Guide to LLC Tax Filing

Updated: 2/20/24

LLC tax filing isn’t a simple topic, mainly because the IRS doesn’t recognize LLCs for tax purposes, and they have no LLC tax return. If you own an LLC, you could be taxed in one of four ways: as a sole proprietorship, a partnership, an S corporation, or a C corporation. We’ll go through each method so that you’ll know how to file taxes for an LLC.

A limited liability company (LLC) is a popular business type that combines the personal asset protection of a corporation with the tax benefits and flexibility of a sole proprietorship. But filing business taxes for an LLC for the first time can be intimidating. First, you should understand some basics about small business taxes.

Unless you tell the IRS otherwise, your limited liability company will be taxed as a sole proprietorship if you’re the only owner; owners of an LLC are called “members.” If your LLC has more than one member, you’ll automatically be taxed as a partnership. Whether your LLC has one or multiple members, though, you’ll also have the option of being taxed as a corporation if you submit the proper forms.

Before you file LLC taxes for the first time, we highly recommend consulting a tax professional for guidance.

Tax Filing for a Single-Member LLC

The IRS considers a single-member entity a “disregarded entity.” Basically, that means that they don’t recognize the business for tax purposes, only the owner. So, the LLC is taxed as a sole proprietorship.

The nice thing about this is that sole proprietorships and partnerships have “pass-through taxation,” meaning that the business itself isn’t taxed on its income, just the owners. A typical corporation has “double taxation,” meaning that the business’s profits are taxed twice, first at the business level and again when they’re distributed to the owners.

In most cases, a single-member LLC’s profits would be reported on Schedule C (“Profit or Loss From Business”) and included with the owner’s personal tax return, Form 1040. One possible exception to this would be money made from rental property, which is often reported on Part 1 of Schedule E. See the IRS’s instructions for Schedule E for more specifics. 

It’s important to know that, as a single-member LLC or a multi-member LLC, you need to report all income from the business, even if you leave it in the business instead of taking it as a personal draw. So, even if that business income is still in your business bank account, you still need to report it.

Tax Filing for a Multi-Member LLC

A multi-member LLC also has pass-through taxation by default, so (unless you choose to be taxed as a corporation) the business itself won’t pay federal income taxes on its profits. The difference is that the LLC must file an informational return with the IRS letting the government know how much each LLC member has profited or lost from the business. 

The multi-member LLC will need to file Form 1065, U.S. Return of Partnership Income. The LLC will also need to issue a Schedule K-1 to each member of the LLC to report the member’s income or losses from the business. The members will then report the information from the K-1 on Part II of Schedule E and include it with their personal income tax returns.

Again, remember that each member must pay federal income tax on their share of earnings, regardless of whether they’re distributed to the members or not.

Tax Filing as an S Corporation

Some LLCs choose to be taxed as an S corporation in order to save on self-employment taxes (the taxes that pay for Social Security and Medicare). Having your LLC taxed as an S corp has pass-through taxation like a single-member or multi-member LLC, but you’ll first need to make sure you meet the IRS’s requirements for S corp election and file Form 2553, Election by a Small Business Corporation.

If the IRS approves your LLC for S corp election, each year you’ll be required to file Form 1120-S, U.S. Income Tax Return for an S Corporation, for the business. Like a multi-member LLC or partnership, the LLC will need to issue a Schedule K-1 to each member of the LLC to report the member’s income or losses from the business. Each member of the LLC filing as an S corp will then report the information from the K-1 on Part II of Schedule E on include it with their personal tax return.

See our S corporation page to learn more about how to form an S corp and the differences between an LLC and an S corp.

Tax Filing as a C Corporation

A C corporation is the default form of corporation. One of its main disadvantages is “double taxation,” meaning that the corporation’s profits are taxed twice, once at the business level and again when distributed to the individual business owners. A C corporation pays corporate taxes on its own federal tax return, and each owner (shareholder) also pays taxes on their share of the profits on their individual tax return.

Most LLCs, especially when they’re starting out, won’t opt to be taxed as a C corporation so as to avoid the double taxation and complexity of filing corporate taxes. Still, certain larger LLCs sometimes find it to their advantage to file as a C corporation for a variety of reasons. For example, C corporations have the widest range of possible deductions, meaning that things like employee health insurance premiums may be deducted.

