IRS LLC Tax Return: Everything You Need to Know
Filing an IRS LLC tax return will vary based on which tax status you've chosen: a sole proprietorship, partnership, or corporation.3 min read
Tax Treatment of LLCs
LLCs are not categorized as separate entities like a corporation. An LLC is a "pass-through entity" which is similar to a sole proprietorship or partnership.
Profits and losses are not paid by the business but are reported by individual members on their own personal tax returns. Although there is no federal tax, some states may require LLCs to pay annual taxes. The LLC is still required to file IRS Form 1065, even though it doesn't pay taxes. This is an informational return the LLC files to ensure that members are properly reporting income and losses.
Single owner LLCs are treated like sole proprietorships. The IRS considers multi-owner LLCs as partnerships. You must report all income and losses on your 1040 Schedule C. Even profits left in the company bank account at year end are subject to income tax.
Each LLC member must receive a Schedule K-1, which itemizes profits and losses. Each member pays taxes based on their membership share of profits and losses. These are called distributive shares and should be set forth in the LLC's operating agreement.
Usually, profits are distributed based on the member's percentage interest in the business. If you choose to set up a different structure, it's called a special allocation. No matter how the percentage is divided, members are required to pay taxes on the entire distributive share, even if the LLC didn't distribute the money.
LLCs that might benefit from corporation tax status are those that keep a lot of the profits, or retained earnings, in the LLC itself. To be taxed as a corporation, you need to file IRS Form 8832, Entity Classification Election, and be sure to check the "corporate tax treatment" box. Starting in 2018, all C corporations are taxed at a flat 21 percent on all profits. This is lower than the top three rates for individual filings, which range from 32 percent to 37 percent. This means LLCs may save money on taxes by being taxed as a C corporation.
However, there is the double taxation issue that exists with corporations. The company pays the 21 percent corporate tax and then members pay tax on individual dividends at rates for capital gains, which can be as high as 23.8 percent. Retained earnings are not subject to double taxation, however.
LLC members are treated as self-employed business owners versus employees so they aren't subject to withholdings. Instead, members are required to set aside enough money to cover taxes on their share of the LLC profits. They have to estimate taxes owed for the year and send the IRS quarterly payments, along with any local state tax agency. There are some helpful things to remember when dealing with self-employment taxes:
- Since LLC members aren't employees, they are not required to contribute to Social Security and Medicare.
- LLC members must pay self-employment taxes to the IRS instead.
- Inactive members may be exempt from this tax.
- Self-employment tax is reported on Schedule SE which is submitted with the 1040.
Be sure to look for possible deductions which can lower the profits you need to report to the IRS. Start-up costs, travel and auto expenses, equipment expenditures, and marketing and advertising costs can be deducted. Look for more possible deductions in the Tax Cuts and Jobs Act.
While most states tax LLCs like the IRS does, a few states do charge LLCs a tax based on the total income amount each year. Some states require an annual LLC fee that is not related to income. You may see it listed as an "annual registration fee" or a "franchise tax."
Things to Note with LLC Tax Filings
The IRS allows LLCs to choose how they want to be taxed: as a partnership, sole proprietorship, or corporation. If you're a single-owner LLC, you're required to pay tax like a sole proprietorship. Other things to remember with tax filings for LLCs:
- Most LLCs with multiple members opt to file as a partnership.
- The IRS requires that all taxpayers submit returns by the filing deadline.
- There is no separate filing deadline for LLCs.
- Your due date depends on the tax treatment status you elected.
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