How is an LLC taxed?

How Single-Member LLCs are Taxed

If you are the only member of your LLC, the IRS will view you as a sole proprietorship. The only time you will not be viewed this way is if you choose to be treated as a corporation. Because of this, the LLC will not pay taxes in and of itself. It will be the responsibility of the single owner to report all of the profits and losses on their personal income tax return and file it with their other personal taxes by attaching a Schedule C form. If you are a single-owner LLC, then you can file using your Social Security Number (SSN) or your Employer Identification Number (EIN). Speak with your tax professional to determine which of these options will be the best for you based on specific criteria.

How Multi-Member LLCs are Taxed

If there are multiple business owners in the LLC, then the IRS will automatically treat your LLC as a partnership for tax purposes. Just like with single-member LLCs, you can elect to be taxed as a corporation if you wish to do so; otherwise, it will be taxed as a partnership. As well as with the sole proprietorship, this business is not taxed directly. Instead, it is taxed through each of the individual owners on their personal tax returns by attaching a Schedule E form. Each owner will only report their share of the profits and losses as outlined in the LLC operating agreement that was formed upon the founding. If everyone reported all of the income, there would be an overpayment of taxes. While this type of agreement is not a requirement in all states, it is still something that would be highly recommended, especially if there are multiple members. This agreement would outline how financial decisions are made, including how to distribute profits and losses every year for tax purposes.

An additional form that will be needed to be filed with taxes every year for any LLCs that are treated like partnerships is Form 1065. This is a form that is required of all partnerships and it helps the IRS to make sure that each member is accurately reporting their income correctly. Each partner in the LLC must also receive a Schedule K-1 from the LLC. This document will show the share of the partnership income for that specific owner as well as any credits or deductions. This is what should be used to accurately report the LLC income on the personal income tax forms. If for some reason your LLC does not split the costs and gains of the LLC as outlined with the percentage interests of each individual owner, then you will have to take an extra step with the IRS. You will have to request a special allocation from them. This is something that can become quite complicated so if this is the case, then it makes the most sense to speak with your accountant or other tax professional.

Lastly, if you opt to be viewed as a corporation instead of a partnership, the LLC will be subject to federal taxes and there is a different method for filing taxes. Instead of each individual listing out their share on their income taxes, the LLC should separately file a Form 1120 to account for all of the income for the entire corporation.

How to Pay Estimated Taxes

Estimated taxes is the best path forward when you have an LLC. It is also something that is expected from the IRS. Because LLC owners are self-employed, they are not subject to tax withholding in real time, like you would be if you worked for another employer. Instead, the IRS expects that estimated taxes as well as self-employment taxes, such as Social Security and Medicare, are made quarterly to the IRS as well as the state office if there are state taxes in the state in which you operate.

One caveat to this is if there is an owner in a multi-member LLC that is not actually actively involved in running the LLC. One example of this would be if they invested in the business but do not actually make any management decisions, do not provide any services to the LLC, and do not work day to day in the business. This is what would be called a silent partner. In this case, that owner would be exempt from paying any self-employment taxes. Speaking to a tax professional can help you determine if an owner would meet this exemption.

When it comes time to estimate your taxes to be paid, you can do so with some free tools on the IRS website. Since it is an estimation it is not expected to be exactly right, but it should be your best educated guess based on your income trajectory. You can make these payments directly to the IRS. At the end of the year, if you have overpaid, then you may be eligible for a refund on your estimated payments.

Consideration for Sales Tax

If your LLC is in the business of selling items to customers, then you are required to collect sales tax at the time of purchase. This is a tax that is imposed by the state and local governments. You should look into the requirements in your state to ensure that you are following the law and collecting any sales tax that is required. This is a tax that is paid for by the purchaser. As a small business owner, you are required to enforce this and collect it on behalf of your local government. You are also required to pass this money on to the local government within the allotted time. The rates and laws will vary by state, so you will need to make sure you are charging the right amount and meeting all deadlines. If you are selling to people in multiple states, you should make sure the rates are correct for each state and pay the money to that state when required. The deadlines may be different from state to state and the tax rates will definitely be different as well. You do not want to miss the sales tax as it could lead to some serious additional payments for your LLC.

Handling State Taxes

Just like you would have to pay taxes to the IRS as an LLC, you will also have to pay taxes to the state in which you operate. In many cases, the process is the same, such as filing this through your individual returns. However, you will want to double check this with your specific state to ensure you are following all guidelines correctly.

There are also some states that impose a separate LLC tax on the income that is earned by the LLC. This may be added to the income tax paid by the individual members. There are other states who may just charge an annual LLC fee to the LLC. This type of fee tends to be unrelated to income and is more like a tax registration fee for the business or a renewal fee. Make sure that you are accounting for these additional fees if you are subject to them. To do that, you should research the tax and business law for your state or speak with your tax professional who can help guide you through all of the requirements and fee structures in your specific state.