IRS LLC Tax: Everything You Need to Know
Understanding IRS LLC tax filings can be difficult if you aren't familiar with other business organization types.3 min read
2. Self-Employment Taxes for LLCs
3. Expenses and Deductions for LLCs
4. Potential State Taxes for LLCs
5. What Forms do LLCs Need to File
Understanding IRS LLC tax filings can be difficult if you aren't familiar with other business organization types as well. LLCs, like corporations, are not treated as separate tax entities. Instead, they are "pass-through entities," like sole proprietorships and partnerships. All of the company's profits and losses are passed along to the owners of the LLC, who are called members. The members report the income and deductions on their personal tax returns. LLCs do not pay federal taxes on the business, but some states require LLCs to pay an annual tax.
How the IRS Treats LLCs for Tax Purposes
Depending on how many members you have, the IRS treats the LLC as a sole proprietorship or partnership. The IRS automatically treats single-owner LLCs as sole proprietorships. This means the LLC doesn't need to file a separate return. The owner is responsible for reporting all LLC income and losses on their 1040 Schedule C.
The IRS treats multi-owner LLCs as partnerships. These LLCs don't file a separate tax return, either. Like a sole proprietorship, members report income and losses on their individual returns under Schedule E. Each member's share is called a distributive share, and the percentage should be spelled out in the LLC's operating agreement. Most agreements indicate distributive shares are proportional to percentage interests. Any other method of distribution is called a special allocation.
If the LLC is taxed as a sole proprietorship or partnership, any money left in the LLC at the end of the year is still taxed, whether or not it was actually distributed to members.
LLCs still need to file IRS Form 1065, which is just informational. This is to ensure members are reporting income and losses correctly on their own taxes. LLCs must also give members a Schedule K-1, which provides a breakdown of each member's share.
LLCs who need to leave income in their business, also called retained earnings, may benefit from corporation status for tax purposes. If you file IRS Form 8832, you can elect to be taxed as a corporation. Potential savings may be wiped out by "double taxation," which is when income is taxed at both the corporate level and then again as dividends on shareholders' personal tax returns.
Retained earnings aren't subject to double taxation, however. There may be other tax benefits for members like fringe benefits, stock ownership plans, and stock options. All of these are not subject to taxation.
Because LLC members are considered self-employed, they are not subject to tax withholdings. This means each member has to be diligent and set aside enough funds to pay taxes on their portion of the profits. Members are required to estimate taxes for the year and make quarterly payments to the IRS, along with any state income tax.
Self-Employment Taxes for LLCs
Because LLC members aren't employees, there are no contributions made to Medicare and Social Security. Member-owners pay this instead as "self-employment" taxes. This only applies to active members. Passive members may or may not be exempt from self-employment taxes, but you need to discuss with an expert to verify first.
Expenses and Deductions for LLCs
You can deduct verifiable business expenses from the profits, which can help reduce the income you are required to report to the IRS. Some of these expenses include equipment costs, travel expenses, start-up costs, advertising, and automobile costs. There is also a new deduction available through the Tax Cuts and Jobs Act that may apply in some cases.
Potential State Taxes for LLCs
A majority of states tax LLCs the way the IRS does, which means individuals are taxed for the business' income. In a handful of states, the LLC may be charged a tax that is calculated off the income amount they make.
There may also be an annual LLC fee that is not tied to annual income. This may be called a "renewal fee," "annual registration," or "franchise tax."
What Forms do LLCs Need to File
To summarize, an LLC will file one of the following forms depending on how it's taxed:
- Single-member LLCs file IRS Form 1040 Schedule C, E, or F
- Multi-member LLCs file Form 1065
- Form 1120S for S corporations
- Form 1120 for C corporations
If you need help with your LLC's tax filings, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.