One of the most important things you can do for your business isn’t finding the right name or figuring out how to offer your service (although those are pretty important too).
If you want your business to thrive, you need to figure out your tax structure.
If you choose a limited liability company (LLC) instead of a corporation, you’re looking at a different kind of Tax Day. That’s why we’re breaking down everything you need to know about how to file LLC taxes.
How Are LLCs Taxed?
First, though, we should talk about how LLCs are taxed.
However, what that actually means for your taxes varies depending on whether you’re a single-owner LLC or a multi-owner LLC.
Single-owner LLCs are treated as sole proprietorships in the eyes of the IRS to simplify taxes when April rolls around.
However, this can make your life a bit more frustrating.
Since single-owner LLCs are treated the same as sole proprietorships for tax purposes, the LLC itself is not required to pay taxes and submit a tax return, which in some sense makes your life easier.
However, this means that you have to report all profits and losses of the LLC on your Schedule C forms, which, not coincidentally, is where you report self-employment income.
Multi-owner LLCs, as you might guess, are a little more complicated, since you’re no longer just accounting for yourself.
In the eyes of the IRS, multi-owner LLCs are treated the same as partnerships for tax purposes. So the LLC itself does not pay taxes on business income; instead, the owners each pay taxes on their lawful shares of the business’s profits on their individual tax returns.
The handling of this is usually spelt out in the LLC’s operating agreement, which delineates each partner’s distributive shares in proportion to their percentage interest in the business.
Regardless of how these shares are divided among partners, the IRS taxes each LLC member as though they received their entire distributed share that year, which means that each partner must pay taxes on their share regardless of whether the LLC actually distributed that money to them.
How to File LLC Taxes
So, your LLC’s standing as a single-owner or multi-owner LLC should help you get a sense of the lay of the land.
From there, we can start to talk about the specifics of taxation for your business. We’ll cover three kinds of taxes here:
- Income taxes
- Sales taxes
- State taxes
As you can guess, your LLC status for each type of tax will change based on what variety of LLC you are.
So, first get a grasp on the specifics of how your business is laid out. From there, you can start reading your individual tax implications.
Income taxes have the largest variation between single and multi-owner LLCs.
As we noted, if you’re a single-owner LLC, then you’re functionally acting as a sole proprietorship when Tax Day comes knocking.
This means that all of your LLCs profits and losses are reported on your personal income taxes, not on separate income taxes filed by the LLC.
For multi-owner LLCs, unless you deliberately elect to be taxed as a corporation, you will be taxed as a partnership. This means that each partner will report their share of profits on their individual income taxes. If, however, you elect to be taxed as a corporation, then the business will pay its own income taxes.
Sales tax refers to the point-of-purchase tax imposed by local and state governments.
In the case of an LLC, you’re required to collect sales tax on the products you sell and distribute it to the appropriate parties. Rates will vary from state to state, so it’s important that your business is on top of local sales tax if you do business in several locations.
Then, there are state taxes, which will also vary based on where you conduct business.
Generally speaking, when you pay your state taxes for your LLC, you’ll pay them through your individual tax returns, the same way you pay the IRS (unless you’ve elected to be taxed as a corporation).
However, it’s a good idea to do your homework on the LLC taxation rules in your specific state. Some states charge an extra tax on income earned through an LLC, while others charge an LLC fee unrelated to your income.
With that in mind, let’s talk about the forms you need for your LLC.
For single-owner LLCs, you’re going to report your LLC taxes through your individual tax returns as though you’re reporting self-employment income, which means you’re going to use Schedule C and file it with your form 1040.
Multi-owner LLCs, like all other partnerships, are required to file form 1065, which helps the IRS to determine that each member is reporting income correctly. This type of LLC is also required to give each partner Schedule K-1, which shows each partner’s share of income, credits, and deductions.
Finally, if you’ve elected to file as a corporation, you need to file form 1120.
Making Sense of Your LLC Taxes
Think you know how to file LLC taxes?
If you’re still a little lost, no worries. It’s a complicated process. That’s why it helps to have a pro help you out.
Check out our blog for more tips and tricks, like these six tips for managing tax deductions. If you’re a single-owner LLC filing self-employment taxes, check out these nine tax deductions you should be taking.