How to file LLC Taxes
By Bazal Razzaq
Updated: October 17, 2023
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- What is an LLC?
- How to change your LLC name in 2023?
- How to set up an LLC as a Non-US resident
- What Is A Foreign LLC?
- Mastering the Art of Maintenance: Things To Do After Setting Up An LLC
- Exploring the Basics: What is a Single Member LLC?
- The Power of Partnership: Unleashing The Potential of A Multi Member LLC
- C Corp vs LLC – Which Business Structure is Right for You?
- A Guide to Business License: Everything you need to know
- Unlocking the Benefits of an LLC (Limited Liability Company)
- Which is the best state to form an LLC in?
- Operating Agreement 101: A Key To A Successful LLC
- One LLC, Multiple Streams of Income: can you have multiple businesses under one LLC?
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- What Is A Domestic Limited Liability Company?
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- Annual Fee for every state in US (Part-3)
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- What are the Benefits of 1099 Contractor in an LLC
The owners of Limited Liability Company can choose and decide how they want to file their LLC Taxes. This flexible arrangement makes LLCs more attractive to small business owners. If you are a new entrepreneur willing to start a business then LLC tax filing could be a bit confusing for you. We have presented the LLC tax filing in a guide below to make it easy for you.
Also, an LLC doesn’t pay taxes at the business level but the income goes to the member’s personal income tax return. An LLC can file as a sole proprietorship, partnership, or corporation, keeping in mind how they are different from each other and how it will affect your business.
In this guide, we have highlighted the classification of taxes, their need, and the best strategy for your LLC Business.
Basics of LLC tax
The classification of LLC taxes depends on its members and the business owners. The Internal Revenue Service (IRS) automatically assigns a default tax structure to an LLC depending on the number of members. The members have an option to change their tax classification.
There are two default tax designations that the IRS assigns-
- Sole proprietorship – If LLC has one owner
- General partnership – If LLC has more than one member
#1 How to file LLC taxes according to its type
The LLC files taxes according to its default designation. But if you want your LLC to get taxed like a corporation then you must change its tax status by filing a form with the IRS. You can reform the LLC as a partnership or proprietorship if it adds or loses members.
You should know how to file business taxes if you want to keep all your finances on track. If you are a beginner, you would want to file as a sole proprietorship or partnership. When the business grows, you can appoint an adviser or accountant to see if the LLC will benefit from taxation as a corporation or not.
How LLCs file federal income taxes under different tax classifications-
Single-member LLC Taxes
This type of tax works like a sole proprietorship. The Schedule C of the member’s personal income tax return is used by the LLCs to report their business income and expenses. The member mentions the net profit or loss on the income section of Form 1040, U.S. Individual Income Tax Return.
The company files as a sole proprietorship when the IRS disregards Limited Liability Company status for tax purposes. The Accountants and tax professionals consider sole proprietorship LLC taxes as a “disregarded entity.” It is for tax-related matters and LLC can retain its limited liability protection.
Forms needed: Schedule C (Form 1040)
Filing due date: April 15
Multiple member LLC Taxes
This type of tax works if your LLC has more than one member and operates as a Partnership. The income of the LLC flows through its members i.e. they report income on their personal tax return.
Multiple member LLCs include –
- Schedule K-1: It is issued to each member to show their respective share of the LLC’s profit. The operating agreement lists each member’s percentage share of profit or loss. The last date to file Form 1065 and Schedule K-1 is March 15.
- File Form 1065: It is an informational tax return that reports the partnership’s income and expenses. The due date for general filing is April 15.
All members of the Limited Liability Company report their share of profit or loss on Schedule E of their personal tax return. Members are obliged to return and pay tax on the entire profit share.
Forms needed: Schedule K-1 Form 1065 and Schedule E Form 1040
Filing due date: March 15 and general filing is April 15.
Your Single or multiple-member LLC can either be taxed as a C- or S-corporation. Both of these will not affect the LLC but will affect the way income is taxed.
- C-corporation: You will be required to file Form 8832 for a C-corporation and file Form 1120 annually. In this status, the company’s income will be taxed twice- at the corporate level, and after-tax profits are distributed to the shareholders as dividends. This is called “double taxation.”
- S-corporation: You will be required to file Form 2553 for an S-corporation and file an 1120-S tax form annually. In this status, the company will become a pass-through entity, and “double taxation” will be avoided. The taxes on income from S-corp is measured as the owners’ individual rates.
