Which LLC Taxes Must Your Business File?

How different types of LLCs prepare and file their taxes

An LLC business legal structure provides business owners with significant flexibility. However, filing taxes can sometimes be confusing. Several factors come into play when determining your options for filing LLC business taxes. 

You’ll file your LLC tax returns in one of three ways:

• Sole proprietorship (Schedule C, Form 1040): Reporting for a single-member LLC can be included in the owner’s individual tax return.
• Partnership (Form 1165): An LLC with two or more members is treated as a partnership for tax purposes by default.
• Corporation (Form 1120 or 1120S): Any LLC can elect to be treated as a traditional C corporation or as an S corporation for tax purposes.

We’ll explain more about each option and its choices. 

Single-member LLCs

The IRS treats a single-member LLC as a sole proprietorship by default. The biggest differentiator between a single-member LLC and a sole proprietorship is that LLCs shield you from liability in nearly every case. Where major events such as a bankruptcy or lawsuit against your business have the potential to result in significant personal loss, LLCs limit the liability to business assets, saving your personal assets like your home and savings.

When filing your single-member LLC taxes, you’ll complete Schedule C, Profit or Loss from Business (Sole Proprietorship), and file it with your individual tax return (Form 1040 or 1040-SR). 

If you prefer, you can use Form 8832, Entity Classification Election, to choose to be treated as either a C corporation or an S corporation for tax purposes. This election does not change your business’s legal structure. It is still an LLC.

Filing Schedule C as a sole proprietor on your individual return has some benefits: 

• Filing is straightforward. Filing Schedule C as a sole proprietor is far simpler than filing a separate corporate return. For a corporate return, you must track and report more information, including balance sheet Additionally, corporate returns have a separate due date you must track.
• Filing is less expensive. If you pay for tax software or hire a tax accountant, you will pay more for the preparation of a corporate return than you would for a Schedule C included with your individual return.

When you use Schedule C as a sole proprietor for your LLC, your business’s profit is calculated by adding all revenue and subtracting the costs of goods and services. Any other business expenses are then subtracted. The final sum is the business’s net profit, which is transferred to Schedule 1, Additional Income and Adjustments to Income, as business income or (loss). The total from Schedule 1 is then included in the total income on Form 1040.

Multimember LLCs

An LLC with more than one member is a multimember LLC. By default, the IRS considers the LLC a partnership for tax purposes. You can also elect to file taxes for a multimember LLC as a C corporation or an S corporation if your LLC meets the qualifications. Here’s how each situation works:

Multimember LLCs filing taxes as a partnership

Here’s what you need to know if your multimember LLC files taxes as a partnership:

• You don’t pay taxes directly. Instead of paying taxes directly, the LLC partners must report their share of profits and losses. The division of profits is determined in the LLC operating agreement, which generally bases each owner’s profit share on the amount of their business investment.
• You’ll file Form 1065. A multimember LLC filing as a partnership files Form 1065 – U.S. Return of Partnership Income – with the IRS. This form reports business profit and loss, partner accounts, and balance sheets that show financial information at the beginning and end of the tax year.
• Partners receive a Schedule K-1. The LLC provides each member with a Schedule K-1 to report each partner’s share of the company and profits, losses and other tax items that flow through directly to each partner. Each partner files a Schedule K-1 form with their individual tax return on Schedule E, Supplemental Income and Loss.

Multimember LLCs filing taxes as a C corporation

Here’s what you should know if your multimember LLC files as a C corporation: 

• You must file IRS Form 8832. Before your LLC can file as a C corporation, you must file Form 8832 with the IRS. 
• You’ll use Form 1120. Once designated as a C corporation, the LLC files its corporate tax return yearly using Form 1120. Unlike a partnership or S corporation, a C corporation pays tax to the IRS directly. 
• LLC members are taxed again. The LLC members pay tax again when they receive dividends or other payments, which is called double taxation. This can be a significant disadvantage to filing as a C corp.
• LLC members become shareholders. On the other hand, when your LLC is taxed as a corporation instead of an LLC, the members become shareholders and are no longer self-employed. You also avoid paying self-employment tax, although if you receive wages from the company, you will still pay Social Security and Medicare tax.

Remember that electing to file your LLC tax return as a C corporation does not create a C corporation or mean that your LLC must meet qualifications to be a C corporation. The election is only for tax filing purposes.