An LLC wanting to file taxes as a C corporation will first need to file Form 8832, Entity Classification Election, to make C corp election. Then, it will need to report the business’s taxes annually on Form 1120, U.S. Corporation Income Tax Return. The individual owners of the LLC will also need to report their income from the business on their individual tax returns.

Learn more about C corp vs. LLC.

Tax Return Dates

A single-member LLC will need to file taxes (Form 1040 and Schedule C) by April 15. A multi-member LLC will need to file Form 1065 and Schedule K-1 by March 15. An LLC filing as an S corp has the same March 15 deadline.

LLCs filing as C corporations can use either a fiscal year or the calendar year for its tax due date. The corporate tax return would be due on the 15th day of the fourth month of the corporation’s tax year.

Self-Employment Taxes

When you’re working for yourself as an LLC taxed as a sole proprietor or a partnership, you need to pay self-employment taxes, which are the taxes that go toward Social Security and Medicare. These total 15.3%. If you were working for someone else, they would pay half of them, and the remaining half would be deducted from your paycheck.

You’ll need to figure out how much you’ll owe in self-employment taxes by using Schedule SE. The IRS does let you deduct half of what you pay in self-employment taxes on your annual personal tax return.

Quarterly Taxes for an LLC

Being self-employed as an LLC owner means you’ll have to make estimated tax payments every tax quarter. If you have an LLC filing as a sole proprietorship, a partnership, or an S corporation and you expect to owe more than $1,000 when you file your return, you’ll have to make estimated tax payments using Form 1040-ES. 

If your LLC is filing as a C corporation, you’ll need to make estimated tax payments if you expect to owe $500 or more on your return.

Estimated quarterly taxes must usually be paid by April 15th for quarter 1, June 15th for quarter 2, September 15th for quarter 3, and January 15th of the following year for quarter 4.

Learn more about estimated taxes.

State and Local Taxes

This article is only covering LLC taxes at the federal level. Not all states treat LLCs the same way the federal government does when it comes to state taxes. You’ll need to research your LLC’s state of origin and your local tax authorities to determine what taxes you’ll be responsible for.

Additional Taxes for LLCs

When managing an LLC, understanding the full spectrum of potential tax liabilities is crucial for compliance and financial planning. Aside from the well-known income and self-employment taxes, LLCs may be subject to several other taxes, depending on their activities, location, and specific elections made. Here’s a breakdown of additional taxes that LLCs may owe:

Payroll Taxes

If your LLC employs staff, you’re responsible for payroll taxes. This includes withholding federal and state income taxes, Social Security and Medicare taxes (also known as FICA taxes), and paying the employer’s share of FICA, along with federal and state unemployment taxes. Payroll taxes require diligent record-keeping and timely deposits to the appropriate tax authorities.

Sales and Use Taxes

LLCs that sell goods or certain services may need to collect sales tax and remit it to the state and possibly local tax authorities. If your LLC purchases goods or services for use in the business without paying sales tax, you may owe use tax on those purchases. The obligation to collect and remit sales tax depends on your business’s physical presence or nexus in the state and, increasingly, on economic criteria such as sales volume or transaction count in states where you do business.

Property Taxes

LLCs that own real property may be liable for property taxes assessed by local or state governments. Property tax rates and the basis for assessment vary widely, but they typically depend on the property’s assessed value. If your LLC also owns tangible personal property used in the business, such as equipment or furniture, you may be subject to personal property taxes in some jurisdictions.

Franchise Taxes

Some states impose a franchise tax on LLCs for the privilege of operating within their jurisdiction. Franchise taxes are not based on income but rather may be calculated based on the LLC’s assets, capital, net worth, or a flat fee, depending on the state’s laws.

Excise Taxes

LLCs involved in specific industries, such as manufacturing, distribution, or selling certain products (e.g., alcohol, tobacco, and fuel), may be subject to federal and state excise taxes. Excise taxes are often included in the price of the product, and businesses are responsible for reporting and paying these taxes to the tax authority.