But before choosing the tax structure, one must apply for an EIN (Employer Identification Number for future needs.
#2 What are other LLC taxes
Limited Liability Company pays more than one tax to their state and federal governments based on their location and tax classification. It includes-
- Property tax
- Self-employment tax
- Excise tax
- Sales tax
- Income taxes
- Social Security tax
- Payroll taxes
#3 How do you change your LLC tax classification
LLC changes the classification of taxes when it adjusts ownership structure or elects a file as a corporation. The tax status can be changed anytime but it cannot be changed again until 60 months after the first date of election. The steps are given below-
Step 1: Choose a structure that is best for the LLC depending on strengths, weaknesses, and goals.
Step 2: Shift business structures to a friendly tax option.
Step 3: Report to the IRS after the effective date of election.
We have discussed the steps below in detail.
- Choose a structure for your LLC
LLC taxes can be filed as
- General partnership
- Sole proprietorship
- S corp
- C corp
Some LLCs would agree to change their classification to become a corporation. But a switch from partnerships to proprietorships is rare. One must consider the strengths and weaknesses of the business structure and choose accordingly.
- Shift your Business Structure
LLC tax classification calls for different requirements
-To file Taxes as a sole proprietor, you require
- Your business is the only member
- Buy owners to shift to sole proprietorship
–To file taxes as a partnership, you require
- LLC has more than one member
- Add a member to a sole proprietorship
-To file LLC taxes as a C- C-corporation, you require
- Maintain 100 shareholders
- Don’t allow nonresident aliens to become a shareholder
- Provide one class of stock
- Behold corporations or partnerships from becoming shareholders
- 3. File with the IRS after the effective date of the election
After the LLC members have decided upon the LLC structure change, they should file with the IRS. If an LLC fails to submit a form on time, it will have to pay taxes based on default classification.
For partnerships, C corporations, and Disregarded entities: Submit Form 8832
For S corporations: Submit Form 2553
#4 LLC Federal Income Taxes
All LLCs will have to file for an IRS regardless of their tax designation. They must fill out Form 1040 for individual income tax return and their appropriate schedules:
Schedule C: To report income from the business
Schedule SE: To pay and file self-employment taxes
Schedule E: To report income from rental properties or other investments.
Multi-member LLCs will have to file more than one tax. In addition to Form 1040, they must file
Form 1065: To report the business’s gains and losses
Schedule K-1: To report share of profit as an individual owner
#5 LLC State Income Taxes
Since LLCs are pass-through entities, they are not liable to pay separate state taxes. Some common state taxes are as follows-
- Franchise Tax: It depends on the per annum earnings of an LLC
- Sales and Use Tax: Consumers pay this tax for physical products which goes back to state or local governments.
- Gross Receipts Tax: It is paid by the seller and not by the buyer.
- Withholding Tax: This income is taken from employee paychecks and paid to the government.
Unemployment Insurance (UI) Tax: It is set up for unemployment benefits and tax rates are decided by the state law.
#6 LLC Business Expenditure
We can eliminate certain expenses from taxes as a business entity. According to the IRS, a business expense is both “ordinary and necessary.”
Tax-deductible expenses include
- Licenses and permits
- General maintenance and rent
- Office Supplies
Other expenses like travel and fun-related purchases are difficult to purchase.
#7 LLC Bookkeeping and Accounting
An LLC must ensure its accounts are well maintained to protect its corporate veil.
Always try to separate your personal and business expenses as much as you can. You can do it by
- Opening a bank account for your business
- Securing a credit card for your business
- Create a bookkeeping system to track down your expenses. You can hire an accountant to do the job.
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Frequently Asked Questions (FAQs)
You must file your personal and LLC taxes separately. The IRS disregards an LLC if it operates as a partnership, S corporation, or proprietorship. The income from the LLC will be reported on the personal tax return. But, if your LLC is a partnership or S corporation, the profit will be subjected to separate income tax filings.
An LLC provides an option to choose tax structures. It benefits from pass-through taxation by default. The LLC can be elected as a corporation to avoid self-employment tax, get tax deductions, and look more appealing to investors.
No. You will take distributions in this case, instead of a 1099. You will take earnings and be responsible for taxes, including self-employment taxes. You should speak with a Certified Public Accountant to understand the specific details about your LLC situation.