To make the most of the protections LLCs offer business owners, you must have a thorough grounding in LLC taxes. With these basics under your belt, you can ask the right questions – and understand your experts’ answers.
If you’re wondering how to file taxes for LLC companies, absorb the information in this article before chatting with your accountant/tax lawyer.
1) LLC Tax Rates Structure
LLC taxes function quite different than corporate taxes (unless you elect for corporate taxation, of course). In particular, the IRS doesn’t tax LLCs as separate business entities.
Instead, an LLC’s profits/losses pass through to its owner(s) personal taxes. LLC owners/members report these figures on their individual federal tax returns. (Remember, some states also apply annual taxes to LLCs.)
Pass-through (the IRS also calls it flow-through) taxation prevents double taxation. Double taxation occurs when your business pays taxes on its income, you take these profits as personal income, and you are taxed on this income.
2) How does the IRS Classify LLCs?
Your LLC taxes depend greatly on the way the IRS classifies your business. The federal government will automatically categorize your company by the number of owners (and certain other factors).
However, you can choose your tax structure (and even change your mind after the fact). If you meet its requirements, you can elect for the IRS to tax your company as either a C- or an S-Corporation.
For example, you can combine the liability benefits and pass-through tax structure of an LLC with the benefits of S-Corp taxation (also pass-through). In fact, you should carefully consider whether an S-Corp might suit your company’s need better than an LLC.
Though LLCs have become popular due to their separation of liabilities between personal and business accounts, you may find a properly-organized S-Corp structure works even better for your company.
By the way, if the IRS doesn’t automatically classify your LLC as a corporation, you can opt-in to this taxation structure. To qualify, your LLC should file IRS Form 8832: Entity Classification Election.
3) Single-Owner LLC Taxes
If your LLC has only one member/owner, the IRS expects you to claim its profits and losses as part of your personal income taxes.
However, it considers your LLC a separate entity for certain excise and employment taxes. (Your company may not fit into the federal government’s default LLC categorizations; check the IRS website to view its specific rules.)
The IRS calls single-owner LLCs as “entities disregarded as separate from their owners” (for tax purposes, not legal liabilities).
These owners repost their companies’ incomes, expenses, deductions, credits, and gains on their personal income tax returns via a variety of forms:
- Schedule E – Supplemental Income and Loss
- Schedule C-EZ – Net Profit from Business
- Schedule C – Profit or Loss from Business
- Schedule F – Profit or Loss from Farming
The IRS considers your single-member LLC a sole proprietorship (for tax purposes) unless you elect for C- or S-Corp taxation.
This means your company (the LLC) doesn’t pay taxes – you do. Use Schedule C (or the other forms listed above) to report your business income on your 1040 tax form.
When figuring out your employee cost deductions, you may need to calculate Full-Time Equivalents (FTEs) for your part-time workers. Use Toggl to create timesheets and create reports. You can even track mileage in Toggl – and integrate with other popular productivity platforms.
4) Should Single-Owner LLCs Get EINs? Can You Use Your Own SSN/LLC?
In most cases, such as W-9 taxpayer identification requests, the IRS wants the owner’s Social Security Number (SSN) or Employer Identification Number (EIN). You probably won’t have to an EIN associated with your LLC.
If your LLC doesn’t have any employees (or need to pay excise taxes), you don’t need to get an EIN for your LLC; use your individual SSN/EIN.
However, certain states require LLCs to get EINs. You may also need an EIN to open a bank account for your LLC.
For more information on the various types of TINs (Taxpayer Identification Numbers), such as SSNs, EINs, ITINs, ATINs, and PTINs, visit the IRS website.
5) Partnership LLC Taxes
Just as with single-owner LLCs, the company itself doesn’t file a tax return or pay taxes (with the exception of employment/excise taxes, of course).
Instead, each of the owners will attach Schedule E: Supplemental Income and Loss to their 1040 form and claim/pay their share of appropriate taxes.
In this document, you’ll specify the number of people in your partnership and attach an IRS Form K-1: Partner’s Share of Income, Deduction, Credits, etc. for each member.
You’ll also have the opportunity to offset your taxable income with a variety of deductions, including rents, salaries, depreciation, employee benefits, etc.
You’ll also need to report your partnership LLC income on your Schedule E and 1040 form. However, if you’ve chosen a corporate taxation structure (or the IRS has required this of you), you’ll need to submit IRS Form 1120: U.S. Corporation Income Tax Return or IRS Form 1120S: U.S. Income Tax Return for an S Corporation.
6) LLC Operating Agreements
Though most states don’t require you to create LLC operating agreements, consider drawing up one of these vital documents. Put in writing exactly how you and your partners will distribute profits and losses.
With an agreed-upon structure for the financial decisions you anticipate for your business, you can avoid paperwork headaches and disagreements down the line.
Some LLC members agree to divide their profits/losses in a way that doesn’t mirror their percentage stakes in a company.
If you create such a structure in your operating agreement, talk with your tax lawyer/accountant about getting IRS approval for a “special allocation.”
7) Who Can’t Get an LLC? Which LLC members must meet special requirements?
