Filing business taxes for an LLC for the first time can certainly seem like a complex task, especially for first-time business owners.
One moment you’re grappling with federal income taxes, the next you’re trying to understand the implications of being considered a disregarded entity for tax purposes.
It doesn’t help when terms such as “personal tax return,” “corporate income tax,” and “sole proprietorship,” swirl around, often leading to more confusion than clarity.
Through our years of experience handling LLC taxes, we’ve realized this isn’t a one-size-fits-all scenario, and each LLC’s tax filing needs a tailored approach.
No worries, though, as we are here to help. In the following sections, we offer insight into different scenarios under which an LLC may operate, the forms required, and best practices to follow to make your tax filing process as efficient as possible. Let’s get started.
Brief Overview
- Depending on their form of organization, LLCs need to file different income forms so they can pay federal income taxes.
- Though filing LLC taxes can be complex, certain best practices simplify the process, such as managing records accurately and utilizing deductions strategically.
- Navigating tax obligations can be easier with professional help, and changing your LLC’s tax classification may provide unique benefits.
How to File Business Taxes for LLC
Filing LLC taxes depends on the LLC’s classification—single-member, multi-member, or corporation. It involves documenting income and deductions, completing the appropriate IRS forms (Schedule C, Form 1065, or 1120), and filing before the deadlines.
Here is a detailed explanation of how to file taxes for various types of LLCs.
1. Single-member LLCs
A Single-member LLC is treated as a sole proprietorship for tax purposes, meaning all business income and losses are reported on the owner’s personal tax returns. The IRS views the owner and the business as a disregarded entity.
Owners of a single-member LLC will need to fill out a Schedule C (Form 1040 or 1040-SR) to detail the profits and losses of the business. Additionally, they need to make estimated tax payments (including income tax and self-employment tax) quarterly throughout the year.
Filing business taxes for a sole proprietorship should be completed by an April 15 deadline.
A helpful tip from our team based on years of experience: keep thorough records of expenses to avail the maximum possible deductions.
2. Multiple member LLCs
Filing business taxes for multiple-member LLCs is slightly more complex. If the LLC has more than one member and hasn’t chosen to be taxed as a corporation, it’s treated as a partnership for federal tax purposes.
This means the LLC doesn’t pay taxes itself. Instead, each member pays a portion of the company’s income taxes on their individual tax returns.
For an LLC filing as a multi-member organization, members need to complete Schedule K-1 (Form 1065) and Schedule E (Form 1040) to report their share of the partnership income on their personal tax return.
Keep in mind the deadline for Schedule K-1 (Form 1065) is March 15, while the general LLC filing date for other forms, including those for personal tax returns, is the same as for a sole proprietorship – April 15.
3. LLCs Assessed as C Corporations
When an LLC chooses to be assessed as a C Corporation, the Internal Revenue Service (IRS) considers it a separate tax entity from its members. In practice, this means the LLC files its own separate tax return using LLC tax Form 1120, the corporation income tax return.
The state income taxes are due on April 15. To add, it’s common for LLCs taxed as C corporations to face double taxation.
Clients often ask us how this double taxation works. In our hands-on exploration, we found that this occurs because in the case of an LLC taxed as a C Corp, corporate income is first taxed at the company level and then taxed again on the personal tax return of each owner when distributed as dividends.
To potentially offset this, we advise claiming any legitimate business expenses as deductions on the corporate tax return, which can help lower the overall taxable income.
4. LLCs Assessed as S Corporations
If an LLC opts for an S corporation tax status, it avoids double taxation. The LLC itself isn’t subject to income tax. Instead, the business’s income or losses are passed through to the members to report on their individual income tax returns.
There’s a catch, however. The IRS requires more than just one LLC tax form for tax filing. With our experience, these usually include Form 1120-S for the S corporate income tax return and a Schedule K-1 form for each owner. Both are due for submission on March 15.
We’ve noticed that while it removes the burden of double charging, the LLC taxed as an S corporation must still pay a reasonable salary to actively participating members, and this salary is subject to self-employment taxes.
But don’t worry, other profits distributed to the members aren’t subject to self-employment taxes, offering significant tax savings.
Pro Tip: If the LLC taxed as an S Corp structure feels right for your company, you can opt to file LLC taxes and pay federal income tax quarterly to avoid any unexpected tax debt at the end of the year.
What Other Taxes LLC Owners Pay?
Besides submitting your annual LLC tax return alone, as an LLC owner, you will need to deal with other taxes as well. We noticed that, in numerous cases, there are additional taxes to be mindful of such as state taxes, self-employment taxes, and estimated quarterly taxes.
State taxes
LLC owners may need to pay state income taxes. This largely depends on the state in which your LLC operates and, typically, the profit it generates.
Some states impose a flat annual tax on LLCs regardless of income (also known as franchise tax), while others calculate tax based on revenue. For instance, California imposes an annual minimum tax of $800 on LLCs.
Self-employment taxes
One factor small business owners often overlook is self-employment taxes. For sole proprietorship or single-member LLCs, the personal income tax return includes this tax, which is used to fund Social Security and Medicare.
According to a report by the IRS, in 2023, the self-employment tax rate is 15.3% on the first $160,200 of net profit.
Remember: setting up a separate business bank account to manage your LLC profits or expenses per the LLC’s operating agreement can help you track and pay these taxes accurately.
