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Are you deciding whether a limited liability company (LLC) structure is right for your business?

Before setting up an LLC, you should understand the tax implications. The simple structure can affect your tax liability and reporting requirements. This article highlights the LLC tax rules, filing deadlines, and advantages of the LLC business entity type. 

How Do LLC Taxes Work?

Limited liability companies default to pass-through entities, meaning LLCs pass income directly to their owners. LLC business owners pay tax on their share of the LLC’s income.

What Are LLC Tax Filing Rules?

An individual or business can establish an LLC by filing organization documents in their state.

The LLC’s federal tax treatment depends on whether the LLC has a single owner or multiple owners. Entity election classifications also affect the LLC’s tax filing rules. 

Depending on its owners and elections, the LLC will comply with tax rules for one of the following business entity types: 

  • Sole proprietorship
  • Partnership
  • C corporation
  • S corporation

    • Single-Member LLC Filing Requirements

    Single-member LLCs (LLCs with one owner) follow sole proprietorship rules. Sole proprietorships are disregarded entities for income tax purposes. The LLC’s sole proprietor should file Form 1040, Schedule C, to report the single-member LLC’s activity. 

    Multi-Member LLC Filing Requirements

    Multi-member LLCs (LLCs with two or more owners) default to partnership tax treatment. Multi-member LLCs should file partnership returns to report their business activity and distribute income to each owner. Business owners should reflect their share of income on their individual tax returns. 

    Corporate Filing Requirements

    Your LLC can file an election to be taxed as a corporation. 

    If your LLC elects C corporation tax treatment, your business should file a C corp tax return and pay corporate income tax. C corps do not automatically pass income to their owners. 

    If your LLC elects S corporation tax treatment, your business should file an S corp tax return. S corps pass income to their owners, who report the activity on their personal income tax returns. 

    Small business tax professionals can help you understand how your business nuances affect your tax filing requirements.

    How Is Income from an LLC Taxed?

    An LLC’s income is subject to one or more taxes, depending on its entity structure and business operations. 

    LLC owners generally pay federal and state income tax. Payroll, self-employment, and sales taxes could also apply. 

    Federal Income Tax

    Single-member and multi-member LLCs automatically pass income through to their owners. Pass-through entities do not pay federal income tax. Instead, the business owners pay federal tax on their share of business income. 

    LLCs with C corp elections lose pass-through entity treatment. LLCs taxed as C corps pay 21% federal income tax. C corp owners pay federal tax on corporate dividends and employee wages they earn. 

    LLC Payroll Taxes

    Payroll taxes apply to all businesses that hire employees, regardless of entity type. If your LLC has employees, you should collect and remit payroll taxes.

    Employers are responsible for the following taxes on employee wages:

  • Unemployment taxes: The 6% federal unemployment tax applies to the first $7,000 of each new employee’s wages. State unemployment tax rates vary – you should check your local requirements. 
  • Social Security taxes: Employee wages are subject to a 12.4% Social Security tax. Employers and employees split the burden: Your LLC should pay 6.2% of each employee’s wages, and you should withhold an additional 6.2% from employee paychecks.
  • Medicare taxes: Employee wages are subject to a 3.9% Medicare tax. Similar to the Social Security tax, employers and employees each pay half of the tax. Your LLC should pay 1.45% of each employee’s wages, and you should withhold an additional 1.45% from employee paychecks.

    • Self-Employment Tax

    Traditional employees pay Social Security and Medicare taxes through paycheck withholding. However, LLC owners do not receive paychecks and must pay self-employment tax on their share of the LLC’s income. (Exceptions apply to LLCs with corporate tax elections.)

    LLC Sales Taxes

    States, cities, and counties impose sales taxes at varying rates. Sales tax rates and applicability depend on the LLC’s business activities. Like payroll taxes, sales taxes apply regardless of the LLC’s business structure. 

    You should check the local rules to determine whether your LLC should pay sales tax. We recommend partnering with small business tax professionals for complicated sales tax questions. 

    Do LLCs Pay State Income Taxes?

    State income tax rules vary depending on the LLC’s business structure and entity elections (if any). Some states impose taxes on pass-through entities, while others only tax the business owners. Some states do not impose income tax.

    The following chart summarizes typical LLC state filing requirements. 

    Business Structure

    Typical State Income Tax Requirements

    Single-member LLC or multi-member LLC

  • Pass the LLC’s income to the owner(s), or
  • Report the LLC’s income on a state LLC return, or
  • Pass the LLC’s income to the owner(s) and file a state LLC return.

