A limited liability company (LLC) is a business structure formed to protect the personal assets of its owners from liability.
This means that LLCs have to pay taxes to stay compliant with state law and not get fined for failing to do so.
There are many different types of taxes an LLC can be required to pay, depending on how the IRS classifies them.
In this blog post, we'll go over how LLCs are taxed and what kind of tax obligations each type has so you know how best to plan your finances accordingly!
How to Treat an LLC for Tax Purposes?
LLC is not taxed as a separate business entity. Instead, the income and expenses pass through from the company to the individual members' tax returns each year.
The process is known as flow-through taxation, which means that all profits or losses are passed on directly to its members without being subject to corporate taxes.
Some states charge a yearly LLC fee that is not based on income. This might be referred to as an "annual registration fee" or "franchise tax."
The cost in most states is around $100, but some states have high fee rates.
However, how you choose your business structure will determine how your company is taxed.
LLCs and Income Taxes
There are numerous business taxes that an LLC's owners may be obligated to pay. The majority of business owners face the most difficulty with federal, state, and local income taxes.
Whether your LLC has single or multiple owners, determines how you file and pay income taxes.
States tax LLC profits separate from their owners' incomes. If a sole-member LLC makes a profit for the year after deducting business expenses, the owner will owe taxes to the IRS at his or her individual income tax rate.
If the company has a loss for the year, the owner can deduct it from their personal income.
In multi-member LLC, for example, an LLC has two owners with a 50-50 share ownership split; each owner is responsible for half of the profits paid in taxes.
Each owner may also claim half of the credits and tax deductions that the LLC qualifies for and deduct half of its losses.
This form of taxation is very similar to that used by partnerships.
The IRS requires a multi-member LLC to submit various tax forms, including Form 1065, U.S. Return of Partnership Income—an annual informational return that yuu must submit to the IRS.
LLC Taxed as a Corporation
LLC owners can choose to be taxed as a corporation or partnership by electing corporate LLC tax treatment with the IRS.
The LLC is taxed like a regular corporation, and profits are passed through to members' personal income taxes on their individual returns each year.
If you have an LLC that qualifies for S Corporation taxation status in your state, it can pass its net profit or loss to its members' personal tax returns each year, with the business itself not taxed.
The owners of an LLC electing corporate taxation will be required to file Form 1120 after filing their federal income taxes as a means of electing S Corporation status.
However, if they divide their earnings between salary and distribution, they are still subject to self-employment taxes.
You'll continue to pay self-employment tax on the portion of your income that is deemed as salary. Still, you'll only have to pay ordinary income tax on the portion that is designated as a distribution.
Electing corporate taxation also means you can opt for a C corporation, which would probably involve double taxation.
LLC Taxed as a Sole Proprietorship
A single-member LLC is rather similar to a sole proprietor because it's considered one for federal income tax purposes.
This means that the LLC owner reports the LLC's profits and business expenses (advertising and promotion costs, for example) on Schedule C of their personal federal Form, submitted along with the 1040 tax return.
In this case, there isn't a separate taxation form or schedule used by single-member LLCs as they are taxed like any other sole proprietorship.
How Are LLC Members Taxed?
LLC owners (LLC members) pay income taxes differently, depending on their elected taxation and structure.
For LLC tax purposes, the IRS considers one-member LLCs sole proprietorships, which implies the LLC itself does not pay taxes and is not required to file an income tax return with the IRS.
Single-Member LLC Taxes
As the LLC's only owner, you must disclose all LLC income (or deductions) on Schedule C. Schedule C must be submitted with your 1040 tax return.
Even if you leave money in the company's bank account at the end of the year to cover future costs or develop the business, you must pay income tax on that money.
Your SMLLC will automatically be treated as a sole prop unless you file for an S or C corporation.
To file as a C corporation, you will need to file IRS Form 8832 to report all business income and file form 1040 for personal income.
Form 2553 is filed upon electing S corporation while your business income is reported on 1120S form.
Multi-Member LLC Taxes
LLC owners conducting business through multi-member LLC owners pay taxes as a partnership.
Co-owned LLCs, like single-member LLCs, do not pay taxes on business profits; instead, the LLC owners each pay taxes on their portion of the profits on their personal income tax returns.
The distributive share of profits and losses, known as a distributive share in an LLC agreement, should be defined in an LLC operating agreement.
A co-owned LLC must file Form 1065 with the IRS, even if it does not pay its own taxes. This form is an informative return that the IRS checks to ensure that LLC members report their earnings correctly.
The LLC must also deliver each member of the LLC with a Schedule K-1, which breaks down each member's portion of the organization's earnings and losses.
Each LLC member reports this information on his or her individual Form 1040, along with a Schedule E attachment.
Are LLC Members Taxed on Distributions?
By default, a single-member LLC is treated as pass-through taxation.
The earnings and expenses are not shown on a separate tax return in the case of a single-member LLC owned by an individual.
For tax purposes, the single-member LLC is disregarded, and tax payments from the LLC are recorded on IRS Form 1040 Schedule C.
Do LLC Get Tax Refunds?
In general, LLCs can't get tax refunds. However, LLCs elected C corporations for tax purposes can receive tax refunds, provided that they make quarterly estimated installments higher than their annual tax liability.
How Much Should an LLC Set Aside for Taxes?
On average, limited liability companies should set aside from 15% to 40% of the LLC's profits. This amount should be enough to cover both state and federal taxes.
Do I Have to Pay Taxes on an LLC That Made No Money?
An LLC that made no income will possibly still have to pay federal income taxes.
The IRS's requirements for a limited liability company tax filing differ depending on the LLC's legal status.
The filing requirements will differ depending on the LLC's tax status.
An LLC may be treated as a disregarded entity and not required to file or file if it's taxed as a partnership or a corporation.
What Expenses Can an LLC Deduct?
An LLC taxed as a C Corporation may deduct all premiums paid on health insurance for its working owners and their spouses.
They may also reimburse an executive or employee the current IRS mileage rate for using a car owned by the executive or an employee.
Other deductions include tangible property deductions, insurance, retirement plans, education, and so on.
How Does an LLC Avoid Self-Employment Tax?
Self-employed business owners must pay self-employment tax on their net earnings.
However, there are ways to avoid self-employment taxes, such as creating a separate tax entity for the business rather than paying self-employment income taxes on personal income from self-employed work.
Having an LLC taxed as a corporation may reduce your self-employment taxation because there is less of a chance the IRS will consider you self-employed.
Can I File My LLC and Personal Taxes Separately?
LLCs are pass-through entities, which means they can't pay separate federal taxes.
As a result, the company's profits are taxed on your personal tax return at your individual bracket.
On the other hand, C corporations separate business and personal income.
As a result, you can file separate federal taxes for your LLC and any other type of entity besides an S corporation or C corp.
Can LLC Losses Offset Personal Income?
If your company is a limited liability company, s corporation, or partnership, your individual return picks up the slack for any losses incurred by the firm.
In the same manner, as a sole proprietor, you may deduct these expenses from your other personal earnings on your individual return.
However, C corporations cannot deduct a company loss on your personal tax return. It is the property of your corporation.
What does it take to juggle LLC tax obligations? It takes a lot of time, patience, and often assistance from an accountant.
Suppose you are starting your own business or running one with multiple members.
In that case, it is important that you understand what tax forms to file to avoid any future consequences for failing to file correctly.