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LLC Taxes: A Simple Guide

By Nick Zarzycki — Reviewed by Janet Berry-Johnson, CPA on October 23, 2019

An LLC (or “limited liability corporation”) is a business entity that behaves like a corporation at the state level, but may be taxed like a partnership or sole proprietorship at the federal level.

To create one you have to apply to your state’s Secretary of State, put together an operating agreement, and secure some licenses, all of which you can read about in our guide to LLCs.

But here’s the best part of being an LLC: if getting taxed as a partnership or sole prop doesn’t result in a lower tax bill, you can opt to file your taxes as a C corporation or S corporation instead.

What does that mean for your particular tax situation? Are LLCs really better from a tax standpoint than all the other business entity types?

Here’s what you need to know.

(And if you really just want to calculate how much tax your LLC owes, you can jump to our free LLC estimated tax calculator.)

How will my LLC get taxed?

The flexibility of the LLC structure means there are four separate tax scenarios that your LLC could fall under:

  1. If it’s a single-member LLC and hasn’t opted to file as a corporation, it will file its taxes exactly as a sole proprietor would.

  2. If it’s a multi-member LLC and hasn’t opted to file as a corporation, it will file its taxes exactly like a partnership.

  3. If it has opted to file its taxes as a C corporation by submitting IRS Form 8832, then it will file its taxes like a C corporation.

  4. If it has opted to file its taxes as an S corporation by submitting IRS Form 2553, then it will file its taxes like an S corporation.

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Filing taxes as a single-member LLC

If you run an LLC by yourself and haven’t opted to file your taxes as a corporation, you’ll file your taxes as a sole proprietor would, by reporting your income and expenses on your personal tax return (Form 1040).

To do this, you’ll first have to calculate and report your business’ profits (or losses) using an IRS form called Schedule C. To fill that out, you’ll need an income statement, and financial records and receipts for all the deductions you plan on making.

You’ll also have to report and pay Social Security and Medicare tax (i.e. your self-employment taxes) using Schedule SE.

Filing taxes as a multi-member LLC

The LLC files Form 1065 to report the business income or loss to the IRS, then gives each member of the LLC a Schedule K-1, which is used to report their share of the LLC’s income and deductions on their personal tax returns.

LLCs are “pass-through” entities, meaning their profits and losses pass through directly to their owners. Owners of multi-member LLCs report their business’s profits and losses on Schedule E, and report self-employment taxes using Schedule SE.

To file Form 1065, you’ll need all of your LLC’s important year-end financial statements, including a profit and loss statement that shows net income and revenues, a list of all the partnership’s deductible expenses, and a balance sheet for the beginning and end of the year.

Schedule K-1 is generated along with Form 1065, which identifies each partner’s allocated profits and losses over the course of the reporting period. Each partner’s Schedule K-1 becomes part of their personal tax return.

Filing taxes as a C corporation

If an LLC thinks it can lower its tax bill by being taxed as a corporation, it can file Form 8832 with the IRS and opt to be taxed as a C corporation.

Getting taxed as a C corporation means that instead of letting the LLC’s income and expenses flow through to their personal tax returns, the LLC owners will now get taxed separately from the company, and the LLC will have to file its own separate corporate tax return.

Also known as Form 1120, LLC owners use the corporate tax return to report the corporation’s income, gains, losses, deductions, credits, and to calculate its tax liability. Like Schedule C, you’ll need all of your company’s important financial information and statements on hand before filling it out.

Read more about filing a corporate tax return.

Filing taxes as an S corporation

An LLC can also file Form 2553 to elect to be taxed as an S corporation.

S corporation status is a special tax designation granted by the IRS that lets corporations pass their corporate income, credits and deductions through to their owners, just like in a partnership or sole proprietorship.

But hold up: why would an LLC already getting taxed as a pass-through entity elect to be taxed as an S corporation? It all has to do with self-employment tax: sole proprietorships and partnerships have to pay it on 100% of the business profits, but S corp owners only pay self-employment taxes on the salary they take from the business.

LLCs filing as S corporations must file Form 1120S, the U.S. Income Tax Return for an S corporation. They’ll also receive a Schedule K-1 reporting their share of the business’, income (or losses) and use the K-1 to complete their own personal tax returns, just like a partner would.

LLC tax calculator

Once you know what entity type your LLC will be taxes as, you can calculate exactly how much tax your LLC owes, by walking through our free estimated tax calculator.

Calculate your estimated quarterly taxes (for free)

Follow our step-by-step estimated quarterly tax calculator to figure out how much you owe.

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Is an LLC better for taxes?

Generally speaking yes, insofar as it gives you maximum tax flexibility.

An LLC is better for taxes if:

You’re currently subject to double taxation

LLCs that opt to be treated as pass-through entities avoid double taxation. Instead of getting taxed when they earn income and distribute profits to shareholders, LLCs pass their gains or losses onto their owners and only get taxed once, which can result in a lower tax bill. If your company is making a profit and you want to take some of that money out of the company, it’s generally cheaper to do so as a pass-through entity than a C corp.

You’re paying lots in self-employment tax

Unlike owners of sole proprietorships and partnerships, S corporation owners only pay self-employment taxes on their wages rather than their entire share of the company’s profits. All other income is paid to shareholders in the form of “distributions” that are not subject to self-employment tax.

You need liability protection

Like C corps and S corps, LLCs give their owners limited liability. This means that if the LLC ever goes under or gets sued, your personal assets are off limits.

You’re focused on growth

If you’re a new and growing business and intend to reinvest most of your profits back into the business, electing to be taxed as a C corporation could lower your tax bill, because C corporations pay tax at a rate that is often lower than individual tax rates.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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