Companies in certain niches, such as insurance companies and banks can’t organize as LLCs.
Also, state governments (and the IRS) have special rules for foreign LLCs, so do your homework if you (or the other members in your LLC) don’t have U.S. citizenship.
As a foreign LLC owner, you’ll need to meet special reporting requirements, get an EIN, and designate a “responsible person.” If you’ve made “reportable transactions” this tax year, you’ll have to file IRS Form 5472: Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Whew, that was a long title!
Hang in there – with the right info, you can navigate the treacherous waters of LLC taxes. Once you get the hang of it (and stalk the IRS website), it’ll be smooth sailing and sunny skies for you and your business.
8) Estimated LLC Taxes
The IRS considers members/owners of LLCs self-employed; no employer withholds taxes from these individuals’ incomes.
As such, you must pay quarterly estimated LLC taxes (including Social Security and Medicare). If your state taxes LLCs, you also need to pay estimated state taxes at appropriate times throughout the year.
9) Paying State Taxes for Your LLC
States that tax LLCs use the same pass-through (or flow-through) model as the IRS. Before organizing as an LLC in your state, check with your tax lawyer/accountant to ensure you understand the relevant regulations (if any).
Some states charge flat fees to LLCs, called renewal fees, franchise taxes, registration fees, etc. These annual fees typically cost around $100.
States may even charge income tax directly to LLCs, in addition to the income taxes paid by members/owners. California, for example, charges a minimum $800 minimum franchise tax to LLC owners. LLCs in California that make over $250K per year must also pay an income tax of around $1,000.
Check with your state’s Secretary of State (or just their website) to learn the specifics of your local jurisdiction.
Contact your local department of tax, revenues, or corporations to determine the complete extent of your tax liabilities before deciding your strategy for LLC taxes.
Of course, there’s always Delaware. This corporate-friendly state leads the nation as a safe-haven for LLCs.
It’s famously business-savvy judiciary has typically considered LLC agreements as literal contracts. Though this state’s Chancery Court has softened this stance in recent years (to protect members/partners from one another), it remains a reliable and business-positive place to register your LLC (or any other kind of company, for that matter).
10) A Possible Exemption
Some owners of multi-member LLCs don’t actively manage the organization or provide services. The IRS may consider these people exempt from LLC taxes, but only in certain cases.
Of course, check carefully with your tax expert before claiming such an exemption.
You’ll also want to examine the relevant regulations regarding LLC management. You can choose to create a “member managed” or “manager managed” LLC (don’t you just love this lingo?).
11) Business Valuation and LLC Taxes
Understanding LLC taxes also gives you an edge when estimating your corporate value. Whether you want to plan for retirement, track your yearly growth, or negotiate a fair price with potential buyers, you must include your LLC tax liability in your evaluations.
Consult your yearly LLC tax return (if corporate) or personal pass-through reporting (if single-owner or a partnership) for the appropriate business valuation figures, and have them ready in any sales negotiations.
12) LLC Sales Taxes
Local and state governments require LLCs to pay sales taxes, just like all other businesses. When people pay for goods and services, they pay these point-of-purchase taxes, which sellers pass on to government agencies.
You must assess, collect, and provide to the authorities in your municipality. Be careful; sales tax laws in each state, requiring you to know the relevant laws and rate in each one in which you do business.
Sales taxes typically depend on the location of the business, not the consumer (though certain states have unique laws regarding this). States have varying definitions of a “nexus,” the place around which your business revolves. This may be a brick-and-mortar location, such as a storefront, warehouse, etc.
However, states may consider other business activities and facilities “nexuses” for the purposes of taxation. If you do business in many states (or all of them), consider using an online point-of-sale (POS) platform that automatically calculates relevant sales taxes.
Luckily, you may not have to pay sales taxes on certain types of transactions. Retailers who buy wholesale items often don’t have to pay sales taxes on these items, under the assumption that the customer will pay sales tax at the final point of sale.
Also, sellers of raw materials who supply manufacturers usually don’t have to pay sales taxes.
Remember, when you sell to non-profit companies, you may not have to collect/submit sales taxes.
13) LLC Tax Brackets
LLC Tax Rates for individual owners and partners pass through to their personal income taxes. However, the federal corporate tax rates for your first $75K of income are lower than personal tax rates (in most cases).
Check with your tax accountant/lawyer and see if you and your partners/fellow owners could benefit from opting into corporate taxes (instead of pass-through).
This option could lower your tax costs and allow your company to offer tax advantages like stock ownership plans, stock options, and other fringe benefits.
The Bottom Line
Ultimately, you’ll want your tax attorney and accountant(s) to carefully assemble your personal and LLC tax returns.
However, with the information in this article, you’ll have enough baseline knowledge to talk confidently with your tax professionals.
Whether you’re calculating time sheets, analyzing reports, or tracking your team’s mileage, Toggl can help. Surely, you want to know (and manage) the amount of time you and your employees put into LLC taxes and IRS research (vs. actual, profitable work).
With our simple, affordable, and easy-to-integrate time-tracking software, you can easily sort out the numbers and put this quarter’s LLC taxes behind you!