LLC taxes are generally reported as a sole proprietor (one owner) or a partnership (multiple owners). Sole proprietors and partnerships are flow-through entities, so the income is taxed on the owner’s tax return. However, it may benefit you to elect for your LLC to be taxed as a C corporation or S corporation.
Limited liability company (LLC) owners will need to keep good records of the LLC’s income, expenses, and owner’s equity. LLCs should keep a full set of books, preferably using full-featured accounting software. We recommend QuickBooks. You can get up to 50% off QuickBooks Online.
How LLC Taxes Work
How LLC taxes work depends upon the type of federal tax entity the LLC chooses. By default, a single-member (owner) LLC is treated as a disregarded entity, which usually results in filing as a sole proprietor. If there is more than one owner, or member, the LLC is, by default, treated as a partnership. Single-member and multimember LLCs can elect to be taxed as S corporations (S-corps) or C corporations (C-corps).
What Is a Disregarded Entity vs Sole Proprietorship?
All single-member LLCs are disregarded entities, but only single-member LLCs owned by an individual (not corporation) are sole proprietorships. Disregarded entity means that for federal income tax purposes, the LLC is assumed to not exist. The income and deductions from the LLC must be reported directly on the tax return of the owner.
If the owner of the LLC is an individual, then the LLC income and deductions are reported on Schedule C of the individual return, just like a sole proprietorship. If the owner of the LLC is a corporation, the LLC income and deductions are reported directly on the corporate tax return by combining it with all the other corporate income and expenses. So, when people say that a single-member LLC is taxed as a sole proprietor, they are assuming it is owned by an individual, which is usually the case.
How to File LLC Tax Returns
Below is a brief description of each of the four LLC tax return options, along with their federal tax reporting responsibilities:
1. LLC Taxes as a Sole Proprietorship
A single-member LLC owned by an individual is, by default, treated like a sole proprietorship. All business income, deductions, and credits must be reported on Schedule C, which will carry over to the owner’s personal tax return, Form 1040. In addition, the owner must also file Schedule SE and pay self-employment tax on their net earnings.
For step-by-step instructions for Schedule C, check out our guide on how to complete Schedule C.
2. LLC Taxes as a Partnership
A multimember LLC is treated like a partnership for tax purposes by default. All income, deductions, and credits of the partnership must be reported on Form 1065. Form 1065 includes a Schedule K-1 for each partner, which reports that partner’s share of all partnership income, deductions, and credits.
The partner must report their Schedule K-1 income, deductions, and credits on their personal tax return, Form 1040, Schedule E. The income will be subject to the owner’s individual income tax rates, but can often be reduced by 20% for the qualified business income deduction.
A partner cannot be an employee of a partnership. Their compensation for any services performed are called guaranteed partner payments and reported as a separate line item on Schedule K-1. Each partner must pay self-employment tax on Schedule SE for both their guaranteed partner payments and their share of business earnings.
For step-by-step instructions for Form 1065, see our guide on how to prepare Form 1065.
3. LLC Taxes as an S Corporation
Any LLC can choose to be treated like an S corporation instead of their default treatment as a sole proprietorship or partnership. By making this election, the income, deductions, and credits of the LLC are reported on Form 1120S and pass through to the owners on Schedule K-1, similar to partnerships. Also like partnerships, the business income is taxed at the individual rates, but are generally eligible for the qualified business income deduction.
Unlike partnerships, owners can be employees of the S corporation. Owners must be compensated for services they provide and their wages reported on Form W-2, like any other employee. The owner and S corporation must both pay their share of payroll taxes. However, the big advantage of S corporations over partnerships is that the business income reported on Schedule K-1 is not subject to self-employment tax.
4. LLC Taxes as a C Corporation
Any LLC can choose to be treated like a C corporation for tax purposes. By making this election, the LLC pays taxes on Form 1120 at the corporate tax rates. The only income reported by the owner on their personal tax returns are dividends, if any, and salary paid to them by the corporation.