Multimember LLCs filing taxes as an S corporation

Here’s what you should know if your multimember LLC files as an S corporation: 

• You must file IRS Form 8832. Before your LLC can file as a S corporation, you must file Form 8832, Entity Classification Election, with the IRS. To qualify as an S corporation, the IRS requires the following:
  • The business must be a domestic corporation.
  • The business must have only allowable shareholders.
  • Shareholders may be individuals, certain trusts and estates.
  • Shareholders may not be partnerships, corporations or non-resident alien shareholders.
  • The business must have no more than 100 shareholders.
  • The business must have only one class of stock.
  • The business must not be an ineligible corporation (i.e., certain financial institutions, insurance companies and domestic international sales corporations).
• An S corporation is a pass-through entity. An S corporation passes corporate income, losses, deductions and credits through to their shareholders for federal tax purposes.
• You must use Form 1120-S. Operating largely like a partnership, S corporations file Form 1120-S to report the company’s income, losses, deductions and other tax information to the IRS. The owners receive a Schedule K-1 to show their share of the business and use that information to complete Schedule E for their own tax return.  
• You may benefit from the QBI deduction. Another advantage of filing as an S corporation versus a C corporation is that S corporation owners may qualify to take the QBI (qualified business income) deduction based on pass-through income.

Estimated tax and the self-employment tax

LLC members must consider estimated tax and self-employment tax requirements. 

Estimated taxes

Most LLC owners, unless they receive wages from a corporation, are not subject to tax withholding. Instead, they must estimate their taxes for the year and pay quarterly estimated taxes using IRS Form 1040-ES as needed to avoid a penalty for underpayment of estimated tax. 

Corporations are also required to estimate taxes and submit them with Form 1120-W. Both sole proprietorships and shareholders must calculate quarterly tax payments and pay them by the IRS deadline as needed. If your state has an income tax, the process is also likely required at that level. 

According to the IRS, you must use the 1040-ES form and make estimated payments if both of the following statements are true:

• You anticipate owing at least $1,000 in taxes after subtracting your withholding and refundable credits.
• You expect your withholding and refundable credits to be less than the smaller of the following:
  • 90 percent of the taxes to be shown on your upcoming tax return
  • 100 percent of the taxes shown on your tax return from the previous year if that return covers all 12 previous months

The IRS requires corporations to file Form 1120-W if they meet the following criteria:

• Corporations must generally make estimated tax payments if they expect their estimated tax (income tax less credits) to be $500 or more.
• S corporations must make estimated tax payments for certain taxes. S corporations should see the instructions for Form 1120-S, U.S. Income Tax Return for an S Corporation, to figure their estimated tax payments.
• Tax-exempt corporations, tax-exempt trusts and domestic private foundations must make estimated tax payments for certain taxes.

These entities should refer to the instructions for their tax return to determine the amount of their estimated tax payments.

Self-employment tax

In addition to estimated taxes, LLC members must consider the self-employment tax. Based on Social Security tax and Medicare tax, this tax is calculated through Schedule SE and is not unlike payroll tax.

While employee contributions to both systems are taken out of their paychecks, anyone considered a self-employed individual by the IRS does so through their taxes. If you’re required to pay your estimated taxes on a quarterly basis, you may also be required to cover your self-employment taxes in that same payment schedule.

The self-employment tax also means your contributions to Medicare and Social Security will be significantly more than those made by employees because employers match those contributions. According to the IRS, the self-employment tax rate is 15.3 percent, with 12.4 percent going to Social Security and 2.9 percent going to Medicare.

Deductions to keep in mind for your LLC

As you prepare your taxes, you should always look for applicable tax deductions to ease your tax burden.

According to the IRS, some general credits and deductions available to all types of businesses include items like the Manufacturers’ Energy Efficient Appliance Credit and the Plug-in Electric Drive Vehicle Credit, among other things.

That being said, tax deductions specifically tailored to LLCs also exist. For example, if your LLC makes a charitable donation, it can deduct up to 10 percent of the contribution.

In general, how your LLC gets its deductions depends largely on the type of business structure it’s taken on. Single-member LLCs can take many of the same deductions that sole proprietors can, including the following: 

• Health insurance for yourself, your spouse and any dependents in your home
• “Ordinary and necessary” business operating expenses, like equipment
• Home office expenses, like rent and utilities
• Vehicle-based costs, like mileage and fuel

Conversely, any partnership-based LLC can take deductions based on those found in Form 1065.

Following the passage of the Tax Cuts and Jobs Act of 2017, the federal government also made it so a qualifying small business owner can utilize pass-through tax deductions of up to 20 percent of net business income earned. This deduction will run until 2025 and is considered an additional personal deduction if you meet certain criteria. While the TCJA pass-through deductions are available to most small businesses, C corps are not eligible.

If you have employees and make less than $315,000 (if married and filing jointly) or $157,700 (if single), then you may qualify. Furthermore, this deduction is capped at a percentage of employee wages or the property cost associated with the business. If your business makes more than $415,000 (if married and filing jointly) or $207,500 (if single), then your business is not eligible for the TCJA pass-through tax deduction.

Filing your LLC taxes using the right form is important

Whether you’re the sole owner of your LLC or work in tandem with other partners, taxes are a critical aspect of the operation that cannot be ignored. Good tax planning can make a huge difference in the tax load carried by you and other members of your LLC, both now and in the future as your business grows. Consult with trusted tax and legal professionals to make the right choice, and revisit your choice in the future as your business grows and expands.

Andrew Martins contributed to this article.