Generally, limited liability company (LLC) taxes are reported as a sole proprietor on Form 1040 Schedule C if there is only one owner or on Form 1065 as a partnership if there are 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 (C-corp) or S corporation (S-corp).
LLC owners will need to keep good records of the business’ income, expenses, and owner’s equity. They should also keep a full set of books, preferably using full-featured accounting software. We recommend QuickBooks Online, which offers a 30-day free trial or 50% off for three months.
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-corps or C-corps.
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.
Learn more by reading our guide on what an LLC is. It includes who LLCs work best for and how to register one.
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. 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, check out our guide on how to fill out Schedule C.
2. 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 (QBID).
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. As an S-corp
Any LLC can choose to be treated like an S-corp instead of the 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 passed through to the owners on Schedule K-1, similar to partnerships. Also, like partnerships, the business income is taxed at individual rates but generally is eligible for the QBID.
Unlike partnerships, owners can be employees of the S-corp. Owners must be compensated for the services they provide, and their wages reported on Form W-2, like any other employee. The owner and S-corp must both pay their share of payroll taxes. However, the big advantage of S-corp over partnerships is that the business income reported on Schedule K-1 is not subject to self-employment tax.
To elect S-corp status for an LLC, you need to file Form 8832 and Form 2553. For more details, read our guide to Form 8832. We also provide step-by-step instructions on how to prepare Form 1120S.
4. As a C-corp
Any LLC can choose to be treated like a C-corp 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 the salary paid to them by the corporation.
The primary advantage of a C-corp 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-corps 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-corp if they expect to make distributions to the owners.
C-corp losses do not pass through to the owners and therefore cannot offset the owner’s other sources of income. C-corp losses carry forward and can be used to offset the future profits of the company. S-corps 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:
- Paying 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.
- Filing state LLC tax returns: In most states, LLCs also have to file a tax return and may have to pay state taxes.
- Collecting 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.
- Withholding payroll tax and paying payroll tax returns: 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. See the list of our top-recommended payroll providers.
- 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.
- Filing 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.
- Registering 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.
- Obtaining 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.
- Paying 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.
- Filing 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-corp.
Frequently Asked Questions (FAQs)
Unless a special election is made, single-member LLCs file their annual taxes on Form 1040, Schedule C. Multi-member LLCs file their taxes on Form 1065. If an LLC elects to be treated as an S-corp, they file their taxes on Form 1120S.
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.
The tax return filing deadline is March 15 to file LLC taxes as a partnership or S-corp. The deadline is April 15 to file LLC taxes as a sole proprietor or C corporation. LLC members must pay estimated taxes on LLC income quarterly.
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-corps or C-corps, 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.
Bottom Line
An 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-corp, or C-corp. 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.
