Taxes always seem to be a hot topic in the United States, and small business owners have an extra reason to worry about taxes. After all, being taxed on your income often means that you have to pay more money at the end of the year for running your company.
In addition, legitimate businesses need every deduction possible when filing their taxes. That way, they can keep more of their business income instead of handing it over to the Internal Revenue Service (IRS).
Startup businesses often choose an LLC (Limited Liability Company) structure for several reasons. Business owners like the fact that they can increase or decrease membership in an LLC at will, as well as manage operations easily without much trouble.
Limited Liability Company (LLC)
LLC is a form of business organization in which there is an unincorporated association of one or more persons.
The LLC owners-called members enjoy limited liability because the company acts as a separate legal entity from its members. This means that if someone sues the LLC, only the assets within it will be taken, and the individual’s personal property will not be touched.
An LLC is a great choice for startup businesses because it is flexible and easy to establish. It is also taxed as any other sole proprietorship would, which means that there are no complicated tax forms to file like an S Corp, C Corp, or an LLP (Limited Liability Partnership).
Classifications of LLCs
There are several types of LLCs out there, and it may be confusing to figure out which kind your business should register as. Generally, LLCs that do not distribute profits usually file as a sole proprietorship or partnership, while those that allow for members bringing in profits file as a corporation.
This type of Limited Liability Company is the simplest form of an LLC because it has only one owner. While you can still open up your business as an LLC, this type of structure is not very beneficial because the owner’s personal assets are at risk in case of debt or lawsuit. It would be best to avoid these kinds of LLCs, as they only offer the owner minimal protection.
These kinds of Limited Liability Companies are taxed like partnerships because there is no distinction between the company and its owners. The profits from a Multi-Member LLC pass through to all members, who pay taxes on their share at personal income tax rates
Single-Member Limited Liability Co. (SMLLC)
An SMLLC is a Limited Liability Company that has only one owner who is also the sole member. The biggest difference between an LLC and an SMLLC is that an SMLLC cannot be taxed as a corporation but must declare itself as either a Corporation or Partnership for tax purposes.
Since an SMLLC has only one owner, it will be treated as a Sole Proprietorship by default. That means that, in most cases, the revenue generated from the business will automatically pass through to the owner’s personal taxes.
This makes operating and filing taxes easier because you treat everything as if you were running your business without any form of LLC structure.
Effective Date of Election
The effective date of an LLC’s election is the first day of its tax year. For example, a new LLC that begins on October 15 must file as a corporation by December 31.
If the elections are not filed within that time frame, then they can still file as a Corporation or Partnership up to two years after the initial filing date if there was reasonable cause for delay. This means that April 15th of the second year will be your deadline for filing your taxes as either an S Corp, C Corp, or LLP (if applicable).
Forms & Instructions
Check the components of an LLC, including what are member roles and responsibilities, how to file for your business with the state, creating articles of organization in your state, getting registered with the IRS as a partnership or corporation.
- PLLC – find out what passive income is in regards to a PLLC, types of PLLCs (single-member vs. multi-member), assets that can be protected under a PLLC structure, determining the tax treatment of pass-through entity vs. C Corporation.
- S Corp – get information about starting an S Corp (including changing from an LLC to an S Corp), filing taxes for an S Corp (and when you need to file it by), making charitable contributions, and filing for the S Corp, annual report for an S Corp.
- C Corp – get information about starting a C Corp (including changing from an LLC to a C Corp), filing taxes for a C Corp (and when you need to file it by), making charitable contributions, and filing for the C Corp, annual report for a CCorp.
- LLP – find out what passive income is in regards to an LLP, types of LLPs (single-member vs. multi-member), assets that can be protected under an LLP structure, determining the tax treatment of pass-through entity vs. LLC.
How Do Limited Liability Companies (LLCs) Pay Taxes?
Generally, Limited Liability Companies are taxed as a disregarded entity. This means that the LLC itself isn’t taxed, and members of the LLC must pay taxes on their share of income personally.
In most cases, it’s best to treat your business as a sole proprietorship or a partnership to avoid double taxation.