Estimated quarterly federal taxes
Our expert analysis indicates that if you expect to owe more than $500 in taxes on the annual LLC tax filing, the IRS generally requires estimated tax payments 4 times a year.
Paying income tax remains an obligation for LLC members regardless of whether you have your LLC taxed as a C or S corp.
From our experience, understanding these additional tax responsibilities thoroughly and consulting with tax professionals can save a substantial amount in overpaid taxes or penalty fees.
Best Practices to Follow for Filing LLC Taxes
Filing taxes as an LLC can be complex, but utilizing best practices can make the process smoother. Here are a few recommendations:
Understand Your Tax Obligations
With any business comes an array of tax obligations that vary based on your entity type. For an LLC, these include paying income taxes, state and local taxes, and potentially self-employment taxes.
These obligations should be well-understood to ensure you’re not missing any crucial steps. The IRS’ official website is a thought-provoking resource for LLC operators.
Keep Accurate Records
Keeping meticulous records can save you stress and time come tax season. It’s necessary to track every business transaction, including income and expenses, to accurately report income and pay tax. Also, accurate records are fundamental when auditing arises.
Pro Tip: We noticed that LLCs that use accounting software usually receive fewer visits from the IRS than those that rely on traditional bookkeeping methods.
Separate Personal and Business Expenses
As a small business owner, it can seem convenient to pool personal and business expenses. However, this can lead to complications, especially for LLCs, where liability protection is a prime advantage.
Separating business transactions can also streamline your LLC tax filing process and safeguard personal assets even when you have a sole proprietorship.
Utilize Deductions
In our experience, LLC owners often overlook the importance of deductions while filing business taxes. Certain expenses, such as office equipment, mileage, and home office costs, can offset taxable income. Keep detailed records to take full advantage of these tax benefits.
Remember, any tax deduction is as valuable as bucks in your pocket when you file LLC taxes.
File Business Taxes on Time
It might sound basic, but many LLC owners underestimate the importance of timely filing. The federal government imposes hefty penalties if business taxes aren’t submitted on time. Even if you can’t pay your tax by the due date, at least file the return.
Consider quarterly tax payments as a way to stay on top of the tax deadlines and spread your tax burden over the course of the year.
Seek Professional Help
Business taxation is a maze. We have seen even seasoned business owners struggle with tax filing. Striking the right balance between paying income tax and protecting your hard-earned LLC profits can be complex.
The US Chamber of Commerce mentions that it generally takes a small business owner 23 hours to prepare and file taxes, not to mention the cost of errors.
Delegating the task to a tax expert who understands how the IRS treats different business structures can provide significant savings in terms of both time and money.
Pro tip from us – if your LLC structure permits, elect to be taxed as an S Corporation. Over 95% of LLCs that have a small business corporation organization find pass-through income appealing as it helps avoid double taxation at a corporate level, as per this analysis.
Making such an election can reduce self-employment tax liabilities, thereby saving your revenue.
How to Change Your Tax Classification
A Limited Liability Company (LLC) can change its tax classification by filing an IRS Form 8832, Entity Classification Election. Here are the steps to do so:
- Obtain Form 8832: This form can be downloaded from the official IRS website.
- Fill out the Form: Complete the information asked, including name, business address, and Employer Identification Number (EIN). In Part 1, select the domestic (within the U.S.) or foreign (outside the U.S.) entity box. In Part 2, check the box that corresponds to the preferred tax classification.
- Review and Sign: Review the form to ensure all information is correct, then sign and date it.
- Submit the Form: Mail it to the IRS at the appropriate address listed on the form, which varies based on the home state of the LLC.
Note, however, that not all LLCs are eligible to change their tax classification at any given time.
For example, if you have changed your tax classification status from a multi-member LLC into an S Corp, and now you decide that you want to change your S corp into a C corp, you will have to wait 60 days until you are legally allowed to do it.
Related Article: How to Sign for an LLC
Find the Best Tax Strategy for your LLC
Identifying the best tax strategy for your LLC hinges on an understanding of your particular business context. But what remains true for any LLC, whether you’re a sole proprietor or part of a multi-member LLC, is the importance of organization and informed decision-making.
Regularly track your LLC’s profits, file business taxes on time, make estimates based on accurate data, and meet quarterly taxes diligently.
It’s paramount that you consider your business structure and, if advantageous, switch from being self-employed to becoming an LLC member.
Bear in mind to seek help when needed. Conversation with a registered agent or tax professional familiar with filing an informational return at the federal level can shed light on your liabilities.
FAQs
To file your LLC taxes, you typically need documents such as your LLC’s EIN (Employer Identification Number), financial records like profit and loss statements, balance sheets, and relevant tax forms like Form 1065 (for partnerships) or Form 1120 (for corporations).
Yes, you can file your LLC and personal taxes separately. An LLC’s income is typically passed through to its owners and reported on their personal tax returns.
No, you cannot file your LLC and personal taxes together on a single tax return. They must be filed separately. LLC income is typically reported on personal tax returns, but each entity requires its own tax filing to maintain proper accounting and compliance.
References:
- https://www.uschamber.com/co/run/finance/tax-forms-every-small-business-owner-should-know
- https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes
- https://econofact.org/the-other-95-taxes-on-pass-through-businesses
