So you want to start a business, but perhaps you’re not ready to commit to the challenges of setting up a full-blown corporation. At the same time, you’d like some tax benefits and liability protection you don’t ordinarily get as a sole proprietor. The limited liability company (LLC) aims to solve this conundrum for entrepreneurs.
LLCs offer flexible tax treatment for small-business owners. That means LLCs get to choose how they want to be taxed: like a sole proprietorship or general partnership, or like a corporation. The details, however, warrant a close look thanks to the complexity of the US tax code.
How to file federal business taxes for a single-member LLC
A single-member LLC is a company with one owner, known as a “member.” By default, single-member LLCs are taxed like sole proprietorships, but they may elect to be taxed as S corporations (S corps) and C corporations (C corps).
In the context of this default status, all income flows directly to the single member, as it does in a sole proprietorship. The member reports any income and expenses on Schedule C of their personal income tax return, and net profit or loss on the income section of the US Internal Revenue Service’s Form 1040, Individual Income Tax Return.
This is no different from how a sole proprietorship would report income, which is why some tax professionals refer to the single-member LLC as a disregarded entity.
Required forms: Schedule C (Form 1040)
Deadline: April 15
How to file federal business taxes for a multi-member LLC
Like single-member LLCs, multi-member LLCs can elect to be taxed as S and C corps, but the default treatment is similar to that of a general partnership. When the default status is applied to multi-member LLCs, income flows directly to the owners in much the same way as in single-member LLCs.
There are a couple of key differences, however. First, the LLC must report all income and expenses on Form 1065, then issue Schedule K-1 forms to each member showing their share of the business’s profit. LLCs members then individually report their share of the profit or loss on Schedule E of their personal tax return. Members must report and pay income taxes on all of their share of the profit, even if some of that money is reinvested back into the business.
Required forms: Form 1065/Schedule K-1, Schedule E (Form 1040)
Deadline: March 15 for Form 1065/Schedule K-1, April 15 for Form 1040
How to file federal business taxes for an LLC taxed as an S corp
An LLC may elect for taxation as an S corp by filing an IRS Form 2553, Election by a Small Business Corporation. The purpose of this election is mainly to save on self-employment tax. For these LLCs, members must be employed by the company and pay themselves a reasonable salary, on which they then pay payroll tax. The remaining profits are passed through to the members, but they are not subject to self-employment taxes or payroll taxes. Profits disbursed to members are known as “distributions.”
S corps are not subject to federal corporate income tax, though some states and cities levy corporate income tax on S corps.
To file business taxes as an LLC taxed as an S corp, the business must file a Form 1120-S showing all business income and losses. Then it must issue K-1 forms to each member (the number of members is capped at 100). Members then report that income on Schedule E of their individual income tax returns.
How to file federal business taxes for an LLC taxed as a C corp
An LLC can file for tax status as a traditional corporation, or C corp, by filing a Form 8832 Entity Classification Election with the IRS. You might opt for this if you foresee reinvesting a substantial amount of your earnings back into the business. An LLC taxed as a C corp must file a corporate income tax or business tax return every year on Form 1120. Members then report salary and dividends on Form 1040.
Required forms: Form 1120, Schedule B (Form 1040)
Deadline: April 15
Required forms: Form 1120-S, Schedule E (Form 1040)
Deadline: March 15
What about estimated federal LLC taxes?
LLC members must make estimated federal income tax payments on pass-through income each quarter if they expect to earn more than $1,000 during the year. You report estimated taxes on a Form 1040-ES, Estimated Tax for Individuals, which includes a worksheet for calculating your payment.
If this is your first year operating an LLC, you must make a best guess at the amount of income you expect to earn for the year. If your estimate is too high or too low, you can complete another worksheet to recalculate your estimated tax payments for the subsequent quarters. In following years, you can make estimates based on earnings in the past year. Note, however, that if earnings increased a lot from the prior tax year, you may owe the IRS more than expected on April 15.
What about state taxes?
Many states require LLCs to file annual reports, pay state income tax, and also pay a special, annual LLC tax or reporting fee. You may have to pay estimated taxes on a schedule that differs from the federal government’s. You should check with the tax authorities in the state where your LLC does business to make sure you comply with local rules and deadlines.
What types of deductions are available for LLCs when filing taxes?
Deductions available to your LLC depend largely on how the entity is taxed—as a sole proprietorship, partnership, or corporation. The deductions include:
- Startup costs. In its first year, an LLC can deduct as much as $5,000 in startup costs for a domain name, web design services, licenses and permits, insurance, supplies and office equipment.
- Business expenses. LLCs can deduct ordinary and necessary business expenses for office supplies, marketing materials, equipment and software, etc.
- Depreciation. Business assets such as machinery, furniture, computers and vehicles depreciate, or lose value, over time. LLCs can take a tax deduction on these losses.
- Interest and taxes. LLCs can deduct interest paid on business loans, as well as state and local taxes if you paid any during the year.
- Home offices. LLCs can deduct expenses related to running a home office if the office is used exclusively for the business.
- Employee benefits. LLCs can deduct costs associated with certain employee benefit programs, such as health insurance and retirement plans.
How to file federal business taxes for LLCs FAQ
What is the penalty for late filing or payment of business taxes for an LLC?
If your LLC owes no taxes, the IRS imposes no fee for filing late. However, for those LLCs that do owe taxes, the penalty is 5% of the unpaid taxes for each month that a return is late.
Can I file taxes myself or should I hire a tax professional to do it for me?
You can file taxes for your LLC yourself using accounting software or a manual spreadsheet, or you can hire a tax preparer to do the work for you. Doing taxes for an LLC is often a complicated process with many different forms to keep track of and file, and it’s easy to make errors that might result in unexpected tax liabilities or even penalties. A tax preparer is a trained professional who is well-versed in everything an LLC needs to file taxes. However, the cost of using an accountant or preparer can run into the hundreds or even thousands of dollars, depending on the complexity of your LLC’s taxes.
How many years can an LLC claim a loss in profit?
An LLC can only claim a loss for 3three out of five years. If your LLC claims a loss for more than three out of any period of five years, the IRS may reclassify your business as a hobby.