LLC Tax Filing: Everything You Need to Know
LLC tax filing can take many different forms including; as a sole proprietorship, if there’s only one owner, as a partnership, if there are multiple owners, or as a corporation, if the owners have a lot of money tied up in the business.8 min read
2. IRS Default Designations
3. Partnership Filing Requirements
4. Corporate Filing Requirements
5. Sole Proprietor Filing Requirements
6. LLC Owners Report Business Income and Losses on Their Personal Tax Returns
7. Single Owner LLC’s
8. Multi Owner LLC’s
9. Consider Electing Corporate Taxation
10. Estimating and Paying Income Taxes
11. Self-Employment Taxes
12. Expenses and Deductions
13. State Taxes and Fees
14. Limited Liability Company (LLC) – Which Return to File
LLC Tax Filing
LLC tax filing can take many different forms including; as a sole proprietorship, if there’s only one owner, as a partnership, if there are multiple owners, or as a corporation, if the owners have a lot of money tied up in the business.
IRS Default Designations
There are two ways in which the Internal Revenue Service will look at your LLC. If you have multiple members or owners, the IRS will automatically designate your LLC as a partnership. This is just for taxes, as the IRS uses the same filing methods for both partnerships and LLC’s. However, if you are the only owner of the company, the IRS will treat your LLC as a sole proprietorship.
There are different tax rates for each. These are not legal business structures, but rather just a simplified method for filing your business’s taxes. If you’d rather pay the corporate tax rate, you classify your business as a corporation for tax purposes. Once you’ve selected a business structure for tax purposes, you cannot change it for another 5 years.
Partnership Filing Requirements
If you decide to file your LLC’s taxes as a partnership, you won’t be responsible for paying taxes on what the business has earned. Instead those earnings go to the individual members or owners of the LLC. They must report these earnings on their personal income tax returns. This goes on the Schedule K-1 section on the personal tax form. The members are also expected to pay self-employment tax, which is where they will pay their fair share towards social services like Medicare, disability, and social security.
Let’s use an example just to make things clear. An LLC has three members or owners and the business takes in roughly $120,000 in one year along with about $60,000 in tax-deductible business expenses. All three members will divide up the profits equally, resulting in $40,000 per owner. They will each report this figure on their personal income tax forms. Then they will split up the business expenses equally on their personal income tax forms, resulting in $20,000 per member. At the end, every member will receive about $20,000 in income before the self-employment tax.
Corporate Filing Requirements
If you decide to file your LLC’s taxes as a corporation, the business will be taxed separately from the individual owners. The business will need its own corporate tax form that lists all the profits made and expenses in a given tax year. The owners will then have to report their personal earnings from the business on their personal income tax returns. This means that the business’s profits are taxed two times, once when the business files its own taxes, and again when the individual owners file their own income tax returns. This is one of the major disadvantages of filing taxes as a corporation.
Sole Proprietor Filing Requirements
If you are the sole owner of an LLC, the IRS will recognize your business as a sole proprietorship for tax purposes. You will fill out your personal income taxes as if you were the business, including profits earned and expenses that need to be deducted. You will need to fill out this information using Schedule C as a self-employed individual.
LLC Owners Report Business Income and Losses on Their Personal Tax Returns
The IRS considers LLC’s to be what’s known as a pass-through entity. This means that the business will not be taxed by the federal government, only the owners of the LLC. All owners of members of the LLC must report the company’s gains and losses on their personal income tax returns. The owners should divide up the profits, expenses, and losses based on the ownership structure of the business. The owners will have to pay taxes on their profits individually using the self-employment tax.
Single Owner LLC’s
When there’s only one owner of an LLC, the IRS treats the company like a sole proprietorship. This means the owner reports all of the business’s earnings on their personal income tax return. The LLC will only be taxed through the owner’s personal taxes. The owner will fill out all of this information on the Schedule C attachment and file their taxes using the 1040 form. The owner must pay taxes on all the money earned in a given year, even if some of the profits will go to tax-deductible expenses in the new year.
Multi Owner LLC’s
When there are several people at the helm of a LLC, the IRS will treat the business as a partnership for tax purposes. This means that the owners will need to split up the business’s earnings, losses and expenses based on the ownership structure of the business. The owners will then report their individual earnings on their personal income tax returns. These earnings are known as distributive shares, and should be designated in the Operating Agreement, a legal document that outlines the ownership structure of the business. Individual earnings are based on the percentage of the business that the member owns.
The owners of a LLC are not bound by law to split up the earnings based on ownership. They can divide the earnings on a curve using what’s known as a special allocation. This means that if one person owns 50% of the company, they are not necessarily entitled to 50% of the profits. All the members are responsible for paying personal income tax on their reported earnings, even if they do not have actually have access to those funds. Some of these earnings may be earmarked for future purposes, but the owners have to pay taxes on these holdings regardless.
