A limited liability company (LLC) can be taxed as one of four entity types – sole proprietorship, partnership, C-corporation (C-corp), or S-corporation (S-corp). The entity type that’s right for LLC taxes, and the type of LLC tax return that needs to be filed, depends on the number of owners and any elections the owners make.
LLC owners will need to need 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 because data from QuickBooks can be imported into tax preparation software, making the tax filing process more efficient. If you don’t have it already, you can get up to 50% off QuickBooks Online.
How LLC Taxes Work
A limited liability company (LLC) tallies up its income and deductions for the year. The net earnings of the LLC are then allocated to each LLC member based on the member’s percentage of ownership of the LLC. LLC members report and pay tax on their share of the LLC’s net earnings for the year.
There are four different ways to file taxes for an LLC. An LLC can be treated as a sole proprietorship, as a partnership, as an S-corporation, or as a C-corporation. LLCs with just one owner are treated as a sole proprietorship for tax purposes. LLCs with two or more members are treated as partnerships. Optionally, LLC members can elect to have the LLC treated as an S-corporation or as a C-corporation.
Below, you will find a brief description of each of these four LLC tax return options, along with their federal tax reporting responsibilities:
1. Sole Proprietorship (Single-Member LLC Default Tax Treatment)
For tax purposes, a single-member LLC is, by default, treated like a sole proprietor. All business income, deductions, and credits must be reported on Schedule C, which will carry over to the owner’s personal tax return. In addition, the owner must also pay self-employment tax on their net earnings.
2. Partnership (Multi-Member LLC Default Tax Treatment)
A multi-member 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 and pass through to the owner’s personal tax return. In addition, each partner is responsible for paying self-employment tax on their net business earnings.
3. S-Corporation (Optional Tax Treatment)
Members can choose for their LLC to be treated like an S-corporation for tax purposes. By making this election, the income, deductions, and credits of the LLC are passed through to the owners on Schedule K-1. For LLCs treated as S-corps, the net earnings of the LLC are subject to ordinary tax rates on the owner’s personal tax return. There is no self-employment tax on the S-corporation’s net earnings. This is similar to partnership treatment, except owners who work for the LLC will be employees subject to FICA taxes on their salary.
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.
4. C-Corporation (Optional Tax Treatment)
An LLC can choose to be treated like a C-corporation for tax purposes. By making this election, the LLC pays its own taxes at the corporate tax rates. The LLC’s income does not pass onto the owner’s personal returns. Instead, the net earnings of the LLC are subject to the corporate tax rate. Currently, the corporate tax rate is a flat 21% on net profits. There is no self-employment tax on the C-corporation’s net earnings. Owners pay tax only on income they actually receive from the LLC, such as salaries or dividends.
To elect C-corp status for an LLC, you need to file Form 8832. For more details, read our guide to Form 8832.
How to File LLC Tax Returns
There are four different ways to file tax returns for an LLC. LLCs treated as a Sole Proprietorship file a Schedule C on the owner’s personal tax return. LLCs treated as a partnership file a partnership tax return. LLCs that choose corporate tax treatment file either an S-corporation tax return or a C-corporation tax return.
How to file taxes for LLCs and the LLC tax returns required for the four LLC types are:
1. Single-Member LLC Tax Returns
Owners of a single-member Limited Liability Company (LLC) taxed as a sole proprietorship report the income, deductions, and credits for the LLC on their personal tax returns (Form 1040). The LLC owner will report the LLC’s income and deductions on Schedule C, and the net earnings of the LLC will also be reported on Schedule SE.
The two forms filed with the owner’s personal 1040 tax return for single-member LLC taxes are:
Schedule C (Profit or Loss from a Business)
Schedule C is the tax form used by sole proprietorships to report all income and expenses for a business. For step-by-step instructions for Schedule C, check out our guide on how to complete Schedule C.
Schedule SE (Self-Employment Tax)
Schedule SE must be filed by a single-member LLC that chooses to be treated like a sole proprietor for tax purposes. This schedule is for calculating the Social Security tax and Medicare tax on self-employment income. Self-employment tax is required when net earnings from self-employment are at least $400 or more for the year. Net earnings from self-employment include income from an LLC as well as income from other sole proprietorships or partnerships.
To learn more, read our guide to self-employment taxes.
2. LLC Partnership Tax Returns
A multi-member Limited Liability Company (LLC) reports its income, deductions, and credits for the LLC on a partnership tax return. With LLC partnership taxes, net income is allocated to each of the members. The partnership is required to file LLC tax return Form 1065 along with Schedule K-1. Each of the LLC members report their share of the LLC’s net income from Schedule K-1 on Schedule E of their personal Form 1040 tax return.