The primary advantage of a C corporation is the net earnings of the LLC are subject to the corporate tax rate, which currently is only a flat 21% on net profits. However, because C corporations do not get a deduction for dividends paid, dividend income reported by owners is subject to double taxation. In general, LLCs do not want to be a C corporation if they expect to make distributions to the owners.
C corporation losses do not pass through to the owners and are therefore not able to offset the owner’s other sources of income. C corporation losses carry forward and can be used to offset future profits of the company. S corporations have a distinct advantage when losses are incurred because they can offset other sources of income on the owner’s return and generate immediate tax savings.
Like S-corps, LLCs must file Form 8832 to elect C corporate status.
Other Responsibilities for LLC Taxes
Additional responsibilities for LLC taxes include withholding tax on the income allocated to its nonresident members, collecting sales tax, paying payroll taxes on employees, and filing Form 1099 information returns.
Some other responsibilities for LLC taxes you should consider are:
- Pay state LLC fees: Some states charge an annual LLC fee, also known as a franchise tax, registration fee, or renewal fee. Be sure to do your research on what fees an LLC is required to pay in your state.
- File state LLC tax returns: In most states, LLCs also have to file a tax return, and may have to pay state taxes.
- Collect sales tax: If you sell products or services that are taxable, then you must collect sales tax from your customers and report and pay that tax to the state authorities. To learn more, check our sales and use tax guide.
- Payroll tax: The LLC will need to withhold payroll taxes from employees and file payroll tax returns with federal and state agencies. At the end of the year, the LLC will need to issue a Form W-2 to each employee.
- Withholding on nonresident members: An LLC may need to withhold federal income tax on LLC income allocated to members who are nonresident aliens. Additionally, an LLC may need to withhold state income tax on LLC income allocated to members who live outside the state where the LLC conducts business.
- File Form 1099-MISC: An LLC may need to file Form 1099-MISC if it has paid money to independent contractors, to attorneys, to healthcare professionals, and for rent.
- Register in states where conducting business: The LLC may need to register in states where the LLC is conducting business. Each state has its own rules for what counts as conducting business in a state.
- City business license or registration: The LLC may need to obtain business registrations or business licenses in the cities where the LLC conducts business operations.
- Pay estimated tax: The members of the LLC may need to make estimated tax payments (both federal and state) so that any tax related to their LLC income is paid throughout the year.
- Personal tax returns: The members of the LLC will need to file their own personal tax returns (Form 1040) reporting their share of the income from the LLC, unless the LLC is treated as a C corporation.
To help you keep track of your responsibilities, we’ve created a free LLC taxes checklist.
Frequently Asked Questions (FAQs) About LLC Taxes
Some common questions business owners ask about LLC taxes are:
How do you file taxes for LLCs with no income?
An LLC is required to file tax returns each year that the LLC is in existence. If there’s a year when the LLC has zero income, a tax return still needs to be filed for that year. It’s OK to state zero income on an LLC tax return if that’s the truth.
When are LLC taxes due?
The tax return filing deadline is March 15 to file LLC taxes as a partnership or S corporation. The deadline is April 15 to file LLC taxes as a sole proprietor or C corporation. Estimated LLC taxes are due quarterly.
How do I pay myself from an LLC?
For LLCs treated as sole proprietorships or partnerships, owners pay themselves for services by taking owner draws. Owner draws are not reported as wages by either the LLC or the owner and have no effect on taxable income. For LLCs treated as S corporations or C corporations, owners payment for services is treated like any other employee. Payroll tax must be withheld and paid and the owner issued a W-2 at the end of the year.
A limited liability company (LLC) is a legal entity that business owners can form for liability protection. LLCs can choose whether they are taxed as a sole proprietorship, partnership, S corporation, or C corporation. The choice of tax entity is extremely important and will have long-term consequences. Please consult a tax professional before filing your first tax return.
LLC owners will need to keep track of their revenues, expenses, payroll, and other financial details. We strongly encourage LLC owners to set up an accounting system. Using accounting software, such as QuickBooks, helps LLC members stay organized and prepared for tax time. If you are ready to purchase, you can get up to 50% off QuickBooks Online.