Consider Electing Corporate Taxation
You might also want to consider electing corporate taxation. All LLC’s have the option of designating the business as a corporation for tax purposes. You might want to consider this option if you have a great deal of funds tied up in the business. If you select the corporate option, you will get to pay a lower rate on the first $75,000 in business income than you would as a sole proprietorship or a partnership. This option would save you and your partners a large amount of money if you’re just getting off the ground.
If you have more than $75,000 in profits, you’re probably better off going with a partnership or sole proprietorship for tax purposes. Choosing the corporate route also means that you and your partners would receive some additional tax benefits including stock options.
Estimating and Paying Income Taxes
As the owners of a LLC, you are considered self-employed and that means that you have to have to pay your taxes in bulk at the end of year. Unlike traditional employees that have a certain amount of money deducted from their paycheck on a regular basis, self-employed individuals must set aside enough money to pay the state, local and federal government at the end of the year.
Depending on where you live, you will need to calculate your personal income tax ahead of time and pay all your taxes for the year at the same time. You can jump over to the IRS website for more information on how much you’ll need to pay in personal income tax.
The owners or members of an LLC are not considered employees, but rather self-employed individuals. This means that you, the owners, will not have any taxes taken out of your paycheck until the end of the year.
Normally, employees will see significant portion of their earnings taken out of their weekly or bimonthly paychecks for social services such as:
- Social Security
Instead, self-employed individuals need to plan ahead and set aside enough money for these services when they pay their personal income taxes in April. This is what’s known as the self-employment tax.
The self-employment tax is only for the members that are actively involved in running and overseeing the business. As for the members that are not actively involved in the management of the business, they may not be legally required to pay the self-employment tax on their individual earnings from the LLC.
If you’re not sure whether or not you need to pay self-employment taxes on your earnings, check with a local accountant or your tax lawyer for more information. You can learn more about self-employment tax laws for LLC’s on the IRS website.
Expenses and Deductions
As the owner of a LLC, you are entitled to a great deal of tax deductions for your business expenses. As you make purchases for your business, you need to keep receipts just in case the IRS decides to audit you or your business. This might include some of the most common business expenses including office supplies, real estate expenses, internet and utilities, or major purchases such as a new car or equipment. If the IRS become suspicious, you will need to prove that these purchases were indeed for your LLC.
State Taxes and Fees
As you might’ve guessed, things get more complicated when it comes to state taxes. Most states will tax LLC’s the same way that the federal government does, which means that the company itself is not taxed, but the individual owners are.
However, some states have different rules and regulations. If the company makes more than a certain threshold, both the company and the individual members will be taxed, much like the traditional corporate tax. This is true in states like California, in which LLC’s that make more than $250,000 will need to pay both the business tax and the member personal income tax. Some states also impose a fee for LLC’s that has nothing to do with income. Make sure that you are up-to-date on how much you will need to pay in taxes in your home state.
Limited Liability Company (LLC) – Which Return to File
As the owner of a LLC, the form that you will use to file your taxes depends of the nature of your company. If you’re the sole owner of the company, you will need to use Form 1040 Schedule C, E or F. As the sole owner of the LLC, you are not allowed to file as a partnership.
If the company is owned by more than one member, all the owners should use Form 1065. If you decide to file taxes as a corporation, you should use Form 1120S for S corporations and Form 1120 for C corporations. You can also take a look at the IRS Publication 3402 for more information on how the owners of LLC’s should go about filing their taxes.
If a corporation is the sole owner of a LLC, the corporation should report all the LLC’s earnings and losses on its tax return, which would be either the 1120S or the 1120 depending on what type of corporation owns the LLC.
When it comes to choosing which return to file, you need to plan ahead. The IRS will only let you change the structure of your business once every five years. If you anticipate some changes in ownership over the next several years, you need to plan accordingly.
As the sole owner of a LLC, you will have to pay income taxes if your company brought in more than $400 that year. You should be using Schedule C to report your earnings and losses. You can also use Schedules E, F or J if you are in a certain industry such as agriculture.
If you are just one of several owners of a LLC, you will need to file your taxes as a partnership and use Schedule K-1 to report your earnings. Instead of filling out a W-2 like a traditional employee, all the owners need to use Schedule K-1. The combined earnings for all members should equal the total earnings of the LLC.
If you decide to submit your LLC as a corporation for tax purposes, you should use Form 1120S, which also designates your company as a pass-through tax entity. This means that the company itself is not taxed by the federal government, but rather each member pays personal income tax on their earnings from the LLC.
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