    • LLC taxed as a corporation

  • File a state corporation return or
  • Pass the LLC’s income to the owner(s) (uncommon).

    • We recommend partnering with tax and accounting professionals who can help you understand your LLC’s state filing requirements.

    LLC Tax Forms and Deadlines

    Which tax forms should your LLC file? 

    Review the following summary of tax returns for each business structure to determine which forms you need – and when you should file.

    Form 1040, Schedule C and Form 1040, Schedule SE

    If you operate a single-member LLC, you should report its business income or loss on IRS Form 1040, Schedule C, Profit or Loss from Business. 

    After calculating your LLC’s business income on Schedule C, determine your self-employment tax on IRS Form 1040, Schedule SE, Self-Employment Tax.

    Report these figures and calculate your total tax liability on your IRS Form 1040, Individual Income Tax Return. Be sure to attach Schedule C and Schedule SE to your Form 1040.

    Form 1065 and Schedule K-1

    Multi-member LLCs should report business income or loss on IRS Form 1065, Return of Partnership Income. Form 1065 calculates the LLC’s income distribution to its owners. 

    Use IRS Form 1065, Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., to report each owner’s share of the LLC’s business activity. Complete a separate K-1 for each LLC owner and attach all K-1s to the Form 1065.

    Form 8832

    If you want to elect corporate tax treatment for your LLC, complete and file IRS Form 8832, Entity Classification Election. Review the instructions and special rules before completing the form.

    Form 1120 and Form 1120-S

    If you’ve filed a corporate election for your LLC, you should report your LLC’s business activity on a corporate income tax return. 

  • LLCs taxed as C corporations should report their business activities on IRS Form 1120, Corporation Income Tax Return. 
  • LLCs taxed as S corporations should report their business activities on IRS Form 1120-S, Income Tax Return for an S Corporation. 

    • LLC Tax Deadlines

    What are LLC tax due dates?

    Tax returns are due on March 15th or April 15th, depending on your business structure: 

  • March 15th: 
  • Multi-member LLCs
  • LLCs taxed as S corps
  • April 15th:
  • Single-member LLCs
  • LLCs taxed as C corps

    • Submit a 6-month extension before your due date if you need more time to file your return – and make sure to pay what you think you’ll owe.

    Pass-through entity owners should make quarterly estimated tax payments on April 15th, June 15th, September 15th, and January 15th. Small business tax professionals can help you monitor due dates and calculate your tax payments. 

    What Are LLC Tax Deductions?

    LLC tax deductions reduce your taxable income. Your LLC can take tax deductions for operating costs such as employee wages and office supplies.

    Other common business expenses include the following: 

  • Accounting and bookkeeping software
  • Business travel
  • Depreciation expense
  • Education and training
  • Legal costs

    • Track your business spending throughout the tax year so you can maximize your LLC tax deductions. 

    What Are the Tax Benefits of an LLC?

    Consider the LLC’s advantages and disadvantages to help you decide how to structure your business. 

    The primary benefit of LLC status is its flexibility and limited liability protection. As mentioned throughout this article, you can elect corporate tax status for your single-member or multi-member LLC. 

    Additionally, LLCs avoid double taxation, which is the concept that C corp income is taxed twice. First, the business pays tax on its income; second, shareholders pay tax on dividend distributions.

    What Are the Tax Disadvantages of an LLC?

    While LLCs enjoy flexibility, the main disadvantage of the LLC structure is the self-employment tax on business owners’ income. 

    Additionally, LLC owners need to file quarterly tax estimates or risk fines and penalties. 

    The tax burden and administrative filing requirements can detract from the LLC’s advantages.

    Is an LLC Right for Your Business?

    When deciding whether you should establish an LLC for your business, consider the following: 

  • Advantages and disadvantages of the structure
  • State and local tax rates
  • Administrative filing requirements
  • Future business expansion
  • Self-employment tax burden

    • Small businesses can benefit from the LLC structure’s simplicity. As your business expands, you could consider a corporation election to avoid self-employment tax. 

    1-800Accountant can help you navigate the entity structure differences. Consult with tax professionals to determine whether an LLC is right for your business. 

    How Can I Get Help with LLC Tax Questions?

    We recommend working with professionals on your business structure decisions. You can get personalized advice when you partner with 1-800Accountant. 

    Set up a free 30-minute consultation to get answers to your LLC tax questions. Tax and accounting professionals can help you set up your LLC, automate bookkeeping, and simplify tax compliance.

    This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.