How Do LLC Taxes Work?

Different business structures have their own pros and cons. Your business structure will determine how you’re taxed, what paperwork you need to file, and what you’re personally liable for.

LLCs are popular because they offer liability protection and tax benefits. But before you form one, it’s important to understand how LLC taxes work.

In this guide, we’ll outline the way taxes are applied to LLCs and how to file so you’re prepared.

How are LLCs taxed?

LLCs are subject to taxation like any business, but how you’re taxed and how you file your taxes can vary based on how many members there are.

Single vs. multiple-member LLCs

If you form an LLC and you’re the only member, you’re considered a single-member LLC.

Single-member LLCs are essentially treated as sole proprietorships, which means you report your income on Form 1040 – Schedule C, Profit or Loss from Business.

As a single-member LLC, if you are active in your business, you’ll pay self-employment tax on your business income as well as paying income taxes based upon your tax rate on your net income.

In some cases, your LLC might not be profitable. If you report a loss of income from your single-member LLC, you can deduct those losses from your personal income, which reduces your tax liability.

Multi-member LLCs are generally considered partnerships. These pass-through entities don’t have to pay taxes as a business entity when they file Form 1065.

Instead, each member is responsible for reporting a portion of the LLC’s income and paying taxes on their individual tax returns from their Form K-1.

The portion each member is responsible for paying depends on their ownership stake. For example, if an LLC has two members with a 50/50 split, each member is responsible for paying 50 percent of the taxes owed on business profits.

How to calculate LLC taxes

When you’re running a business, it’s beneficial to at least have an estimate of how much you expect to pay in taxes. You’re considered a self-employed individual as a member of an LLC, which means your tax responsibilities are a little different.

If you are an employee, your employer usually deducts a portion of your income to pay Social Security and Medicare taxes, but that’s not the case when you’re self-employed. Instead, you have to pay self-employment taxes in addition to the income taxes you owe on your LLC profits.

The self-employment tax rate is 15.3%. This rate is a combination of the 12.4% Social Security tax and the 2.9% Medicare tax. This self-employment tax is in addition to your income taxes. However, you can deduct half of your total self-employment tax as an income tax deduction. 

To figure out how much you owe, you’ll need to determine how much profit you’re responsible for reporting on your tax return. This is the number you use to calculate your tax liability. Start by multiplying your net income by the self-employment tax rate.

Once you’ve determined the self-employment tax, you can claim half of that total as an income tax deduction when calculating your income taxes.

Multi-member LLCs will need to determine the percentage of the ownership stake each member has and what portion of taxes they’re responsible for. As an LLC member, you can find this information reflected on your Schedule K-1.

When you’re calculating your LLC taxes, don’t forget about tax credits and deductions. You may be able to lower your taxable income or reduce your tax liability if you qualify for certain write-offs.

How to file LLC taxes

Because single-member LLCs are treated as sole proprietorships by default, you’ll need to include Schedule C when you file your Form 1040. Most single-member LLCs will file a Schedule C, but some businesses may use Schedule E or Schedule F instead.

Multi-member LLCs are a little more complex. Each year, you need to file Form 1065 to report income, gains, losses, deductions, and credits. However, this isn’t the form used to pay your LLC taxes.

If you run a multi-member LLC, you have to send a Schedule K-1 to each member to let them know what percentage of profits they’re responsible for paying taxes on. These Schedule K-1s are typically due by March 15.

When each member receives their Schedule K-1, they will use it to complete their individual tax return and pay income taxes on their percentage of the LLC profits. Each member is also responsible for paying their portion of self-employment taxes.

LLCs can elect to file as a corporation by filing Form 8832 to be treated as a C-corporation (C-Corp) or Form 2553 to be treated as an S-corporation (S-Corp). If you elect to file as an S-Corp, you’ll use Form 1120-S to file your business taxes.

If you file as a C-Corp, you can use Form 1120 to file your taxes. If neither form is submitted, then your LLC will be considered a Sole proprietorship or a partnership by default.

Make sure to note which forms you’ll need on your business tax checklist.

When are LLC taxes due?

There are a handful of LLC tax deadlines you should be aware of if you’re running an LLC. Meeting these deadlines helps you avoid penalties and interest.

• The deadline for filing Form 1040 is April 15, but you can request an extension to have the deadline pushed back to October 15.
• The deadline to file Form 1065 is March 15. You can request an extension to file by September 15.
• The deadline to send Schedule K-1s to each shareholder is March 15 because they need to use that form to file their individual tax return by the April 15 deadline.

If you elect to file as an S-Corp, you have to file Form 1120-S and provide a Schedule K-1 to each shareholder. Form 1120-S must be filed by March 15. For C-Corps, Form 1120 must be submitted by the April 15 deadline.

A Schedule K-1 will not be issued by C-Corps as all business income taxes will be paid at the corporate level.

What are the tax disadvantages of an LLC?

When you’re starting a company, deciding on a business structure can be difficult. However, it’s important to consider how your business structure protects you, how it affects your taxes, and how it compares to other business structures.

As a member of an LLC, you typically have to pay more taxes. Each LLC member is responsible for paying income tax on business profits, but you also have to pay the 15.3% self-employment tax.

Other types of corporations are taxed differently, including S-Corps and C-Corps. If your business is an S-Corp or C-Corp, you don’t have to pay self-employment taxes. As an S corporation, you pay income tax on business income and any earnings as an employee. As a C-Corp, you pay corporate income taxes on business income and income tax on earnings as an employee.

Forming and maintaining an LLC can also be more expensive due to filing and renewal fees. These fees vary by state, so this potential drawback may be more notable in some states than others.

Depending on your situation, it may make more sense to form a Sole proprietorship or elect to be treated as an S-Corp or C-Corp.

If you want to elect to be treated as an S-Corp, you’ll need to file Form 2553. You must file Form 2553 no more than two months and 15 days after the beginning of the tax year if you want the election to take effect that year. You can file Form 2553 at any time during the year to be treated as an S-Corp the following year.

You can use Form 8832 to elect to be treated as a C-Corp. This election can only be applied to a full tax year, so the election will take effect the following year when you file Form 8832.

How can LLC owners minimize their tax bill?

There are a few small business tax tips you can use to minimize your tax bill as an LLC.

You may be eligible to claim several business tax credits and deductions `that can help you lower your tax bill, including:

• Rent
• Insurance
• Depreciation
• Office expense
• Professional fees
• Home office deduction
• Vehicle expenses
• Travel costs
• Advertising 

Working with a tax professional is one of the best ways to minimize your tax bill. A tax expert can help you file an accurate tax return and find tax credits and deductions that reduce your tax liability.