What Tax Form Does an LLC File?

“What tax form does an LLC file?” is a common question for those interested in starting a corporation. LLCs file different tax forms depending on whether they are a sole proprietorship, partnership or a corporation. Each structure comes with its own advantages and drawbacks.

Limited Liability Company (LLC)

A limited liability company is formed under a state law. It is not recognized as a business classification by the IRS unlike corporations. Instead, it falls under the category of “pass-through entities”. All profits and losses go to the owners of the LLC. These gains or losses are reported on their personal tax returns. Therefore, the LLC does not pay any sort of income tax.

IRS Default Designation

Unless you file Form 8832, the IRS will treat your LLC as a partnership for income tax purposes. If you are the sole owner of the LLC, then you must pay all the taxes on business profits in the same manner as a sole proprietor.

If you file Form 8832, then you will be taxed like a corporation rather than a sole proprietorship. This can only be changed after five years. Each designation has its own set of advantages and disadvantages.

What kind of Tax Return Do I File?

The IRS gives LLCs many different options in choosing how to tax your earnings. Essentially, you can be taxed like a partnership, corporation, or sole proprietorship depending on which set of rules is appropriate for your business. IRS 3402, Tax Issues for LLC, can help you make this decision.

Being taxed as a corporation is a good choice if your LLC keeps a large portion of profits within the LLC as retained earnings. LLCs can be taxed as corporations by filing IRS Form 8832 and choosing “corporate tax treatment” on the form. Corporate tax rates are lower on the first $75,000 earned compared to rates for other types of LLCs. The corporation structure also allows you to offer various benefits to employees such as stock options and ownership.

If your LLC has more than one member, the IRS assumes it is a partnership. The LLC pays no taxes but individual members pay taxes on any profits on their personal income tax return. The LLC files Form 1065: Partnership Return of Income which includes a Schedule K-1 for each member. This supplement includes each member’s share of the LLC’s income, deductions, and tax credits.

If a member is actively engaged in the business, then she must pay a self-employment tax. If a member is a limited partner and not engaged in the business, then she doesn’t have to pay a self-employment tax on any profits. If a member spends more than 500 hours on the business annually, then she is considered an active member.

If the LLC has only one member, then it will file as a sole proprietorship using Schedule C. The LLC doesn’t have to pay taxes. The LLC’s income and expenses are reported on the individual’s tax return on Form 1040, Schedule C, E, or F. If the only member of the LLC is a corporation, then the LLC’s income and expenses are reported on the corporation’s returns on Form 1120 or 1120S.

LLCs with multiple members can file as a partnership with Form 1065 or as a partnership with Form 8832. LLCs filed as a partnership do not pay taxes. Instead, individual members show their portion of earnings on their individual tax returns.

Dividing Up the Profit Between Members

Upon formation, LLCs draft an operating agreement which clarifies member’s ownership shares. This comes into play when distributing profits between members. If profit sharing differs from ownership shares, members can draft a “special allocation”.

The LLC’s profits are reported as income on member’s individual tax returns based on these profit sharing agreements. Members must pay taxes on this amount even if the LLC does not distribute all their money. 

Partnership Filing Requirements

Limited liability companies with multiple members must file Form 1065. However, they are not responsible for paying taxes on business earnings. The LLC reports each member’s share of income on Schedule K-1 at the end of the year. This amount is reported on members’ individual tax returns and count towards member’s taxable income. 

Corporate Filing Requirements

If your LLC is designated as a corporation, it becomes its own separate entity with it a unique identification number. The LLC will report all income and deductions on Form 1120 annually and pay the appropriate amount. If the LLC does not pay or file its return, then the LLC members are not personally liable.

One disadvantage of the corporate tax structure is double taxation. Income from the business is taxed at the corporate level. Then it is is taxed as income when the corporation makes distributions to its members. Thus, the corporation structure is better if earnings will be kept within the LLC rather than regularly distributed.

Sole Proprietor Filing Requirements

With a sole proprietorship, members are personally responsible for tax payments and filings. When members of sole proprietorship LLC, file their personal income tax returns, they must include Schedule C. Schedule C includes all business related income and deductions and counts towards personal income tax.

Do I Separate Tax Returns For My Business and Personal Taxes?

Single member LLCs are not reported separately. All information about your business’ income and deductions are reported on Schedule C and count towards personal income.

Multi member LLCs are reported separately and file their own tax returns. If the LLC is treated as a partnership, then Form K-1 issued which gives each member’s share of income and deductions. This amount contributes towards their personal income and is taxed individually. LLCs who file as corporations are taxed at the corporate level. 

Estimating and Paying Income Taxes

LLC members are not subject to tax withholding, because they are considered self-employed business owners and not employees.

Self-Employment Taxes

LLC members are considered to be “self-employed”, so no contributions towards Social Security or Medicare are made from their paycheck. Thus, LLC members must pay self-employment taxes. This tax applies to any member who is active in the business for over 500 hours.

Owners are considered passive, if they are active less than 500 hours in the business. These passive owners are not subject to the self-employment tax. The exact regulations differ depending on the rules surrounding the industry on who is exempt from this tax.
Schedule SE reports each member’s self-employment tax and is submitted with their personal tax return. LLC members pay double the self-employment tax of normal employees, because there is no matching contribution from the employer. The self-employment tax is 15.3 percent of income up to a certain amount and then 2.9 percent afterwards.

Expenses and Deductions

To calculate your LLC’s income, you deduct your expenses from your income. These deductions will lower your profit and taxes. Some common expenses include start-up costs, travel expenses, rent, capital investments, and marketing costs.

State Taxes and Fees

In most states, taxation rules for LLC follows the same guidelines as the IRS. For sole proprietorship and partnership LLCs, all income is reported and paid on personal income tax returns. Corporate LLCs are taxed at the corporate level with distributions taxed as income.

However, some states do tax LLCs directly in addition to taxing individual members. Other states have an annual fee for LLCs. When forming your LLC, take a close look at how your state treats and taxes LLCs.

How Do I File Taxes for an LLC?

If your LLC is set ups a sole proprietorship, fill out Schedule C as part of Form 1040 to show the LLC’s income counts which towards your personal income tax returns. If your business is considered “specialty income”, then you may have to file Schedules E,F, or J instead of Schedule C. 

If your LLC is a partnership, then you will file Form 1065 and distribute a Schedule K-1 to all members, showing their portion. Each member’s specific amount will reflect the LLC’s profits and their ownership share. This amount will count towards personal income and be taxed as that rate.

For sole proprietorship and partnership LLCs, members are subject to self-employment taxes on any income and must file Schedule SE. LLCs of a larger size must also file additional forms related to withholding taxes for their employees.

Form 1120 or 1120S needs to be filed for LLCs that have chosen to be taxed as a corporation or an S corporation. With S Corporations, the tax rules work similarly as partnerships. A K-1 is produced for each member detailing their share of income and expenses. Members include this information on their tax returns and are taxed accordingly. There is no taxation on the corporate level for S corporations.

In addition, understand how your state’s tax authority treats these different LLC designations. In most states, the procedures largely follow these same guidelines with complementary forms. However, certain states do have additional rules for LLCs.

If you need help completing and filing tax forms for your LLC, you can post your legal needs 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, Stripe, and Twilio.