LLC Tax Return: Everything You Need to Know
The LLC tax return could refer to a variety of tax forms that have to be filed to the IRS when operating this legal entity. 8 min read
LLC Tax Return
The LLC tax return could refer to a variety of tax forms that have to be filed to the IRS when operating this legal entity. Upon officially forming an LLC, your business entity could be considered a partnership by the IRS for income tax only.
If you are the only one who owns the LLC, you are required to pay tax on your profits the way a sole proprietor would. There are different regulations regarding tax filing for partnerships and sole proprietorships. If you want your LLC to be taxed the same way a corporation is, you’ll have to submit IRS Form 8832 to elect corporate tax. For five years after electing this, you will not be able to change the designation of your LLC.
Requirements of Filing for Partnership
When an LLC is treated as a partnership, the LLC isn’t actually responsible for paying tax on business profits. Instead, IRS Form 1065 needs to be filed for annual partnership tax returns. Any income, as well as deductions and credits, should be reported by each owner. The purpose of the tax return is solely for information. The amount of profit reported every year must be included on a Schedule K-1.
Say you and someone else decide to form an LLC and run the business as a partnership. The business earns $100,000 in one year yet had $60,000 in business expenses that could be deducted. You and your business partner would each file a Schedule K-1, listing $50,000 in earnings and $30,000 in deductions. After filing the Schedule K-1, these numbers must be reported on personal income tax returns. The LLC will actually cause your personal taxable income to go up by $20,000. For example, if you and a friend create an LLC to run a business that earns $100,000 and has $60,000 of deductible business expenses, then each of you will receive a Schedule K-1 with $50,000 of earnings and $30,000 of deductions. Both of you must then report these figures on your personal income tax returns.
Requirements for Corporate Filing
If you elect corporate tax for your LLC, the business is seen as an individual taxpayer by the IRS. In this case, your income and deductions must be reported by the LLC on Form 1120 every year, meeting the deadline and paying the correct amount of income tax due.
If for some reason the LLC does not pay the income tax or file the return on time, you aren’t personally liable. The downside to being taxed as a corporation is that your business profits will be taxed twice. Your LLC is taxed the first time when a corporate tax return is filed and the second tax occurs when the LLC owners get their dividends. Any owners of the LLC have to report their dividends on the personal 1040 forms and pay the appropriate amount of tax.
Requirements for Sole Proprietor Filing
The IRS considers your LLC a totally separate owner if you decide to be taxed as a sole proprietor. In this arrangement, any taxes and filings due become your personal responsibility. You need to accompany your personal income tax return with a Schedule C. This document reports earnings and deductions caused by business operations.
LLC Owners and Their Tax Returns
An LLC is often referred to as a pass-through entity. This is because LLCs are not corporations (corporations are separate tax entities). Profits and losses incurred by the LLC go directly to (or pass though) the business entity and go straight to the owners. The owner then reports their figures on a personal tax return. Although LLCs must pay annual state tax, they do not have to pay federal income tax. Based on how many owners the LLC has, the IRS will regard your business as either a sole proprietorship or partnership.
LLCs Owned by One Person
If an LLC is owned by only one person, the IRS treats the business entity as a sole proprietorship. The LLC does not pay taxes or file a return. Instead, the owner of the LLC must report all of the profits and losses of the LLC on Schedule C and file it with their 1040 tax return. You will also probably have to pay income tax on any money that you leave in your business bank account for future business spending.
LLCS Owned by More Than One Person
Any LLC that is owned by two people is treated as a partnership by the IRS. Just as single-owned LLCs don’t pay business income tax, neither do LLCs owned by two people.
The business partners report their profit on their own personal income tax returns along with Schedule E. When LLC owners share the profits and losses, this is called a “distributive share”. This arrangement should be included in the LLC’s operating agreement. Many operating agreements that owners create state that the distributive share is in direct relation to each owner’s interest in that business.
As an example, if one partner owns 70 percent of the company and the other partner owns 30 percent of the company, the first partner will keep 70 percent of the profits and losses and the second partner receives 30 percent of profits and losses. In the event that someone wants to distribute profits and losses without making those distributions match up the percentage of each person’s involvement in the business, this arrangement is called a “special allocation”.
When it comes to taxes, even if the members don’t receive all of their shares, the IRS still taxes them on their entire distributive share.
