IRS LLC Tax Form: Everything You Need to Know
An IRS LLC tax form isn’t generally required since an LLC does not operate as a separate entity from its owners and an LLC operates as a pass-through business.3 min read
An IRS LLC tax form isn’t generally required since an LLC does not operate as a separate entity from its owners. An LLC operates as a pass-through business in which the LLC owners (members) report the profits and losses of the LLC on their personal tax returns.
Another item to keep in mind regarding LLC taxes is that the LLC does not pay federal income taxes; however, some states do in fact charge an annual tax for LLCs. Since your LLC is not required to pay federal income taxes, there is no formal IRS LLC tax form to fill out. This is why the members are required to report all LLC income and losses on their personal tax returns.
Single-Member LLC Taxes
A single-member LLC is an LLC owned by only one person. For tax purposes, the IRS treats single-member LLCs as sole proprietorships. Therefore, the single member must include all LLC funds on Schedule C, and submit it with a 1040 tax return. The LLC’s income and deductions will be reported on the attachment to Schedule C. If your LLC deals with specialty income, i.e. farming or fishing, then you will fill out Schedule E, F, or J instead of Schedule C. Be mindful that you will be required to pay income tax on all profits of the LLC, even if you plan on leaving profits in the business bank account at year end.
Multi-Member LLC Taxes
Multi-member LLCs are treated as partnerships for tax purposes. Similar to the single-member LLC, multi-member LLCs do not pay federal income taxes. Instead, the members report their share of the LLC profits on their personal income tax return by filling out Schedule E. The amount in which each member must report is laid out in the LLC operating agreement. Sometimes, the members will divide up the profits whereas other members will identify that the portion to be paid for taxes is dependent upon how much capital each member personally contributed to the LLC. For example, if John owns 70% of the LLC and Matt owns the remaining 30%, then John is entitled to 70% of the profits and Matt is entitled to the other 30%. This means that 70% of such profits will be reported on John’s personal income tax return, and 30% will be reported on Matt’s personal income tax return.
LLC Taxed as a C Corporation
There are some benefits for LLCs being taxed as a C Corporation, including the following:
- Tax savings
- Savings on retained earnings
- LLCs can offer their employees fringe benefits
If you have a substantial amount of profits, and want to retain such profits in the LLC, then it would be a good idea to elect to be taxed as a corporation. Beginning in 2018, all C Corporations are taxed at a flat rate of 21% on all profits, which is lower than all 3 individual income tax brackets, which range from 32-37%. Such individual rates would generally apply to LLCs, particularly if they are taxed as sole proprietorships. Therefore, the LLC can save money by being taxed as a C Corporation.
While the tax savings may appear quite high, keep in mind that C Corporations are subject to double taxation. First, the business is taxed 21% at the corporate level on all profits. Thereafter, if any distributions were made to the owners (distributions from those actual profits that were already taxed), those distributions are taxed again at the personal level (reported on the owners’ personal tax returns). The personal tax rate can be up to 23.8% depending on how much the capital gain was.
But if an LLC wants to keep a lot of the profits in the business bank account, then those retained earnings will not be subject to double taxation.
LLCs electing to be taxed as a corporation can offer the owners and employees various fringe benefits, none of which will be double taxed.
If you need help filing taxes for your LLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and an average of 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.