LLC Tax
Generally, an LLC is considered a pass-through entity for federal income tax purposes. This means that the LLC is exempt from paying taxes on its business income. Members of the LLC are taxed on their portion of the company’s profits. State or local governments may impose additional taxes on LLCs. Members may elect to have the LLC taxed as a corporation rather than as a pass-through company.
Multiple types of LLC taxes exist. These taxes are imposed by the federal, state, and local governments. All members of an LLC are responsible for paying income tax and self-employment tax on all LLC-related income. Depending on the products you sell and your employment status, you may also be required to pay payroll taxes and sales taxes. To further complicate matters, an LLC may elect to be taxed as a different corporate entity.
How LLCs pay income taxes
The owners of an LLC may be responsible for a broad spectrum of company taxes. Most business owners are most burdened by federal, state, and local income taxes. Whether your LLC has one owner (a single-member LLC) or numerous owners affects how you file and pay income taxes (a multi-member LLC).
Income taxes for single-member LLCs
For federal income tax purposes, the IRS classifies a single-member LLC as a disregarded entity by default. A disregarded entity means that the LLC is not required to file a separate income tax return to report income and expenses. The member’s income and expenses will be reported directly on his or her tax return.
In other words, as the sole owner of an LLC, you will record company revenue and costs on Schedule C of Form 1040, just as a lone proprietor would. If, after deducting business expenses, the LLC earns a profit for the year, the owner will owe IRS taxes at their personal income tax rate. If the LLC works at a loss for the year, the owner may deduct the losses from his or her personal income. Some states impose a special tax or fee on LLCs. California, for instance, imposes a yearly LLC tax of $800 in addition to an annual fee that varies dependent on the LLC’s California income. Consider these LLC taxes while choosing your business structure and developing your budget.
Income taxes for multi-member LLCs
Multimember LLCs are pass-through entities for tax purposes. Similar to a single-member LLC, the LLC is exempt from taxation. Depending on their LLC ownership, each member is taxed on the business’s income. The LLC tax rate is depending on the tax bracket of each member.
Each owner of a 50-50 LLC pays taxes on half of the business’s profits. Each member can claim one-half of the tax deductions, credits, and losses of the LLC. This tax is structured as a partnership.
An annual Form 1065, U.S. Return of Partnership Income, must be filed with the IRS by a multi-member LLC. Each LLC owner must have a completed Schedule K-1 by March 15. The K-1 details the income, losses, credits, and deductions of each LLC owner. Schedule K-1 is attached to each owner’s tax return.
Local and state pass-through taxation continues. Most states have 1065 and K-1 forms. Some states, such as California, tax LLCs more than others.
Choosing corporate tax status for your LLC
Form 8832 permits taxation of your LLC as a C-corporation (your state might also require additional forms for a change in tax status). If you change this, your LLC’s tax rate will be 21%. File U.S. Corporation Income Tax Return Form 1120. You will also be required to pay state and local corporate taxes in your area.
File Form 2553 with the IRS to become a S corporation. S-corporations are taxed similarly to pass-through entities, such as an LLC, but salaries and distributions are taxed differently. To file taxes for an S-corporation with the IRS, submit Form 1120S.
Choosing corporate tax status has no legal effect on an LLC. Legally, your business continues to be an LLC. If you would benefit from corporate tax status, consult a tax expert. A corporation is taxed differently and has more deductions and credits than an LLC.