Limited liability companies are unique business structures that provide the owners with many benefits. If you own a limited liability company (LLC), you have probably wondered what IRS tax forms your business should file each year.
That will depend on the taxation election an LLC chooses upon registration with state authorities.
LLCs and Taxes
The IRS automatically treats LLCs as a pass-through entity for income tax purposes.
This means that the LLC members pay taxes on their profits and losses through their owners' personal income tax returns, known as "pass-through taxation."
This type of taxation can be beneficial because it spreads out the risk to individuals.
Still, it also means that an LLC will not pay any federal income tax unless it has taxable income (and even then only at the owner level). However, LLC members will pay self-employment taxes for Social Security and Medicare.
LLCs can choose to be taxed like sole proprietorships, partnerships, and corporations. The tax forms LLCs need to file will depend on this.
LLCs Taxed as Sole Proprietorships
A sole proprietorship is a business structure where a person has no separate legal existence from their business.
However, the personal assets of the LLC owner taxed as sole proprietorship are not at risk if there is any debt or liability that an LLC's assets cannot pay.
The owner's personal assets are shielded against the LLC's debt, but the owner is still responsible for any personal income tax on the LLC's profits.
A sole proprietor has taxes withheld from their paychecks and pays estimated quarterly taxes. LLCs taxed as sole proprietorships file taxes as other sole proprietors, and that is Schedule C (Form 1040).
It is usually single-member LLC that chooses to be treated as a sole proprietorship. A single-member LLC has only one member, and the tax rules for a multi-member LLC would not be as beneficial.
Because single-member LLCs taxed as sole proprietorships are required to file Schedule C, they are eligible to benefit from pass-through taxation and take advantage of deductions that can help lower their taxable income.
LLCs Taxed as Partnerships
Multi-member LLCs have two or more owners, and they represent a limited liability company that is treated as a partnership by the Internal Revenue Service.
That means it is still one of the pass-through entities, but each LLC member has a stake in it.
Members of a multi-member LLC are treated as partners for federal income tax purposes, and they report their share of the LLC's income or loss on Schedule E, Supplemental Income, and Loss.
Each member of the LLC reports their share of the business income or loss on their personal tax return and then pays personal income taxes.
Form 1065 is also known as the U.S. Return of Partnership Income form and is also one of the partnership filing requirements used for reporting their income, gains, and losses deductions on business operations to both members and the IRS.
It shows how much each member earned in profits or took home after expenses were paid out.
Schedule K-1, which is a tax form for LLCs, breaks down each member's cut of the business's earnings and losses.
Each LLC member subsequently reports this profit and loss data on personal tax returns (Form 1040), along with Schedule E attached.
LLCs Taxed as Corporations
An LLC can opt for corporate tax treatment, too. Corporate taxation is more complex than individual taxation but still simpler than taxing a partnership.
An LLC can choose to be treated as a C corporation or an S corporation. This choice will dictate the corporate filing requirements.
A C corporation files a corporate tax return and is responsible for taxes on its income, whether it takes the form of dividends or capital gains when the company's shares are sold.
An S Corporation does not pay any taxes at the business level; they pass through their retained earnings to be taxed as personal income.
The shareholders report income and losses on their personal tax returns. Keep in mind that LLCs have to fulfill certain requirements to be taxed as S corporations, such as having only one class of stock and no more than 100 shareholders. In case they do, they file form 2553.
LLCs taxed as corporations are required to file Form 8832 with the IRS in order to elect corporate taxation status.
Self-employment tax is the tax you pay on self-employment income.
You may need to make estimated quarterly payments of your self-employment taxes if you are operating a business or practice as an independent contractor, sole proprietor, member of a partnership, or commissioner of an estate (you're in charge of settling someone's estate).
An LLC that elects to be taxed as a C corp must pay income tax on its business earnings.
Because business profits do not flow through to shareholders' personal taxes, they are not subject to individual taxation like disregarded entity LLCs or S Corporations.
Owners of a corporation (S or C) pay no self-employment taxes. If they receive money from the LLC as a salary, they must pay FICA, FUTA, and income tax withholding.
Self-employed business owners who are members of an LLC file a Schedule C with their federal income tax return.
When LLC business owners submit their Form 1040 tax return, they must also fill out Schedule SE ("Self-Employment Tax"), which is included with the form.
When completing Schedule SE, LLC members will need to utilize some of the data from their Schedule C (or Schedule K-1 if they operate a multi-member LLC).
Does LLC Have to File a State Income Tax Return?
The majority of states impose the same state tax rate on LLC's profits as the IRS does.
The LLC's owners pay state taxes on their personal returns, while the LLC itself is not taxed.
Some states may impose additional fees, though. An LLC files taxes as a C corporation, an S corporation, or a partnership. The states generally accept Form 8832, which establishes whether the company will file a corporate, stockholder, or partnership income tax return.
Do LLCs Pay Taxes Monthly?
As a business entity, an LLC doesn't have to make quarterly tax payments.
However, if the business owner/member is also an employee of the LLC, they have to make monthly tax payments on their income. The owner/member would need to pay self-employment taxes on their income from the business entity, so this is a good example of when you'd file a Schedule C with your personal return.
How Many Times Are LLCs Taxed?
In most cases, LLCs are taxed annually. However, there are some cases when LLCs may be taxed more than once in a single year. This is the case, for instance, with S-corps, where pass-through taxation can lead to LLC members being subject to double taxation.
Do My LLC Taxes Affect My Personal Taxes?
Although having an LLC may help you save money on taxes, it does not exempt you from personal income tax. The money you earn is taxable income, whether you get a salary or profit from the LLC, and you report it on your personal income tax return.
Do You Get a Tax Refund if Your LLC Loses Money?
Your share of the LLC'sLLC's losses will be included on your personal tax return. All of your deductions, as well as any business losses you incurred during the tax year, are summed up and then subtracted from LLC'sLLC's income for the year.
Can You Minimize Self-Employment Taxes?
By opting to be taxed as a corporation for tax purposes, LLC owners may cut their individual self-employment tax burden by designating the LLC as an S Corporation.
When entrepreneurs want to lower their own self-employment taxes, the most common technique is to choose to be classified as an S Corporation (under Subchapter S of the Internal Revenue Code).
What's the Best Tax Form For an LLC? (Conclusion)
To avoid the potential tax issues, we recommend seeking professional tax advice from a qualified accountant or lawyer.
Filing taxes for LLCs can be complicated, and it is important to seek expert help if you are unsure about how to proceed with your particular situation.