Limited Liability Companies, also known as LLCs, are the simplest and least expensive business structures in the United States. The legal structure of an LLC combines the tax advantages of a partnership with the protection of personal assets enjoyed by corporations. But, how do LLC taxes work?
Unlike a sole proprietorship, an LLC is a separate entity from its owner(s), meaning that the business owners are protected from personal liabilities. However, when it comes to filing taxes, an LLC works much like a sole proprietorship, as we’ll see in this publication.
Learn about the differences between an LLC and other business structures.
First, let’s answer some questions you may have about LLC taxes.
How to File Taxes as an LLC – FAQs
1. What taxes does an LLC pay?
The IRS treats one-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the IRS. If you are the sole owner of an LLC, you must report all profits or losses of your business on Schedule C and submit it with your individual tax return (Form 1040).
2. How much does an LLC pay in taxes?
The amount that an LLC has to pay on LLC taxes will depend on the total income of the owner. Remember what we said: your LLC is treated as a sole proprietorship when it comes to filing taxes. That said, an LLC usually has a lower tax rate than a corporation. For example, the corporate tax rate for $75,000 in taxable income is 34%, while the personal tax rate for the same amount of income is 25%.
3. Is an LLC better for taxes?
One of the most significant benefits of an LLC is that is considered a pass-through business. This means that the owner of an LLC simply reports their share of profit and loss on their individual tax return (the taxable income of the LLC “passes” to the taxable income of the owner). When it comes to LLC taxes, this prevents double taxation: being taxed on an individual level and being taxed as a business.
4. Do I have to file taxes if my LLC made no money?
Usually, LLCs that have elected to be taxed as a sole proprietorship are not required to file a federal tax return. But that a few states do require LLCs or sole proprietorships to file tax returns, even though they’re pass-through entities. Remember that this return must report profits as well as losses.
How Do You File Taxes as an LLC? Step-By-Step Guide
1. Gather the IRS Forms You Need to Submit
Businesses that file taxes as an LLC are considered transfer entities. This means that you’ll be only taxed as an individual.
For tax purposes, an LLC can be classified into different entities. Depending on the entity or category of your choice, you’ll be taxed one way or the other. For example, an LLC with a single owner is subject to tax payments the same way as a sole proprietorship, using Schedule C (Form 1040).
In any case, if you want to file LLC taxes, you must file Form 8832 (Entity Classification Election), to inform the IRS which tax category you want to select for your company.
Keep in mind that the way an LLC files taxes depends on this selection. These are some of the forms that generally must be submitted, depending on the entity you choose for your company:
There are other forms that you may have to submit. If you decide to classify your LLC as a sole proprietorship or partnership, you must pay self-employment taxes. Therefore you need to submit Schedule SE or Self-Employment Tax Form. If the business had more employees during the tax year, you may have to file forms like 940, 941 or 944.
2. Learn What Tax Deductibles You’re Eligible For
Limited Liability Companies can benefit from a variety of incentives and tax deductions that allow owners to save money. These are some of the most common tax deductions among LLCs:
- Donations to charity. LLCs can deduct donations made to charitable organizations, up to 10 percent of their income.
- Home Office. If your LLC operates from your own home, you can deduct utilities, your telephone bill, mortgage interest, real estate taxes, and rent, among other costs, as long as you meet certain conditions. For example, the home office should be used on a regular basis, and exclusively for business purposes, as well as to store inventory or products. The amount of the deduction depends on the percentage of space in the house used by the LLC.
- Mileage. This type of business can deduct the cost of the mileage covered for business purposes. The mileage does not include commuting from home to the workplace.
- Education. An LLC can deduct expenses on the education of its employees. These costs may include tuition, equipment, supplies, and books. These expenses can not exceed $5,250.
- Ordinary and necessary expenses. They are expenses related to the business. The list is long, but most common expenses are the following: transportation, consulting services, accounting, attorney’s fees, office supplies, repairs, financial services, payroll, travel, and entertainment, among others.
Get here a complete list with the most common tax deductibles for small businesses.
3. Be aware of the Deadlines for Filing Taxes as an LLC
LLCs must pay their taxes quarterly. The deadline to file taxes depends on the tax classification of the business:
- One single-member LLCs. They must submit Schedule C before April 15th.
- Partnerships. They must submit Form 1065 and Schedule K-1 for each member before March 15th.
- Corporations S. March 15th.
4. Be Aware of the Extensions to File LLC Taxes
If you need an extension, you must submit an application within the deadlines mentioned above. These are the extensions for the different categories of LLC:
- One single-member LLCs. The extension ends on October 15th. On this date, the owner’s personal tax return must be filed.
- Partnerships. The deadline is September 16th.
- Corporations S. The deadline is also September 16th.
Pros and Cons of Filing LLC Taxes
Structuring your business as a Limited Liability Company offers certain tax advantages. For tax purposes, an LLC, as we have seen, is considered a transfer-entity. This means that the company’s benefits transfer directly to its members, and the government doesn’t tax the company directly. Thus, federal taxes are charged on the income of business members. This makes filing taxes easier for an LLC.
But filing taxes as an LLC also has drawbacks. If your LLC pays taxes as a partnership, the IRS considers that the members of the company are independent workers, subject therefore to self-employment taxes. Thus, employees must pay Social Security and Medicare taxes, which are calculated according to the company’s total net earnings.
Learn how to file your business taxes according to the legal structure of your business.
If you have an LLC, the most important thing to remember is to inform the IRS in a timely manner about how you will pay your taxes. To make this decision, you may need the advice of a Certified Public Accountant. A tax professional can inform you about the benefits of declaring taxes as an LLC, the deadlines, and the deductions you may be entitled to.
Check here where to get assistance with your business taxes.
Remember that a well-prepared tax return can save you a lot of money and above all, reduce the chances of being audited by the IRS.