The four forms required for LLC partnership taxes are:
Form 1065 (Federal Tax Return for Partnership Income)
Partnerships are required to report all income, deductions, and credits of the partnership on Form 1065. This form is filed for informational purposes only, which means that there is no tax due. For more information on partnership tax returns, check out our guide on how to complete Form 1065.
Schedule K-1 (Partner’s Share of Income, Deductions, & Credits)
Since partnerships do not pay taxes as an entity, the income and expenses generated by the partnership must be paid by each partner. Each partner’s share of the partnership’s income and expenses is reported on Schedule K-1.
Schedule E (Form 1040)
Each partner must report information from the Schedule K-1 on his/her personal tax return using Schedule E. The net business income of the LLC is reported on Part II of Schedule E.
Schedule SE (Self-Employment Tax)
Each member of a multi-member LLC that is taxed as a partnership is subject to self-employment tax on their net business income. To calculate self-employment tax, complete Schedule SE and file it with your personal tax return. Self-employment tax applies when a person’s net earnings from self-employment reaches at least $400 for the year. Net earnings from self-employment includes income from LLCs, from partnerships, and from sole proprietorships. To learn more, read our guide to self-employment taxes.
3. S-Corporation LLC Tax Returns
An LLC that elects to be treated like an S-corporation is required to file Form 1120S, the S-corporation tax return. LLC members report and pay tax on their share of the LLC’s earnings on their personal tax returns, either as wages taxed through Form W-2 or as a share of the LLC’s net earnings reported on Part II of Schedule E.
The three forms required for S-corporation LLC taxes are:
Form 1120S (Federal Tax Return for S-Corporations)
Form 1120S is used to report all business earnings for an S-corporation. An S-corp usually does not pay its own taxes. Instead, all income and expenses generated by the business are allocated to and paid by each owner of the LLC. For more information on S-corp tax returns, check out our guide on how to complete Form 1120S.
Schedule K-1 (Shareholder’s Share of Income, Deductions, & Credits)
Since S-corps do not pay LLC taxes as an entity, the income and expenses generated by the S-corp must be paid by each shareholder. Each shareholder’s share of income and expenses is provided on Schedule K-1 (Form 1120S).
Schedule E (Form 1040)
Each member must report information from the Schedule K-1 on his/her personal tax return using Schedule E. The net business income of the LLC is reported on Part II of Schedule E.
4. C-Corporation LLC Tax Returns
An LLC that elects to be treated like a C-corporation for tax purposes reports its income and pays its own income tax on Form 1120, the C-corp tax return. The LLC will pay its own taxes, at the corporate tax rates, on its net earnings. The members pay tax on their personal Form 1040 only on salary or dividends actually received from the LLC.
The two LLC tax return forms required for LLCs treated as C-corporations are:
Form 1120 (Federal Tax Return for C-Corporations)
Form 1120 is used to report all business earnings for a C-corporation. Since a C-corporation is viewed as a taxable entity by the IRS, the LLC pays its own income tax at corporate tax rates.
Form 1099-DIV (Dividends & Distributions)
The LLC may need to prepare and to file Form 1099-DIV. This form is used when the LLC taxed as a C-corporation pays out dividends to the members. The members will then include this dividend income and pay tax on their personal 1040 tax returns. For more details on information returns, check out our guide to Form 1099 reporting.
What Your Responsibilities for LLC Taxes Are
The owners or members of the LLC are responsible for filing LLC tax returns and paying any state or local LLC taxes. Additional responsibilities for LLC taxes include withholding tax on the income allocated to its 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. If you live in one of the seven states that does not have a state income tax (Alaska, Florida, Nevada, S. Dakota, Texas, Washington, and Wyoming), then lucky you! For those not so fortunate, you will report and pay taxes for your LLC to your state just like you do federal 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 Non-Resident Members: An LLC may need to withhold federal income tax on LLC income allocated to members who are non-resident 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 prepare and to file Form 1099-MISC if it has paid money to independent contractors, to attorneys, to health care 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.
To help you keep track of your responsibilities, we’ve created a free LLC taxes checklist.
Download in PDF, Word, and Google Docs
How to Choose Your LLC Tax Treatment
There are a number of factors to consider when deciding which entity type to choose for LLC tax purposes. Each business structure is unique, and the tax laws change quite often. Therefore, you should seek the advice of a CPA and/or tax attorney who can evaluate your business and help you make this decision.
When deciding which tax treatment works best for an LLC, consider how profits will be taxed, how the owners will be compensated, how to handle losses if the LLC is losing money, which entity type results in the lowest LLC taxes, and if you’ll need to pay self-employment or FICA taxes.
The five key factors to consider when choosing your LLC tax treatment are:
1. How Many Times LLC Taxes on Profits are Paid
With sole proprietors, partnerships, and S-corps, all income and expenses are passed through to the owners’ entities and taxed once. However, when it comes to a C-corp, all profits are taxed at the corporate level and then again when profits are distributed to each shareholder in the form of dividends. This is called double taxation.