- If you personally own an LLC without any other members, you will be able to file taxes as a Sole Proprietor – which means all revenue from your business can go through directly onto your personal tax return.
- An LLC with more than one member must choose between being taxed as a partnership or corporation.
- If an LLC is choosing to be taxed as a corporation, then all profits will be reported by the individual members of the LLC and go onto their personal income tax returns.
- If an LLC is choosing to be taxed as a Partnership, then all profits from the business will pass through directly onto members of the partnership’s personal tax returns.
How do LLC taxes work?
An LLC with only one member will be taxed as a sole proprietor. This will mean that all profits from the business will go directly onto your personal tax return and be taxed at your individual tax rate.
An LLC with more than one owner (member) can choose to file taxes as a corporation or partnership – each of these options have different tax implications, so we suggest seeking legal advice before deciding which option is best for you.
How do LLCs pay income taxes?
The IRS views LLCs as “disregarded entities” or single-member LLCs. As a disregarded entity, the LLC itself does not pay income taxes – instead, the members of the LLC are responsible for reporting their share of profits on their personal tax returns.
Income taxes for single-member LLC
If you are the only owner of an LLC, your business is considered a “disregarded entity” by the IRS. This means that for tax purposes, there is no legal distinction between you and your LLC.
This makes reporting taxes on your income very easy. As a disregarded entity, all of the profits from your business are included in your personal tax return when you file with the IRS.
For example, if you make $100,000 in profit this year from your LLC’s business activities, then this amount will be reported to the IRS along with all of your other personal income (wages earned at a job, dividends received from investments, etc.) When it comes time to file with the IRS, you simply include your full income from all sources on the same tax return.
Income taxes for multi-member LLCs
If you form an LLC with more than one member, your business is considered a “partnership” by the IRS and, for tax purposes, has separate legal status from its members.
Partnerships file an informational partnership tax return each year to report the financial results of their business activity to the IRS and to their members. This return must be filed every year no later than two and a half months after the end of each fiscal year.
Depending on when during the fiscal year that you formed your LLC, this may mean that your first partnership return will not need to be filed until as late as May 1st of the following year. Your LLC members will need to receive a copy of this return by the date that it is due.
If you choose, your LLC can file as a corporation instead of a partnership. If you make this choice, then your business will be taxed similarly to a regular corporation — filing annual returns with the state each year and paying income tax purposes on profits incurred during the fiscal year.
Choosing corporate tax status for your LLC
When you form an LLC, you are given the option to choose whether or not your business will be taxed as a corporation. If this is the case, then profits from the business (after expenses) will pass onto members’ tax returns and will be taxed according to each member’s individual tax rate.
Additionally, LLCs that choose corporate tax status must file annual returns with both their home state and with the IRS reporting on any income earned during that year. Many of the rules surrounding what information needs to be included in these filings are very similar to those for corporations — more details can be found at our Guide To Corporation Tax Filing.
LLC payroll taxes
The IRS views all LLCs as “disregarded entities” for tax purposes — meaning that the business itself does not have a legal identity separate from its owner(s)
This means that any profits a member receives from their work in the LLC will be included as part of their personal income and taxed according to how much they made on all other sources during that year. This is very similar to how an S-Corporation works.
An LLC can hire employees just like any other type of business; however, the company itself will not pay taxes on these employees’ wages. Instead, each individual worker will pay taxes on their yearly salaries out of their own earnings – these amounts are then deducted directly from the employee paychecks. This is true for both full-time and part-time workers.
LLC Tax Returns
Every LLC with more than one owner must file an annual informational tax return with their state. This is usually done by the 15th of April each year, though this date may vary depending on your state’s laws.
These returns are used to show that members have followed all state business regulations throughout the past year; they can also be used to report income made during that time period (and, if necessary, any losses incurred).
These returns will not need to be filed with the IRS unless your LLC chooses to pay taxes as a corporation instead of filing as a separate disregarded entity; most LLCs choose not to do this because it will increase their tax liability.
LLC self-employment taxes
All LLC members who work for the business must pay self-employment tax on any profits made. This fee is comprised of both social security and Medicare taxes and will be automatically withheld from your payroll every time you get paid if your LLC files as a corporation.
