Table of Contents
If you own a limited liability company (LLC), it’s important to understand how LLC taxes work. How an LLC is taxed affects how profits are reported, how much owners owe, and which tax forms should be used. Keep reading to find out more about LLC taxation.
Key Points
• The Internal Revenue Service (IRS) automatically treats an LLC as a pass-through business by default, meaning profits flow to owners’ personal tax returns.
• A single-member LLC is classified as a disregarded entity, so all income and expenses are reported on the owner’s personal tax return.
• Multi-member LLC taxation is generally the same as partnership taxation, filing an informational Form 1065 and issuing each owner a Schedule K-1 for their share of profits.
• Owners expecting to owe at least $1,000 must make quarterly estimated tax payments.
• Electing S-corp status through IRS Form 2553 can reduce self-employment tax by allowing owners to take a reasonable salary plus distributions not subject to that tax.
How Are LLCs Taxed?
Unless a limited liability company (LLC) files an election to change its status, the Internal Revenue Service (IRS) will by default treat the LLC as a pass-through business and that’s how the LLC will be taxed.
This means that profits flow to and are taxed through the owners’ personal tax returns. Owners will receive default pass-through treatment automatically, without having to file anything. The classification applies as soon as the LLC is formed.
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Single-Member LLC Taxes
Single-member LLCs are treated as disregarded entities. That means that a single-member LLC doesn’t pay income tax separately from its owner unless a tax treatment election has been made that requires otherwise. All income and expenses are reported on the owner’s personal tax return, typically on Schedule C. The profit is taxed at the owner’s individual income tax rate.
Multi-Member LLC Taxes
A multi-member LLC is generally taxed as a partnership. The LLC files an informational return, Form 1065, that reports total income and expenses, and then issues each owner a tax form for their share of the profit on a Schedule K-1. (The LLC may also send out Schedules K-2 and/or K-3 if there are items of international tax relevance.) Each partner reports their share on their personal returns.
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LLC Corporate Tax Elections
LLCs are not all taxed the same way. How an LLC is taxed and the tax forms it uses depend on what elections it has made. Here are the ways an LLC can be taxed if it has elected to be a corporation.
LLC Taxed as an S Corp
An LLC that has elected status as an S corporation (S corp) files a corporate pass-through return, Form 1120-S. The business reports income at the entity level, issues owner tax forms for pass-through income, and files payroll forms for any wages paid.
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LLC Taxed as a C Corp
An LLC that has chosen to be taxed as a C corporation (C corp) files Form 1120, a corporate income tax return, and pays tax at the entity level. Owners report dividends separately if profits are distributed.
Self-Employment Tax and Quarterly Estimated Taxes
LLC owners usually have to pay self-employment tax. If the LLC is taxed as a pass-through business, the IRS generally treats the owners as self-employed rather than as employees. Owners calculate self-employment tax on their personal returns based on the LLC’s net profit after deductions and pay this in addition to regular income tax.
LLC owners who expect to owe at least $1,000 when their return is filed must pay estimated taxes. Estimated tax payments are made quarterly through the year. Estimated taxes include federal income tax and, where applicable, self-employment tax. They do not replace payroll tax deposits for wages.
Estimated taxes apply because LLC income often flows directly to owners without any withholding. These payments let owners prepay income tax and self-employment tax on that income. They’re based on estimates of annual tax based on projected income, divided across quarterly payments.
Estimated quarterly tax payments are generally due on April 15 for income earned January 1 to March 31, June 15 for income earned April 1 to May 31, September 15 for income earned June 1 to August 31, and January 15 of the following year for income earned September 1 to December 31. If any of these due dates falls on a Saturday, Sunday, or legal holiday, the payments are due the next business day.
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State and Local LLC Tax Requirements
It’s important to bear in mind the entire range of small business taxes. State and local governments often also have their own taxes, fees, and filing requirements. Many states tax LLC income at the owner level for pass-through LLCs, using the same classification as federal tax law. If an LLC is taxed as a corporation, the business might owe state corporate income tax instead. States may also charge LLCs a flat annual fee or franchise tax for doing business in the state.
Some states assess taxes or fees based on total annual revenue instead of profit. Additionally, cities and counties may also impose local business income taxes, gross receipt taxes, or annual license fees.
The Takeaway
LLC taxes can be complicated once your business starts generating revenue. Understanding the different tax implications of the different choices you make in structuring your company can help you pinpoint what might work for you as you grow your business.
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FAQ
What tax forms does an LLC file?
The tax forms that an LLC files depend on how that individual organization is taxed, not on the LLC label itself. Single-member LLCs, multi-member LLCs, LLCs taxed as S corporations, and LLCs taxed as C corporations file different tax forms.
Can an LLC avoid self-employment tax?
An LLC can reduce self-employment tax by electing S-corp status for the LLC and using IRS Form 2553. Under this strategy, you would pay yourself a reasonable salary, subject to payroll taxes, and then take additional distributions from profits that are not subject to self-employment tax.
What is the difference between an S corp and a C corp election for an LLC?
An LLC that has elected to be treated as an S corp files a corporate pass-through return, Form 1120-S. The business reports income at the entity level, issues owner tax forms for pass-through income, and files payroll forms for any wages paid. An LLC that has elected to be treated as a C corp files a corporate income tax return using Form 1120 and pays tax at the entity level. If profits are distributed, owners report dividends separately.
Do LLCs pay taxes on revenue or profit?
LLCs are “pass-through” entities by default, which means profits flow to the owners’ personal tax returns unless the LLC has elected otherwise. However, some states assess taxes or fees based on total revenue rather than profit.
When are LLC quarterly estimated taxes due?
Estimated quarterly tax payments are generally due on April 15 for income earned January 1 to March 31, June 15 for income earned April 1 to May 31, September 15 for income earned June 1 to August 31, and January 15 of the following year for income earned September 1 to December 31. If any of these due dates falls on a Saturday, Sunday, or legal holiday, the payments are due the next business day.
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