You'll be able to choose the best tax status for your business, discover tax benefits, and avoid future fines if you know how you will be taxed while forming an LLC.
Whether you are in a general partnership or a limited partnership, you will need to fill in your tax paperwork and understand how you will pay income tax as a partnership!
What is an LLC Partnership?
An LLC, or limited liability company, is a business structure that provides the asset protection of a corporation with some of the tax benefits of a partnership.
Because many small businesses are operated as partnerships, it's important to understand how an LLC will impact your taxes if you're starting an LLC.
It also helps to know what kind of taxation an LLC can expect if you're considering making the switch from a corporation to an LLC. When you do, there are two types of partnerships:
Limited Partnership:
A limited partnership has at least one general partner and one limited partner.
General Partnership:
General partners manage the business and have unlimited liability, which means they're responsible for all debts and liabilities of the company. Limited partners, on the other hand, are liable only to the extent of their investments in the business.
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Classifications
An LLC is classified as a corporation, partnership, or part of the owner's tax return (a "disregarded entity") depending on elections made by the company and the number of members.
A domestic LLC with at least two members is classified as a partnership for federal tax purposes unless it files Form 8832 and elects to be treated as a corporation.
An LLC with only one member is considered an entity disregarded as separate from its owner for income tax purposes unless it files Form 8832 and opts to be taxed as a corporation.
However, an LLC with only one member is still considered a distinct entity for employment tax and certain excise taxes.
Multi-Member LLC Federal Taxes
How to File Taxes for a Partnership LLC? A multi-member LLC is a business structure that has more than one owner or member.
The IRS taxes multi-member LLCs as either a partnership or a corporation—multi-member LLCs can’t decide their own tax status.
When you choose an LLC federal tax treatment for your business, the first thing you'll need is to choose how your LLC will be taxed. Federally, it's either a partnership or a corporation.
Distributive Share Taxes
If your multi-member LLC has a partnership tax treatment, each member of the LLC will receive a distributive share. The distributive share is money or property that each partner receives from the company’s profits and losses.
Each partner's distributive share must be in proportion to his percentage interest in the business. Â A member's distributive share can never be less than zero.
In a multi-member LLC, the members are taxed as partners on their distributive shares from the company. These distributive shares are included in each member's personal income tax return and must be reported to the IRS.
Generally, your multi-member LLC will need to file a partnership tax return on IRS Form 1065 to report the company's business income and expenses.
LLC Employee Taxes
If you have employees, your multi-member LLC will have to pay federal income taxes on wages paid to those employees.
When it comes to paying federal employment taxes, an LLC is the same as any other business structure—you'll need to withhold money from your employees' wages for social security and medicare.
You are also responsible for matching social security and medicare taxes.
If your LLC has any employees, you'll need to pay federal unemployment tax as well. And don't forget about state employment taxes—most states will require that you withhold money from your employees' wages and submit it for state unemployment tax.
FICA Taxes
Two types of taxes levied by employers and employees under the Federal Insurance Contributions Act (FICA) are the Social Security tax and the Medicare tax.
Employers must match their employees' FICA tax payments. As a result, each pays one-half of the overall FICA rate.
Unemployment Taxes
The maximum taxable earnings for the Unemployment tax in 2015 is $15,500.
You'll want to know that the unemployment tax rate for your multi-member LLC will be different from a single-member LLC because you'll be charged based on each member's distributive share.
List of Forms:
If you choose to have your multi-member LLC taxed as a partnership, here are some forms for federal income taxes that your company will need:
- Income 1040: This is used to compute federal and state income taxes. All taxpayers are required to complete this document.
- Schedule E: On their individual federal income tax returns, partners indicate the proportion of profit or loss they generated.
- Schedule SE: This is the form for submitting and paying your self-employment taxes. Medicare and Social Security taxes must be paid by the owner of a disregarded entity.
- Form 1065: Partnerships must complete and submit a tax form to the IRS. The LLC files an information form for partnerships to record profits and losses with the IRS.
- Schedule K-1 Form: A partner's financial statement is a document that describes the income taxes regarding the earnings and losses of each partner.
FAQs
Why Would an LLC Elect to Be Taxed as a Partnership?
A multi-member LLC taxed as a partnership chooses this route because it is able to split up profits and losses. This allows each member to claim their portion of the business's expenses on their personal income tax return.
Can You Change a Partnership LLC to a Single-Member Limited Liability Company?
Yes, you can change the tax status of your LLC. This is accomplished by filing IRS Form 8832 to request that the Internal Revenue Service change your multi-member LLC into a single-member company taxed as an S Corporation.
As with all legal filings, there will be an associated fee for this service.
How Do I File Taxes for an LLC Partnership With No Income?
A multi-member LLC taxed as a partnership is required to file an income tax even when there is no income for federal income tax purposes; however if there are no expenses or losses, your company does not have to pay taxes.
Do I Pay Self-Taxed Employment Taxes as a Partnership?
Yes, a multi-member LLC taxed as a partnership has to pay a self-employment tax. The company will have to file form SE and any other related forms for reporting these obligations.
Is an LLC Automatically a Partnership?
No. Organizing an LLC does not guarantee that your company will be taxed as a partnership. In fact, LLCs have the option to choose from three different tax classifications: sole proprietorship, corporation, and a limited liability partnership.
Does an LLC Have to File a Partnership Return?
Yes. An LLC will need to file a partnership return even if the company has no income because, like an individual, it is required to file taxes each year.
Are LLC and Partnerships Taxed the Same?
A multi-member LLC taxed as a partnership is different from a partnership in that the business does not file taxes. The members of an LLC are required to report earnings on their individual tax returns, so this type of entity is subject to double taxation.
What Is the Tax Rate for an LLC Taxed as a Partnership?
The tax rate for an LLC that files taxes will depend on how many members are in the company. If you have two members, your LLC will be taxed as a partnership. The tax rate for one member is 15 percent, while the rate for two or more members in an LLC is 34 percent.
Do You File LLC Business and Personal Taxes Together?
A multi-member LLC taxed as a partnership will file an information return with the Internal Revenue Service and separate tax returns for each member. This is usually done using Form 1065 and Schedule K-1.
Filing Taxes for a Partnership LLC: Conclusion
To conclude, a multi-member LLC taxed as a partnership must file an IRS Form 1065 to report the company's business income and expenses.
In addition, you must pay employment taxes on wages paid to employees of your business. LLC employees may include the company's owner if they choose not to be treated as sole proprietors.
Lastly, you must pay a self-employment tax on any wages paid to the owner of a disregarded entity.