The Benefits of Corporate Taxation
Corporate taxation might benefit you if you decide to retain earnings, (a.k.a. set aside some of your LLC’s profits). Any LLC can elect to be taxed as a corporation. Submit IRS Form 8832 Entity Classification Election and check the corporate tax treatment box on the document. The first $75,000 of business profits are taxed at a lower rate when they are taxed as a corporation instead of an individual. This can save you a substantial amount of money on your taxes. When you decide to be taxed as a corporation, your LLC can provide members and employees with stock options, stock ownership plans, and tax benefits.
Basics of Paying Income Taxes
An LLC owner is considered a self-employed individual and therefore does not have to pay tax withholding. Instead, the owner has to set aside money to pay taxes on their share of profits. Quarterly payments need to be made to the IRS every April, June, September, and Jan. 15.
Basics of Self-Employment Taxes
Because LLC owners are self-employed, they do not receive paychecks that are subject to tax for Social Security and Medicare. Instead, self-employment taxes need to be paid to the IRS, and those taxes will cover contributions to the aforementioned systems. If an owner or member of the LLC is not active (meaning they might have invested in the company but don’t have anything to do with management), might not be required to pay taxes on any share of the profits that they receive. Although tax regulations can be confusing, it is a safe bet to assume that you are an active member or owner of the LLC, you will be paying self-employment tax on your profits. You’ll need to report you tax amount due on Schedule SE and submit this form annually with your tax return.
Expenses and Deductions
A sizable chunk of your business expenses will not be taxed. These expenses can be written off or deducted, thus significantly reducing the amount of taxes that you owe to the IRS. Examples of deductible expenses are business travel costs, equipment and furniture purchases, start-up costs, and marketing costs.
State Taxes and Fees
LLC owners must pay taxes on their personal return, even though the LLC doesn’t owe state taxes. However, there are some states that require LLCs to pay a base tax if there are profits of $250,000 or more in one year. The taxes could be anything from $900 to $11,000. In certain states, you also have to pay a yearly LLC fee.
Know Which Returns to File
What form an LLC will file is contingent on a variety of circumstances. If the LLC is owned by only one person, Form 1040 must be filled out and accompanied with either Schedule C, E, or F. For LLCs owned by several people as well as for partnerships, Form 1065 needs to be filled out. For S Corporations, file Form 112S and for C Corporations, file Form 1120. If you still need assistance figuring out which tax forms to report profits and losses on, take a look at the IRS Publication 3402 Tax Issues for Limited Liability Companies for more information.
In the case that the single member of the LLC is a human being, all profits and expenses that went through the LLC will be reported on Form 1040 and Schedule C, E, or F. But if the single member of the LLC is a corporation, all business profits and expenses are reported on the corporation’s tax return. This is usually reported on Form 1120 or Form 1120S. A single member LLC is not permitted to file a partnership return.
Single-member LLCs may not file a partnership return. If any LLC has two members, a partnership return is filed (Form 1065). If you would prefer to file as a corporation, you need to submit Form 8832 (however, this is not necessary if you are going to file as a partnership). Keep in mind that whatever tax return you decide to file, you have to continue filing that same return every year instead of switching tax returns. For an LLC that is treated as a sole proprietor, include Schedule C, Profit or Loss from Business with your filing of Form 1040. As a sole proprietorship, you are required to pay federal income taxes on any profits and losses made through your LLC. Include these figures on your personal income tax return’s Schedule C portion. If you make more than $400 through your LLC, you must file Schedule C. If you receive any sort of specialty income (i.e. fishing or farming), file either Schedule E, F, or J instead of Schedule C.
If your LLC is a partnership, submit IRS Form 1065, U.S. Return of Partnership Income. You must also give all other LLC members or owners a Schedule K-1 to fill out and submit. On this particular form, each owner must include their share of profit on their own personal income tax return. The IRS Form 1065 is a return used for informational purpose. It makes it easier to prepare Schedule K-1 and send the form to each owner. The K-1 is essentially the W-2 of partnerships.
If your LLC is being taxed as a corporation, you will file IRS Form 1120, US Corporation Income Tax Return. And if you have decided to be taxed as an S corporation specifically, you will need to file Form 1120S. Some LLCs elect to be treated as an S corporation because it is yet another way to be considered a pass-through entity by the IRS. You will also need to distribute Schedule K-1 to all LLC members and owners if you elect to be treated as an S corporation.
You need each owner to submit this form because the S corporation doesn’t actually file its own taxes. The form that business owners must file if they elect sole proprietorship treatment for their LLC is Schedule SE, Self-Employment Tax. For any LLC that has employees, Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return needs to be filed along with Form 941, Employer's Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return.
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