How Do Want Your LLC Taxed On Your Tax Return?
Taxes are the most important factor to consider when forming and choosing a corporate entity. Your business entity structure has a direct impact on the amount of taxes you'll owe the government. A limited liability corporation (LLC) is a type of business that is registered with the state and protects its owners from personal liability.
How To File Taxes As A Single-Member LLC (Sole Proprietorship)
If you run an LLC on your own and haven't chosen to file as a corporation, you will be filing your federal income taxes as a sole proprietor. This entails filing a personal income tax return to detail your earnings and spending on Form 1040. You pay taxes based on your personal income tax rate when you register as a sole proprietor.
To do so, you'll need to use an IRS form called Schedule C to determine and report your LLC's profits or losses. This is how your taxable income will be calculated. You would need to acquire an income statement as well as financial documents and receipts for all the deductions you intend to take. Using Schedule SE, you'll also have to file a Social Security and Medicare tax return and make payments.
How To File Taxes As A Multi-Member LLC (Partnership)
Multi-member LLCs are considered "pass-through entities" for federal income tax purposes. A pass-through entity (also known as a flow-through entity) is a corporate structure in which the profits from the company are recognized as the owners' personal income. It's used to prevent double taxation, which occurs when a company's earnings are subject to corporation tax first, then to the owner's personal income.
This is very similar to a single-member LLC in that the LLC does not pay its own taxes. Rather, each member's taxes on the LLC's earnings are in proportion to their ownership stake in the LLC. A multi-member LLC is required to file various tax forms with the IRS, including Form 1065 and the U.S. Return of Partnership Income. By March 15 of each year, the LLC must also provide each owner with a completed Schedule K-1.
How To File Taxes As C-Corporation
When you change your tax status to a C-Corporation, the IRS will begin treating your firm as a separate taxpayer. Rather than allowing the LLC's corporate revenue and costs to flow through to their personal tax returns, the LLC owners are taxed separately from the firm and the LLC files its own separate corporate tax return. Before filling out the corporate tax return Form 1120, you would need to acquire all of your company's financial information and statements.
How To File Taxes As S-Corporation
S-Corporation status is a tax designation provided by the IRS that permits firms to pass their corporate revenue, credits, and deductions to their business owners, like a partnership or sole proprietorship. LLCs filing as S-Corporations must file Form 1120S which is the U.S. Income Tax Return for an S-Corporation. Members receive a Schedule K-1 from the business, which reports their share of the business's revenue or losses and they use the K-1 to file their personal tax returns.
Do LLC Members Pay Self-Employment Tax?
As stated above, because LLC members are not employees, no Social Security or Medicare contributions are deducted from their compensation. Instead, most LLC members are obliged to pay these taxes, which are referred to as "self-employment taxes," when paid by a business owner, directly to the IRS.
Each member is liable for the self-employment tax reported on Schedule SE, which must be submitted annually with their tax return. Because ordinary employees' contributions to the self-employment tax are matched by their employers, LLC owners (including sole proprietors and partners) pay twice as much self-employment tax as regular employees. LLC members can deduct half of the total sum from their taxable income.
The self-employment tax rate for business owners is 15.3% as of 2022, and it includes the following:
On wages up to $147,000, the social security tax rate is 12.4%.
2.9% Medicare tax rate on all earnings, plus
An extra 0.9% Medicare tax rate on all income over $250,000 (married filing jointly), $125,000 (married filing separately), or $200,000 (married filing separately & all other taxpayers).
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