If you run your business under a limited liability corporation (LLC), you have additional options when it comes to how the IRS taxes your profits. Your decision will have a direct impact on the tax filing laws that apply to you. There are no special tax laws for LLCs; the IRS enables the LLC to employ partnership, corporation, or single proprietor tax standards.
What is the protocol for LLC taxes?
For federal income tax purposes, an LLC is normally classified as a pass-through business. This means that the LLC does not have to pay taxes on its business income. The LLC’s members pay taxes on their portion of the LLC’s profits. Additional LLC taxes may be imposed by state or municipal governments. Members can elect to have the LLC taxed as a corporation rather than a pass-through company.
There are several kinds of LLC taxes. These taxes are levied by the federal government, as well as state and municipal governments. All LLC members are liable for paying income tax and self-employment taxes on any income earned via the LLC. Depending on what you sell and whether or not you employ people, you may also be required to pay payroll and sales taxes. To make matters even more complicated, an LLC might elect to be taxed as a separate corporate organization.
In this article, we’ll go through the wide gamut of LLC taxes, what you’ll be accountable for, and ways to lower your tax payment. Understanding your tax burden ahead of time might help you make more informed financial decisions.
IRS Default Designations
The IRS regards your organization as a partnership immediately after you form the LLC, but solely for income tax reasons. If you are the sole owner of the LLC, however, you must pay business profits tax as if you were a lone proprietor. Both categories have distinct tax filing requirements. You can elect corporate tax status by completing IRS Form 8832 if you prefer the tax filing regulations of a company. After making this choice, you will be unable to modify the LLC designation for the next five years.
Requirements for Partnership Filing
Limited liability corporations subject to partnership tax laws are not required to pay tax on company earnings, but they must prepare yearly partnership tax reports on IRS Form 1065. This return is just for informative reasons; all income, deductions, and
credits are reported on individual tax forms by each individual owner.
At the end of the year, the LLC discloses each owner’s part of these funds on a Schedule K-1. For example, if you and a buddy form an LLC to run a firm that makes $100,000 and has $60,000 in deductible business costs, you will each receive a Schedule K-1 showing $50,000 in profits and $30,000 in deductions. These statistics must then be reported on your personal income tax filings by both of you. In essence, the company will boost your personal taxable income by $20,000.
Corporate Filing Requirement
If you opt to make a corporate tax election for the LLC, the IRS will treat your company as a distinct taxpayer, just as you are from your buddy. As a result, the firm is exclusively responsible for filing Form 1120 each year and paying the required income
tax by the deadline.
You and the other owners are not individually responsible if the LLC fails to pay the tax or file a return. However, one disadvantage of corporation classification is that firm profits are taxed twice. The first level of tax is applied when the LLC submits a corporate tax return, and the second is levied when the owners get a dividend. The dividend must be reported as taxable income on each owner’s personal Form 1040 and taxed accordingly.
Filing Requirements for a Single-Member LLC
Single-member LLCs are regarded in the same way as sole proprietorships. The IRS does not consider the LLC company to be independent and distinct from the owner. This essentially implies that you are individually liable for all tax payments and filings. When filing your personal income tax return, you must now include a Schedule C attachment. Schedule C solely discloses revenue and deductions from your company activity. If you compute a profit on Schedule C, it is added to the other income you report on Form 1040.
It’s worth noting that these taxes aren’t paid when you file your tax returns. Because the IRS uses a pay-as-you-go method for payroll taxes, you must deposit your payroll taxes according to the IRS’s schedule throughout the year. Deposits are accepted using the Electronic Federal Tax Payment System (EFTPS). Unemployment taxes are paid quarterly, but social security and Medicare taxes are paid regularly or semiweekly, depending on your tax burden. The instructions for Forms 940 and 941 provided by the IRS might assist you in determining your deposit schedule.