How Is An LLC Taxed?

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This page describes how an LLC is taxed. Most LLCs start with pass-through tax treatment. This is usually the most beneficial for businesses that are just starting up. Larger LLCs can benefit from electing S-Corp or C-Corp tax treatment with the IRS.

Get a Federal Tax ID

An LLC’s federal tax ID number is used for reporting taxes, opening a bank account, and hiring employees. Multi-member LLCs must obtain a federal tax ID (also called an EIN). Single-member LLCs with employees must obtain an EIN. Single-member LLCs without employees may wish to obtain an EIN to avoid using their SSN for business transactions.

Pass-Through Tax Treatment

Pass-through tax treatment is the default for an LLC. The IRS technically calls your tax treatment:

  • A “disregarded entity” if the LLC has only one member, or
  • A “partnership” if the LLC has two or more members.

The result is the same: profits, losses, credits, and deductions of the LLC pass-through to the owners’ personal income tax returns.

Reporting and paying federal business income tax is easy.

  • A member of a single-member LLCs reports business income on Schedule C. This amount is totaled into your total personal income taxes due on Form 1040 and you will pay corporate income tax at your personal income tax rate.
  • If the LLC has more than one member, then it reports to the IRS how the monies are distributed amongst owners using Form 1065. Typically the monies are divided proportional to membership interest. So if you own 50% of the LLC, you will pay taxes on 50% of the LLC profits. You can define a different distribution allocation in the operating agreement.
  • A member of a multi-member LLCs reports business income on Schedule E. This amount is totaled into your total personal income taxes due on Form 1040 and you will pay corporate income tax at your personal income tax rate.

S-Corp & C-Corp Elections

An LLC is the only business structure that the IRS allows to elect pass-through taxation, S-Corp treatment, or C-Corp treatment. Tax flexibility is a good thing because it will help you save money at every stage of your business’s growth.

LLCs with owner-employees with profits greater than $75,000 per owner per year often save on self-employment taxes by electing S-Corp taxation. Very large LLCs elect C-Corp tax treatments when the savings from income splitting and deducting benefits outweigh the additional cost of corporate double-taxation.

Other Taxes

This article focused only on how an LLC is taxed in regards to its federal income tax obligation. Your LLC is also responsible for state income taxes. Your business may also have other types of tax obligations such as self-employment taxes, employer taxes, and sales tax. In many states, you must apply for a state tax ID and register for the appropriate tax accounts with your state department of revenue.

Key Takeaways:

  1. Most LLCs benefit from pass-through taxation when starting out.
  2. As your business grows, the LLC can often save money by electing a new tax treatment with the IRS.

Continue reading "Federal Tax ID for an LLC"

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