How are LLCs taxed?

Starting an LLC can help protect your personal money and give you some flexibility, but figuring out how taxes work for LLCs can be confusing. The way an LLC is taxed also depends on things like how many owners it has and how the owners get paid. Let’s take a closer look:

How are LLCs taxed?

There isn’t just one way an LLC pays taxes. Here are the main options:

Single-Member LLCs (just one owner)

An LLC with only one member is a “disregarded entity” for tax purposes, meaning the IRS doesn’t treat the business as a separate taxpayer. Instead, the owner reports the business income and expenses on their own tax return using a form called Schedule C.

One thing to note is that the owner may have to pay self-employment tax, which includes Social Security and Medicare. They also need to send in quarterly tax payments to the IRS.

This setup is a lot like how the IRS treats a sole proprietorship. The big difference is that an LLC gives you legal protection for your personal assets.

Multi-Member LLCs (two or more owners)

When two or more people own an LLC, it’s usually taxed like a partnership. Partnerships are pass-through entities, meaning the LLC itself doesn’t pay taxes. Instead, the profits go to the owners, and each one pays taxes on their share.

The LLC files a form called Form 1065 and gives each owner a Schedule K-1 that shows their part of the profits or losses. Like with single-member LLCs, multi-member LLC owners may also need to pay self-employment tax on the money they earn.

Choosing to be taxed like a Corporation

The members of an LLC may choose a different tax classification for the business. Instead of the default tax treatment as a sole proprietorship or partnership, they may choose to have the IRS tax the LLC as a corporation.

This can be done by filing Form 8832. Then, the IRS must approve the request to change the LLC’s tax status. If approved, the LLC can be taxed like a C-corporation or an S-corporation.

C-corporation:

• The business pays its own taxes.
• Owners don’t report business profits on their personal tax returns unless they get paid dividends.
• But this could mean double taxes: once when the company makes money, and again when owners receive dividends.

S-corporation:

• The business passes profits and losses to the owners, who pay taxes on their share.
• Owners report this on their personal tax returns.
• To qualify, the business must meet a few rules, like having fewer than 100 owners who are all U.S. citizens or residents, and not having more than one class of members.

What is an LLC’s tax rate?

The tax rate for LLC profits depends on the tax treatment it has chosen:

• If an LLC has elected C-corp tax treatment, it pays the corporate income tax rate of 21%.
• If taxed any other way (sole proprietorship, partnership, or S-corp), the owners pay taxes based on their own personal tax rates, which can be from 10% to 37%.

What tax forms do LLCs file?

An LLC’s tax filing requirements depend on the tax treatment it has chosen:

What other taxes do LLCs pay?

If your LLC has employees, you’ll also have to handle employment taxes. This includes withholding federal income tax and Social Security and Medicare taxes from employee paychecks, as well as federal and state unemployment taxes.

Depending on the location and the types of business activities, LLCs may also need to pay or collect and remit a variety of additional taxes at the state or local levels, including:

• State income tax.
• Franchise tax.
• Excise tax.
• Sales tax.

If all of this sounds like a lot, don’t worry. We’re here to help you set up your LLC and figure out the best way to handle your taxes.