Starting a business is an adventure, but tax season can be extremely confusing. The reasonable question you might ask is, “Do I need to file my LLC and personal taxes separately?” The answer— it depends. While it’s not a simple answer, we can help you explore the topic at a high level.
IRS treatment of LLCs for tax purposes
LLCs offer flexibility via the IRS – that’s why they’re a popular choice for business structures. But how your LLC’s tax situation is dealt with will depend on the number of members (a fancy way to say owners) and how you decide to “classify” it. Solo LLC owners need to approach tax season a little differently than those in a group setup. By understanding these details, you can follow the IRS rules, and maybe even save yourself some cash.
Single-member LLC taxation
When you’re the only one with ownership of the LLC, the IRS calls it a “disregarded entity.” That’s because they don’t treat your LLC as a separate entity for tax purposes, and you’ll file your personal and LLC taxes together (using Schedule C). This is pretty straightforward. Your one-business job, like running a lemonade stand and collecting the profits for yourself, is your personal business income. Fortunately, on your tax forms, you can include the lemonade stand under your personal return.
Multi-member LLC taxation
As for an LLC that has more than one member, the IRS considers it a partnership by default (unless you file with the IRS to elect corporate status). With a partnership, each member will report their profit and losses on their own tax return. The partnership as a whole doesn’t pay tax. The LLC partnership files a separate 1065 form but doesn’t pay tax. Instead, each member pays the tax on their portion of the profit. Each member of the partnership receives a Schedule K-1, which reports income and deductions. You include this form with your personal tax return.
LLCs taxed as C-Corporations
Sometimes, LLCs are aggressive enough to elect to be taxed as a C-Corporation. Rather than one of the other business scenarios, a C-Corporation reports any profits and losses on its corporate tax return (using Form 1120). The profit or retained earnings would remain within the company, and any of the earned salaries or dividends taken by you would then also appear on your personal return. It’s a wee bit more complex but necessary in some instances.
LLCs taxed as S-Corporations
An S-corporation represents a more favorable pass-through structure to some. It doesn’t require double taxation, as profits, losses, credits, and deductions pass through to each owner. Each owner then can claim their respective shares of these gains or income on their personal tax returns. Like a multi-member LLC, the LLC itself files Form 1120S (even though it’s an informational filing only), and each owner receives a K-1 for their individual tax returns.
Additional taxes your LLC might owe
However, taxes of income on the federal level are not the only concern; your LLC may also be responsible for other federal and state taxes, depending usually on the location of the LLC and the business being conducted.
Self-employment tax
If you’re running a single-member LLC, this means you’re self-employed, and you’re going to be asked to pay self-employment tax— which covers your Social Security and Medicare contributions. This isn’t the same as income tax, and it can really stack up, so make sure you know how to account for them.
State-level taxes
Your local state income taxes are another consideration for your business. Depending on the state, you could be obligated to file a state income tax form, franchise taxes, or another form or state-specific requirements. The tax code varies widely. So, speaking with a CPA will help you with managing your business needs.
Quarterly estimated taxes
If your LLC is making money, it will likely owe quarterly estimated taxes to help avoid future penalties. This basically requires you to estimate the quarter’s income and pay the amount owed to the IRS (on a quarterly basis) as you earn.
Is it possible to file LLC taxes separately?
If you’re wondering whether your personal and LLC tax circumstances are totally unheard of or dangerously risky, the answer really just depends on the organization of your LLC. Single-member LLCs have to file taxes with their personal tax returns, but multiple-member LLCs and LLCs taxed as corporations file separate tax returns on the company’s behalf. So no matter your team member status, you’ll still owe income tax.
Can LLC expenses be deducted on a personal tax return?
Yes. However, the ability to do so depends on how taxes are reported for your LLC. If your LLC’s profit and loss are passed through to your personal taxes (a single-member LLC for example), then you can file and deduct business expenses on Schedule C. This can save you a lot on your tax bill at the end of the year. If you are a C-corp, the LLC will need to file to account for any deductions. Those deductions will reduce the LLC’s tax bill, not yours.
Simplify your LLC’s tax filing process
Processing the finances for your LLC often feels like a full-time job, everything from self-employment tax and quarterly estimated taxes to meeting tax obligations in your state. But don’t let taxes bog you down for one more season. We’ve created the perfect guide to get you through this year ahead. Simply pick what you need, and get started today with Workhy!
