LLC Tax Preparation: Everything You Need to Know
LLC tax preparation involves different tax rules and forms, depending on the business's tax status. LLCs may be taxed like sole proprietorships, partnerships, or corporations.3 min read
The various forms you might use to file taxes include the following:
- Schedule C
- Form 1065
- Form 1120 or 1120S
- Schedule K-1
LLC owners can choose how the IRS treats their business for tax purposes. The LLC itself doesn't pay taxes. Instead, the business income passes to the company's owners or members, and they pay taxes on earnings via their personal tax returns.
Preparing an LLC Tax Return
To prepare your LLC tax return, you should follow these steps.
- Determine your tax election. Single-member LLCs can be taxed as corporations or sole proprietorships, and multi-member LLCs can choose to be taxed like corporations or partnerships.
- If you filed a return last year, retrieve those documents. The only time you wouldn't need to refer to last year's return is if this is your first year filing taxes for your LLC.
- Prepare your company's books. Your LLC should have a procedure in place for recording and classifying business income and expenses. You might use an accounting program or the services of a bookkeeper.
- Update each member's record of capital accounts. A member's capital account is the amount of property, money, and services he or she has given to the company, minus any withdrawals. In most cases, the capital account is a reflection of a member's share of company profits and losses, which is typically in proportion to his or her ownership interest.
- Look for changes in the amount of profits and losses due to each member. In an operating agreement, you can change how to allocate profits and losses to your LLC's members. Instead of allocating based on a proportion of a member's ownership interest, members may agree to another type of apportionment.
- Use a do-it-yourself tax preparation program or retain an accountant. You'll have a better idea if you can use a tax program yourself or if you should hire an accountant after you collect basic information like profit and loss allocations, tax classification, and income and expenses. In many cases, if you're used to paying taxes as a sole proprietor, you might feel comfortable continuing to file a return yourself. LLCs that are taxed like corporations have more complex tax rules, so their owners may find it helpful to hire an accountant.
Various Tax Forms LLCs May Need
Multi-member LLCs file Form 1065. This form applies to LLCs as well as partnerships, so it can serve your needs as an LLC business owner.
You must show your business's total earnings as well as your company expenses and deductions. You don't actually pay taxes with this form because as an LLC, business income passes through the company to its members. The form simply provides information to the IRS.
Along with Form 1065, you'll issue a Schedule K-1 to all company members. Schedule K-1 lists the member's income. You don't list the business's total earnings on it, only the member's individual share of business earnings. Members use the information on Schedule K-1 when declaring their income on Form 1040.
Single-member LLC owners don't file Form 1065 and don't need a Schedule K-1. All you have to do is complete Schedule C and attach it to your personal tax return. You'll also calculate your self-employment tax on Schedule SE.
Corporate Tax Status
You may choose to be taxed like a corporation, in which case you'll file Form 8832 to make this election. Your business will still be an LLC, but you'll be taxed at the corporate rate and subject to double taxation. If you make this election, you'll file taxes using Form 1120.
You might choose S corporation status instead of C corporation to retain the pass-through benefits. In that case, file Form 2553 to make the election for S corp status and use Form 1120S to file your return.
If you're the sole owner of an LLC, you may be able to file your taxes yourself with little trouble. Multi-member LLCs may find it helpful to hire a CPA to do their taxes for them since taxes are often more complicated when a business is taxed like a partnership or corporation.
If you need help with an LLC and its tax requirements, 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 average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.