LLC members are owners of the LLC, not employees, which means that contributions are not made by them or on their behalf to Social Security and Medicare. Most LLC owners are still required to make contributions to Social Security and Medicare through “self-employment taxes.” These taxes are paid to the IRS.
Currently, only managing owners, owners that manage the LLC, are required to pay self-employment taxes to the IRS. Members of the LLC whose contribution is solely as an investment and do not manage the business, are often not required to pay self-employment taxes on their share of profits. The line between who must pay and who does not have to pay is tricky, and it is advisable to consult an attorney and a tax adviser to help you avoid mistakes which could result in financial penalties.
Owners of an LLC that hires and pays W-2 employees are not automatically exempt from paying Self-employment taxes. For example, if Mary is the sole owner of an LLC and hires two employees who she pays regular wages, she will be required to pay applicable employment taxes associated with her employees and she will also be required to pay self-employment taxes on her own earnings from LLC income.
Advantages of Taxation as a Corporation
Even though being taxed twice may not sound appealing, there are sound reasons why LLCs might want to consider electing to be taxed as a corporation. Some of the advantages of being taxed as a corporation are:
- Corporate tax rates for the first $75,000 taxable corporate income are less than individual tax rates most LLC owners;
- Corporate tax election benefits LLC owners that want to keep profits in their LLC because the owners do not have to pay taxes on funds that were not actually distributed to them;
- Entities taxed as corporations can offer certain benefits like stock options that have tax advantages which are unavailable to LLC owners and employees
- LLC owners are not personally liable if the LLC taxed like a corporation does not pay its taxes or file a return.
What IRS Forms LLCs Should File
Required forms depend on the LLC’s filing status and other factors. The IRS provides a detailed explanation in its Publication 3402: Taxation of Limited Liability Companies. The following are general rules of thumb for LLCs filing requirements. It is important to note that individual LLC owners have their own obligation to file their individual tax returns, reporting income, regardless of the LLCs requirements. Each situation is unique, and it is important to consult expert advisors.
IRS Forms for LLCs Taxed as Sole Proprietorships.
Single-member LLC taxed as sole proprietorships must complete and file Form 1040, an individual tax return. Schedule C to Form 1040 is completed to report the LLCs income and tax deductions. If the Schedule C shows a profit, that income is reported on the LLC owner’s Form 1040 as income. Certain LLCs, like those that earn income from fishing, must complete Schedule E, F, or J in lieu of Schedule C. Schedule SE must be filed for calculation and payment of self-employment tax.
IRS Forms for LLCs Taxed as Partnerships.
- Form 1065 is filed to report the income of LLCs taxed as partnerships. This is merely an informational form. The LLC does not pay taxes based on this form. Instead, like a sole proprietorship form LLC, income is reported on the individual owner’s Form 1040s in proportion with their distributive share. For example, if you and your LLC co-owner each have a 50 percent distributive share of the LLC and the LLC earned $100,000 last year with $40,000 in deductible expenses, you and your business partner will each receive a Schedule K-1 showing $50,000 of earnings and $20,000 in deductions.
The LLC must also prepare and distribute a Schedule K-1 (equivalent of a W-2) is distributed to each LLC owner. Schedule SE’s must be filed for calculation and payment of self-employment tax by each member responsible for such taxes.
IRS Forms for LLCs Taxed as Corporations.
Different forms are filed by LLCs depending on if they have elected S-Corporation status or not. If they have not, a Form 1120 is filed that reports the LLCs income and deductions. The individual owners must include any dividends they received from the LLC during the year on their individual tax return.
If S-Corporation status is elected, the LLC files a Form 1120S and prepares and distributes a Schedule K-1 to each of its owners. The income then “passes through” to the individual owner’s tax returns just as it does for LLCs taxed as sole proprietorships and as partnerships.
LLCs With Employees
LLCs of all kinds that hire employees are responsible for completing and filing the required employment tax forms. These usually include a Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and Form 941, Employer's Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return. If you use a payroll processing company for your company’s payroll, the company may provide some assistance in preparing required tax forms.
State Taxes and Fees
In addition to federal taxes, LLCs in most states must also pay state taxes or some type of annual fee to the state where it is formed. The system in most states is similar to the IRS where the LLC owner pays taxes for LLC profits on their individual returns.
However, some states impose an additional LLC income related tax on the LLC level. California’s LLC is a notoriously harsh example. All LLCs in California must pay an annual minimum fee of hundreds of dollars to the state’s Franchise Tax Board. The more the LLC makes, the more it must pay. For example, LLCs with income greater than $250,000 are responsible to the state for taxes ranging from about $900 to $11,000 depending on the exact amount made.
Other states require a smaller flat rate fee to be paid by all LLCs that is not tied to income. As you can probably tell, the approaches can vary greatly from state to state. State government websites typically provide a wealth of information on how LLC taxation works in their state.
State Level LLC Tax Forms.
Usually, LLCs will file returns that are analogous to the forms they filed with the IRS, so your LLC filed partnership forms with the IRS, you will likely file partnership forms with the state agency as well. However, state level taxation and associated forms vary greatly between states. Some states don’t even have a business income tax.
Due to this variety and frequent changes in the law, the best practice is to contact your state’s taxing authority to ask about the forms that your LLC is required to file with the state. There is similar variety when it comes to state level employment related taxes, and the employment agency of your LLC’s state is usually the best source of information on this taxation topic.
Tax attorneys and some business attorneys can work with your LLC and your accountant to help you decide on the right tax election for your LLC and to prepare the required forms, saving you time, energy, and risk of making a mistake. UpCounsel’s platform provides an excellent way to find attorneys for this purpose, post your legal need today and start receiving bids from experienced attorneys who want to help you.