How to File LLC Taxes
Do Business the Right Way
Understanding how to file LLC taxes is an essential part of running your business. However, unfamiliar tax options and processes can be tough to navigate. In our LLC Tax Guide below, we take you step-by-step through LLC taxes, going over tax classifications, filing information, and different tax options available to LLCs.
LLC Tax Filings & Options
How Do LLC Taxes Work?
The IRS doesn’t have an “LLC” tax classification. By default, the IRS taxes a multi-member LLC as a partnership. The IRS taxes a single-member LLC as a disregarded entity.
LLCs taxed as partnerships or disregarded entities have a few important tax characteristics in common:
- Pass-through taxation: Unlike a corporation, the LLC itself doesn’t file income taxes. Instead, income “passes through” to members. Members then report the income on their personal tax returns.
- Self-employment income: In the eyes of the IRS, each member of the LLC is a self-employed business owner. Members must pay self-employment taxes on ALL of their business income—even if they plan to keep some of the income in the business. Self-employment taxes include both social security and Medicare. The combined rate is currently 15.3%.
LLCs can also choose to file paperwork with the IRS to be taxed as a corporation (S-corp or C-corp). We go over these tax options later on.
LLC Tax Forms & Due Dates
Unless your LLC changes how it is taxed with the IRS, an LLC is taxed as a partnership or disregarded entity. So what does that mean when it comes to LLC tax forms and due dates?
Below is a chart explaining the federal forms, schedules and due dates commonly required for LLCs with default tax status. Note that federal requirements may change with time, and your LLC’s particular situation may require alternative or additional forms or schedules.
|Multi-member LLCs file…||
15th day of 3rd month after tax year end
|LLC members file…||
Form 1040 (personal tax return)
Schedule E (multi-member LLC)
Schedule C (single-member LLC)
Schedule SE (for self-employment taxes)
|LLC members calculate & pay estimated taxes using…||
- Form 1065 is an informational return that the LLC itself files. Schedule K-1 reports each member’s share of profits and losses. When submitting Form 1065, the LLC must include a separate Schedule K-1 for each member. The LLC also has to give each member a copy of their Schedule K-1.
- Form 1040 is just the personal tax return individuals file each year. However, LLC members have to attach Schedule E or Schedule C for their share of profits and losses. If a member receives sufficient income from the LLC (typically $400 or more), they have to attach Schedule SE for self-employment taxes.
- Form 1040-ES is for estimated taxes. If a member expects to owe $,1,000 or more in self-employment taxes, the member is required to pay estimated taxes for the year, which are due either in total on April 15th or quarterly throughout the year.
LLC Tax Rates
So how much do LLCs pay in taxes? Because income is reported on personal returns, it depends on income tax rates. The federal tax rate for personal income has seven brackets. The 2020 tax rates start at 10% and top out at 37% for income over $518,400 ($622,050 for joint filers).
Of course, state tax rates and requirements vary significantly. For example, Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming don’t have a state income tax while states like California and Hawaii have top marginal rates over 10%.
LLC Tax Election Options
When you start an LLC, your business is taxed as either a partnership or disregarded entity by default. However, LLCs can also choose to be taxed as S-corporations or C-corporations by filing the following forms with the IRS:
Why would an LLC elect to be taxed as an S-corp or C-corp? Below, we describe the general characteristics of each tax type. Before changing the tax classification of your LLC, it’s a good idea to consult a tax attorney to review all the advantages and disadvantages for your business.
LLCs Taxed as S-Corps
An S-corp is a common tax election for LLCs. At first glance, S-corp taxes might not seem much different from default LLC taxes. Both are pass-through entities. This means they don’t file federal corporate income taxes. Income passes through the business to owners, who report their income on their personal returns.
However, one of the major differences is the way S-corps treat self-employment taxes:
- S-corps can distribute money to owners as both salary and dividends. Salary is subject to self-employment taxes while dividends are not. Note that owners who provide services to the LLC must be paid a reasonable salary.
Overall, the most common advantage of choosing an S-corp election is the ability to save money on self-employment taxes. Owners can avoid paying 15.3% self-employment tax on all their income by taking a portion of the business income as dividends. However, the company would need to be making enough money to cover the reasonable salary requirements.
LLCs Taxed as C-Corps
C-corps file corporate income taxes. This means that the business itself pays taxes on profits. In addition, any profits distributed to shareholders are taxed on the personal level. This is because shareholders have to report profits they receive on their personal tax returns. Essentially, both the business itself and the shareholders end up paying taxes on profits. This is commonly known as “double taxation.”
However, shareholders only pay taxes on profits they receive—if the C-corp retains any profit in the business, this profit won’t appear on shareholders’ returns. This is different from a default LLC or S-corp, in which owners have to report their entire share of profits on their personal return, even if they reinvest some money into the company. For this reason, C-corps are often the choice of companies that plan to keep money in the business to build and grow.
There are also significantly more tax deductions available to businesses taxed as C-corps, including deductions for charitable contributions, salaries, and health insurance.
LLC Tax Classification Requirements
Considering changing your LLC’s tax election? Note that S-corps have many restrictions. An LLC must meet specific requirements to qualify for an S-corp election.
- The business must be a domestic entity with 100 owners or fewer.
- All the owners must be US citizens or permanent residents.
- Owners can’t be partnerships, corporations, or most other business types.
- The business will be limited to one class of stock (while LLCs don’t issue stock, distributions must remain proportional to ownership–the IRS can view disproportional distributions similarly to multiple classes of stock)
- The business can’t be a Domestic International Sales Corporation (DISC). Some types of banking and insurance businesses are prohibited as well.
C-corps have fewer restrictions and requirements—most LLCs easily qualify. For example, there are restrictions for 501(a) tax-exempt organizations, foreign entities, and businesses who have previously changed their election.
Unlike S-corps, C-corps can have a variety of owners, including foreign shareholders and business entities like LLCs and corporations. As a result, C-corps generally have more financing and investment options, which may be an important consideration for your LLC.
LLC Tax Questions
Do LLCs need EINs?
Yes, most LLCs will need a federal tax ID number, commonly known as an employer identification number or EIN. The IRS requires EINs for many common tax filings. For example, LLCs that have employees, are taxed as corporations, or pay certain excise taxes must get an EIN. Banks typically require an LLC EIN as well to open a business bank account (essentially for paying yourself with an LLC) Some states also require LLCs to get EINs to meet their state tax obligations.
How is a series LLC taxed?
For federal tax purposes, each series of a series LLC is treated as a separate taxable entity. This means each series of a series LLC would not typically be liable for the taxes of other series or the parent organization. It also mean each series can make its own tax election. For example, one series of the series LLC might be taxed as an S-corp while another is taxed as a partnership.
Can I form an S-corp instead of changing my tax election?
No, an S-corp is just a tax election, not a business entity. You have to form a standard business entity like an LLC or corporation first. Afterwards, you can apply for an S-corp tax election.