Choosing Your LLC’s Tax Status

When filing taxes for an LLC for the first time, one of the most critical decisions you’ll make is selecting how you want your LLC to be taxed. This choice significantly impacts your tax responsibilities, paperwork requirements, and potentially your bottom line. Understanding the options and their implications is key to making an informed decision. Here’s how to navigate this crucial choice:

Default Taxation

By default, the IRS taxes single-member LLCs as sole proprietorships and multi-member LLCs as partnerships. In both cases, the LLC is considered a “pass-through” entity, meaning the business itself doesn’t pay income taxes. Instead, profits and losses “pass through” to the owners’ personal tax returns, and they pay taxes at their individual income tax rates. This setup simplifies tax filing and avoids the double taxation faced by corporations.

Electing Corporate Taxation

LLCs have the option to elect to be taxed as either an S corporation (S corp) or a C corporation (C corp), each with distinct tax treatments and operational requirements.

• S Corp Election: Electing S corp status can be advantageous for LLCs that would benefit from self-employment tax savings on distributions. To be taxed as an S corp, an LLC must file IRS Form 2553. S corps are still pass-through entities, but only salaries paid to owners who work in the business are subject to self-employment taxes. Any additional profits paid as distributions are not subject to these taxes, potentially leading to tax savings. However, there are limitations and qualifications, such as the number of allowable shareholders and types of shareholders, that must be met to qualify for S corp status.
• C Corp Election: Choosing C corp taxation by filing IRS Form 8832 allows an LLC to be taxed as a separate entity from its owners. This means the company pays corporate income tax on its profits, and any dividends paid to owners are taxed again on their personal returns, leading to double taxation. However, this option can offer benefits, such as reduced overall tax rates on retained earnings and the ability to offer employee benefits that are tax-deductible for the business.

Factors to Consider

• Tax Burden: Evaluate how different tax treatments affect your overall tax liability, including self-employment taxes and the potential impact of double taxation.
• Compliance and Administrative Work: Corporate tax statuses require adherence to more complex regulations and additional paperwork, including separate tax returns for the business.
• State Tax Implications: Remember that your tax election might also affect how your LLC is taxed at the state level. Some states do not recognize the S corp election or impose franchise or other taxes that could affect your decision.

Seeking Professional Advice

Given the complexity of tax laws and the nuances of how they apply to different business situations, consulting with a tax professional or accountant is highly advisable. They can provide personalized advice based on your LLC’s specific circumstances, help you understand the implications of each option, and assist in filing the necessary paperwork to elect your chosen tax status.

Making an informed choice on how your LLC will be taxed is foundational to setting up your business for financial success. This decision should be revisited periodically as your business grows and evolves, ensuring your tax strategy continues to align with your business goals and the changing tax landscape.

How often can an LLC change its tax status?

An LLC can change its tax status, but there are restrictions on how frequently these changes can be made to prevent abuse of tax benefits. According to IRS regulations, once an LLC elects to change its tax classification, it generally cannot change that classification again for 60 months (five years) without IRS approval. This rule applies after making an election that does not match the LLC’s default classification. For example, if a single-member LLC elects to be taxed as an S corporation, it cannot elect to change back to a disregarded entity or switch to C corporation status without IRS approval for five years.

There are exceptions to this rule, such as if the IRS believes the election to change was made with the principal purpose of tax avoidance or if there is a change in the business’s ownership or business structure that necessitates a new classification for tax purposes.

Because tax laws and regulations are subject to change and can have significant implications for your business, it’s advisable to consult with a tax professional or accountant before making any decisions regarding changing your LLC’s tax status. This helps ensure not only compliance with current regulations but also that your business is making the most advantageous tax election based on its specific circumstances.

Annual Reports

Although not always referred to as a tax, most states require LLCs to file either an annual report or biennial report with the state, accompanied by a fee. The purpose of the report in most states is to keep the state updated on your LLC’s basic information, such as contact person, address, registered agent, etc.

The annual report fees vary widely by state. Some states have no fee, while a state like California charges $800 annually. Some states have substantial penalties for not filing the report and paying the fee, which could include fines or dissolving your LLC altogether.

We can help you with this task with our annual report filing service.

We can help!

Filing taxes as an LLC or any business can get complicated, so it helps to stay organized. Our ZenBusiness Money tool can help you track income and expenses with a few simple clicks, allowing you to track, categorize, and manage all your expenses and small business tax deductions.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.