However, C-corps do not necessarily need to pay out dividends every year. And sometimes owners can pay zero tax on C-corp dividends. Thus, in some situations, C-corp entities can result in lower LLC taxes on profits. Since this is a significant tax planning opportunity for the LLC members, the members should seek advice from an attorney and a certified public accountant.
For LLCs treated as S-corps, the net earnings of the LLC are subject to ordinary tax rates on the owner’s personal tax return. There is no self-employment tax on the S-corporation’s net earnings.
For LLCs treated as C-corps, the net earnings of the LLC are subject to the corporate tax rate. Currently, the corporate tax rate is a flat 21% on net profits. There is no self-employment tax on the C-corporation’s net earnings.
2. How the Owners Are Compensated
The owners of an LLC taxed as an S-corp or as a C-corp must be treated as employees of the company and draw a reasonable salary. This can be a benefit to the owners if the LLC is profitable and they have high Social Security and Medicare taxes.
The benefit here is that the Social Security and Medicare taxes (also known as FICA taxes) for the owner’s salary could be less expensive compared to the self-employment tax that applies to sole proprietors and partnerships.
FICA taxes often come out less than the self-employment tax for four reasons:
- LLC Deduction for Half of FICA: The employer’s portion of FICA taxes reduce the amount of net earnings that will pass through to the owners, resulting in a lower tax bill on the LLC’s net income.
- Pre-Tax Health Insurance: Benefits for the owner-employees are pre-taxed for FICA in an S-corp or C-corp, while these same health benefits do not reduce the self-employment tax for sole proprietors and partnerships.
- Pre-Tax Retirement Savings: Employer-paid contributions to retirement plan savings for the owner-employees can be higher in an S-corp or C-corp.
- Fewer Taxes on LLC Profits: Owners can set their salary to be less than the net earnings of the LLC. This results in less FICA taxes compared to paying self-employment tax on the full amount of net earnings for sole proprietors and partnerships.
Owners must pay themselves a reasonable salary. This means the salary paid to the owners must be appropriate given the nature of the work they perform.
3. How Operating Losses Are Treated
If an LLC taxed as a sole proprietor, partnership, or S-corp reports a loss, operating losses will pass through to the owner’s personal tax return for LLC tax purposes. This can result in a lower tax bill for the owners. In contrast, a loss on LLC tax returns for a C-corp will just carry forward and offset future earnings of the company.
4. Which Entity Type Results in Lower LLC Taxes
The overall tax bill for an LLC taxed as a sole proprietor, partnership, or S-corp could be lower than a C-corp. That’s because the taxes for these three entities are based on the individual tax rate of the owner, as opposed to a corporate tax rate of the C-corp.
5. If Self-Employment Tax or FICA Taxes are Paid
Owners of sole proprietorships and partnerships pay self-employment taxes on their net earnings from the LLC. On the other hand, the owners of S-corps and C-corps pay FICA taxes on their salaries.
Frequently Asked Questions (FAQs) About LLC Taxes
In this article, we’ve covered the basic rules about LLC taxes at the federal level. There is much more that could be said about LLC taxes, however. Below we address some questions about LLC taxes that come up often. If you have additional questions, feel free to post them in the Fit Small Business Forum, and we’ll get back to you with an answer.
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 okay to state zero income on an LLC tax return if that’s the truth.
When are LLC taxes due?
LLC tax returns are due on March 15th or April 15th. The tax filing deadline is March 15th to file LLC taxes as a partnership or S-corporation. The deadline is April 15th to file LLC taxes as a sole proprietor or C-corporation. LLC taxes are paid quarterly through a process called estimated tax.
How much are the LLC taxes in California?
LLCs formed or doing business in California are subject to an annual franchise tax. The California franchise tax is a minimum of $800 each year. LLCs with gross incomes above $250,000 may need to pay an additional LLC fee (on top of the franchise tax). Get more details by visiting the California Franchise Tax Board website.
How much are the LLC taxes in Texas?
LLCs formed, organized, or doing business in Texas are subject to an annual franchise tax. The Texas franchise tax is 0.375% for retail and wholesale businesses, and 0.75% for other types of businesses. See the Texas Comptroller website for more details.
Bottom Line
A limited liability company (LLC) is a type of legal entity that business owners can form to organize their business operations. An LLC offers the owners limited liability protection, which can be beneficial from a legal perspective. Owners have some flexibility in choosing the tax treatment for their LLC.
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.
ikomrad
March 25, 2018 at 2:26 amQuickbooks Desktop Professional has a lot more features and cost less than QBO. I’d recommend that instead.