A sole proprietor / single-member LLC can request quarterly payments instead, but this adds an additional 4.2% to their total tax liability. To avoid an extremely high-income tax bill at the end of the year, some small business owners choose to incorporate it in order to reduce their self-employment fees.
LLC sales taxes
Sales tax is paid when you make a purchase in your home state.
- When you buy goods or services in your state, sales tax will be charged to you based on the location of the business that sold it to you.
- Your local government will then receive a portion of this money for use towards the public property, community projects, and other general spending.
- A percentage of this collected money is also given back to the business owner who provided these products so they can continue to run their company.
- Your LLC must collect sales tax if they are operating within an area that has its own local sales tax regulations.
- If you do not wish to collect taxes from customers, there may be some exceptions made depending on your industry type — contact your city’s department of revenue for further information.
LLC tax forms and LLC tax deadlines
Every business must complete several forms throughout the year to keep records of their income sources, deductions, business expenses, and assets. Some types of businesses are required to submit additional statements at certain times.
These statements include:
- federal income tax returns
- state information returns
- payroll reports
You will also need to file an informational tax return with your state by April 15th each year – this document is used to report your LLC’s net income or loss for the previous fiscal year. Depending on where you live, you may be required to pay an annual filing fee as well; this cost usually ranges between $25-$100 dollars.
Your LLC will also need to know which IRS forms they should be submitting every month (or quarter if applicable). Forms W-2 and 1099 are used to report salaries paid to employees, while IRS Schedule C is an informational return used to report and pay self-employment tax on all profits made during the year.
Filing IRS form 8832 can help your LLC choose its filing status and tax treatment. You may need to file form 8832 again if your business makes a major change to its structure.
Schedule K 1 is filed by single-member LLCs to split their profits with other members.
Annual Tax Filing
LLC income tax returns are used to report profits (or losses) made throughout the year and must be completed by April 15th each year — this is done whether or not you choose to file your company as a separate legal entity.
Most LLCs will submit their information return along with their members’ tax returns in order to avoid having two different filing deadlines.
No matter if you make a profit or loss, an informational LLC tax return must be submitted every fiscal year. Each state has its own set of laws that govern how separate entities work, so it’s important to know what you should be doing at all times.
- Being aware of your business structure requires separate taxation or not – if you’re small LLC is doing business in more than one state, your home state may require you to file as a corporation or otherwise
- Deciding which tax form to use
- Understanding the difference between being taxed as an S-Corp vs. C-Corp
- Knowing how LLC taxes are paid to both federal and state governments
Expenses and Deductions
LLC tax forms should include a complete list of expenses and deductions your business has for the year. These will be used to lower the amount of money you owe to federal and state authorities.
Some common examples include:
- Vehicle, travel, or food expenses that were necessary for conducting business throughout the year
- Office space rent
- Salaries paid to employees
- Costs associated with marketing and advertising
- Rent or mortgage interest paid on property owned by the LLC (such as an office or warehouse)
Certain items can also be deducted if they were purchased for personal use but will still benefit the LLC -these types of purchases include computers, software, furniture, vehicles, etc. Your accountant can help determine what is and isn’t eligible for this tax deduction.
The following are examples of items that cannot be deducted:
- Personal expenses not related to the business (e . g ., a new HDTV or luxury car)
- Business trips were taken on an airplane if there was another mode of transportation available at a cheaper price
- Everyday meals while conducting business meetings at a restaurant
- Casual gifts from your business to employees on special occasions such as birthdays, Christmas, etc.
LLC tax tips for business owners
- Always work with a certified public accountant to prepare your LLC tax returns
- Keep thorough records of all transactions incurred during the year
- Be aware of other required paperwork, including quarterly payroll reports and an annual informational return for each state you do business in
- Make sure your LLC abides by all rules and regulations set out by both federal and state authorities.
- File on time every year; penalties can be costly (5% per month) if not filed correctly or on time.
Those are the basics of LLC taxation. If you have any questions, be sure to contact a tax or legal professional for further guidance. You can also continue reading on our blog to learn more about how taxes work with your business!