If you’re considering starting a Limited Liability Company (LLC) or restructuring your business as an LLC, it’s important to know how often an LLC pays taxes and how to file business taxes for an LLC. As an LLC, your company benefits from receiving personal liability protection without the compliance formalities required of a C Corporation. In addition, the LLC structure is flexible about how LLC taxes are filed.
For single-member LLC taxes, the sole business owner can file taxes as a sole proprietorship, a C Corporation, or an S Corporation. Multi-member LLCs, which have more than one owner, can choose to be taxed as a partnership, C Corporation, or S Corporation.
Can’t decide which election to select for your company’s LLC taxes? Here’s more information to help make your decision.
Although a company’s legal structure is regulated by the state in which the company is formed, your company can elect to be taxed in a few different ways for federal tax purposes.
Single-member LLC taxes depend on the type of entity you choose for federal tax filing. If you don’t make a choice, the LLC is classified as a “disregarded entity,” which is the same tax structure as a sole proprietorship. Sole proprietorships are pass-through entities, meaning the business’s profits and losses pass through to the sole business owner. The owner’s personal tax forms report profits and losses as business activity (Schedule C). Therefore, the LLC’s taxes depend on the sole owner’s personal tax rate. An owner of a single-member LLC, like a sole proprietor, is not considered an employee, so must pay self-employment taxes (Social Security and Medicare).
With more than one owner, the multi-member LLC receives the same tax treatment as a partnership. Partnerships are also pass-through entities for LLC taxes. Partnerships report business income on a separate 1065 partnership tax return. Then profit and losses are passed to the members/partners, who pay self-employment taxes on their shares of the business’s income. Most multi-member LLCs’ profits and losses are allocated equally; however, the LLC can divide income based on a percentage share, duties performed, or money invested. The LLCs’ operating agreement records the company’s distribution allocations.
Read More: Single-member vs. Multiple-member LLC
C Corporation Election
The single-member LLC and multi-member LLC have the option to be treated as a C Corporation for federal tax purposes. As a C Corporation, the company does not pass income and losses onto its members; instead, it files its own tax forms and pays its own business taxes.
To file taxes for the LLC, the LLC files IRS Form 8832 and indicates its intention to file its LLC taxes as a C Corporation. Then the LLC files Form 1120, U.S. Corporation Income Tax Return. If the LLC chooses to disburse profits to LLC owners/members as dividends, the dividends are reported on the owners’ tax returns at the qualifying dividend rate (double taxation). The LLC is then responsible for paying payroll taxes to LLC members working for the business. LLCs may decide to file taxes as a C Corporation if their profits are high, and allocating the profit to owners would create inflated personal income and high individual tax rates.
S Corporation Election
LLCs choosing to elect S Corporation status for taxe purposes avoid the double taxation of the C Corporation; however, they are still required to self-employment taxes. With an S Corporation election, profits and losses can be passed down to LLC members as salary and dividends, with only the salary portion subject to self-employment taxes.
LLCs can elect S Corporation status by filing IRS Form 2553 by March 15 of the current tax year. At tax time, the LLC/Corporation files a 1120S tax return, with members receiving a Schedule K-1 form indicating their share of the profits and losses.
When are LLC Taxes Due?
Tax deadlines depend on how the LLC elects to pay its taxes:
- For LLCs filing as a C Corporation or partnership, the LLC must choose its tax year as fiscal (any 12-month period) or calendar (January 1 through December 31).
- For LLCs choosing a calendar tax year, the tax deadline is April 15. Fiscal year LLCs file taxes on the 15th day of the fourth month after the year ends.
- LLCs electing S Corporation status file taxes on March 15.
- Because a single-member LLC does not exist separately from its owner, the LLC must use the same tax year as the owner.
For help deciding if the LLC is the right structure for your company or to register a new LLC, contact CorpNet today!