The IRS does not recognize an LLC as a business entity for federal income tax purposes. An LLC can file as a sole propriety, partnership, a C corporation, or an S corporation tax, whichever results in the most reduced taxes. To establish an LLC, apply to your state's Secretary of State, then prepare an operating agreement and your required licenses.
Read on to learn more about LLC tax categories, LLC tax filing requirements, LLC tax rates, and tax software solutions.
LLC Tax Categories
- A single-member LLC (one shareholder) must file taxes as a sole proprietor.
- A multi-member LLC (multiple shareholders) must file taxes as a partnership.
- An LLC that submits the IRS Form 8832 must file taxes as a C corporation
- An LLC that submits the IRS Form 2553 must file taxes as an S corporation
Single-Member LLC Tax Filing
A single-member LLC must report income and expenses on a personal income tax return (Form 1040). File as a sole proprietor by:
- Using the IRS form Schedule C to calculate and report the profits (or losses) of your LLC to determine your taxable income.
- Preparing an income statement, plus financial records and receipts for all planned deductions.
- Using Schedule SE to report and make Social Security and Medicare tax payments.
Multi-Member LLC
Use the informational return Form 1065 to report your business profits or losses.
An LLC puts together a Schedule K-1 for each member. This form must be submitted as part of Form 1065. Members also use this form to report their share of the LLC's revenues and deductions on their personal tax returns.
LLCs are recognized disregarded entities, which means their profits and losses flow straight to the owners. Multi-member LLC owners use Schedule E to report their profits and losses and Schedule SE to report self-employment taxes.
To file Form 1065, list:
- All the key year-end financial statements of your LLC, such as a profit and loss statement
- All the deductible business expenses
- A balance sheet for the beginning and end of the year
An LLC submits the Schedule K-1 as part of Form 1065, identifying each partner's share of the profits or losses for the duration of the filing period,
C Corporation Tax Filing
The IRS recognizes a C corporation as a separate taxpayer. Hence, it files its own separate corporate tax returns and owners are taxed separately from the company.
C corporation owners use Form 1120 to report the income, gains, losses, credits, and deductions of the business. All the company's key financial information and statements must also be prepared alongside the form.
S Corporation Tax Filing
The IRS grants the S corporation classification to—like in a sole proprietorship or partnership—enable corporations to flow their corporate income, credits, and deductions through the business owners.
An LLC files as an S corporation to pay a self-employment tax based only on the income its owner receives from the business, unlike in a sole proprietorship or partnership where owners pay it based on 100% of the business profits.
To file as an S corporation:
- File Form 1120-S
- Members use Schedule K-1 to report their share of the business profits or losses
- Use K-1 to file personal tax returns
The Tax Rate for LLCs
The LLC does not have a fixed tax rate. Rather, it takes on the tax rates of its chosen structure type.
- Sole Proprietorship: Taxed at the individual member's personal income tax rate, ranging from 10% to 37%, depending on the total taxable income.
- Partnerships: Taxed at the individual's personal income tax rate, like in a sole proprietorship
- C Corporations: A C corporation's tax is subject to the flat corporate tax rate of 21% on the LLC's net income at the federal level. Note that profits allocated to LLC members as dividends may be subject to an individual-level tax, resulting in double taxation.
- S Corporation: Instead of paying corporate income tax, S corporations' income flows through the owners taxed individually. Owners must then file self-employment taxes on their income. Meanwhile, distributions are not subject to such taxes.
State Taxes and Fees
On top of the federal taxes, LLCs may pay.
- Franchise taxes: Some states implement a tax based on LLC net income or a flat franchise tax.
- Annual fees: These fees vary by state and range between $50 and several hundred dollars annually.
- State tax: An LLC selling products or services may need to prepare and remit sales taxes based on state mandates.
Tax Software Solutions: Helping LLCs Choose the Best Tax Strategy
Today, many LLCs rely on tax software solutions to help them manage their taxes, comply with tax regulations, and minimize the risks of tax errors and penalties. These platforms calculate tax liability, generate tax reports and forms, and file taxes with national and international tax authorities. Its other notable feature includes collaboration tools that allow tax teams to work seamlessly. Tax software solutions also provide system integration to expedite tax filing and compliance processes.
If you plan to form an LLC or change its tax status, it's a smart idea to invest in tax software. Factors to consider when deciding on one are user-friendliness, supported tax forms, user support, and affordability, among others.
