LLC Tax Reporting Requirements: Everything You Need to Know
LLCs don't pay federal income taxes themselves, but some states impose yearly taxes on them. In addition, even though there's no tax liability for the business at the federal level, multi-member LLCs are still required to file an information report with the IRS.3 min read
LLC tax reporting requirements differ, depending on how the IRS taxes the business. In general, LLCs are responsible for the following:
- FICA tax
- Franchise tax
- Property tax
- Sales and use tax
Individual owners, or members, of the LLC report their share of profits and losses on their personal tax returns to the IRS.
Limited Liability Company Tax Reporting
As an LLC owner, you have some flexibility in how your business earnings are taxed. The IRS allows you to choose one of the following tax statuses:
- Sole proprietorship
LLCs don't pay federal income taxes themselves, but some states impose yearly taxes on them. In addition, even though there's no tax liability for the business at the federal level, multi-member LLCs are still required to file an information report with the IRS.
Withholding and FICA Taxes
If you operate an LLC that has employees, you'll probably have to withhold federal income taxes from their wages.
Employers and employees are both required to contribute FICA taxes, or Medicare and Social Security taxes. Employers withhold the employees' portion of FICA taxes on each paycheck. LLCs that withhold FICA taxes must file a return as well as deposit the amount of withheld tax into an authorized bank.
If your state has an income tax, then your LLC must withhold the necessary taxes from employees and pay the withheld amount to the state.
Many states impose additional taxes on LLCs, although these businesses are considered pass-through entities for tax purposes.
Franchise taxes are imposed in exchange for allowing an LLC to conduct business in the state. Depending on the state, this tax may be called one of the following:
- License tax
- Privilege tax
- Excise tax
- Registration tax
- Registration fee
The amount of the tax varies from one state to another. Some states impose a flat fee, while others charge an amount based on how many members a company has. Other states consider an LLC's income or the members' distributional share when deciding how to tax the company.
Failing to pay a franchise tax can lead to severe penalties for an LLC, including dissolution.
If your LLC owns or uses property, you may be subject to property taxes. The three types of property that can be taxed include the following:
- Real property, which consists of land as well as structures, fixtures, buildings, and other improvements on that land
- Tangible personal property, which includes physical objects that one can own, such as vehicles, office equipment, and machinery
- Intangible personal property, which has no physical substance but instead represents particular value — for most businesses, this is their “good will”
All states tax real property, and many tax tangible property. A smaller number tax intangible property as well.
Sales and Use Taxes
Most states impose sales and use taxes, but the amount of tax and the types of products and services taxed vary widely. Sales tax is imposed on the gross amount of certain transactions, such as the retail sale of tangible property. Use tax is imposed on the consumption, storage, or use of tangible property which isn't otherwise subject to sales tax.
Issues surrounding use tax often come up when someone purchases a “big ticket” item in one state and uses it in another state.
The rate for use tax and sales tax is the same. While consumers pay sales and use taxes, retailers are responsible for collecting the taxes and paying the collected amount to the state. It doesn't matter what business type the retailer is, i.e., sole proprietor, LLC, or corporation. Sellers are responsible for collecting and paying appropriate taxes.
In general, retailers must obtain necessary permits or licenses before being allowed to do business in a state. This makes it easier for the state to identify who's responsible for various taxes.
To keep your company running smoothly and ensure you meet all tax requirements, you'll probably want to hire a tax professional to handle this aspect of your business. Failing to meet requirements can be costly, so it's often worth having an expert take care of your taxes so that you can focus on running your company.
If you need help with an LLC and its 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.