Discover the types of taxes your LLC needs to pay and learn how to trim your tax bill.
When picking a business structure for your company, taxes play a huge role. Ultimately, whether you opt for a limited liability company (LLC), sole proprietorship, or corporation affects how much your business pays in taxes and how you file them. LLCs, which offer personal liability protection for owners and are registered with the state, have flexibility in how they’re taxed.
How Do LLC Taxes Work?
An LLC is usually treated as a pass-through entity for federal income tax purposes. This means the LLC itself doesn’t pay taxes on its business income. Instead, the LLC owners, called members, pay taxes on their portion of the LLC’s profits. However, members have the option to have the LLC taxed as a corporation instead of a pass-through entity.
There are various types of LLC taxes, imposed by the federal government, as well as state and local authorities. All LLC members are accountable for paying income tax on any earnings they receive from the LLC, along with self-employment taxes. Depending on your business activities and if you have employees, you might also be on the hook for payroll taxes and sales taxes.
How LLCs Pay Income Taxes
LLC owners may have to handle various business taxes, but federal, state, and local income taxes are typically the heaviest load. How you go about filing and paying income taxes hinges on whether your LLC has just one owner (a single-member LLC) or multiple owners (a multi-member LLC).
Income Taxes for Single-Member LLCs
By default, the IRS treats a single-member LLC as a disregarded entity for federal income tax purposes. This means LLC members report the business’s profits and losses on their individual tax returns instead of filing a separate business form.
In simpler terms, as the sole owner of an LLC, you’ll report your business income and expenses on Form 1040, Schedule C, much like a sole proprietor. If your LLC makes a profit for the year after deducting business expenses, you’ll owe taxes to the IRS based on your personal income tax rate. Conversely, if your LLC operates at a loss for the year, you can deduct those losses from your personal income.
This process generally applies similarly at the state and local levels, with some states imposing a separate LLC tax or fee. For instance, California levies an $800 annual LLC tax, along with a fee that varies based on your LLC’s income. Keep these LLC taxes in mind when choosing your business structure and making budgeting decisions.
Income Taxes for Multi-Member LLCs
Similar to single-member LLCs, multi-member LLCs are typically treated as pass-through entities for federal income tax purposes, meaning the LLC itself doesn’t pay taxes separately. Instead, each member pays taxes on the LLC’s income based on their ownership share. The tax rate for the LLC aligns with each member’s individual income tax bracket.
For example, if two members in an LLC have a 50-50 ownership split, each owner is responsible for paying taxes on half of the business’s profits. Each owner can also claim half of the small-business tax deductions and credits that the LLC qualifies for, as well as write off half of the losses. This taxation method operates very similarly to a partnership.
A multi-member LLC must file certain tax forms with the IRS, including Form 1065, U.S. Return of Partnership Income — an informational return submitted annually. Additionally, the LLC must provide each owner with a completed Schedule K-1 by March 15 of each year. The Schedule K-1 outlines each owner’s share of the LLC’s income, losses, credits, and deductions.
Each owner then attaches their Schedule K-1 to their personal income tax return filed with the IRS. Pass-through taxation also applies at the state and local levels. Most states have their own version of Form 1065 and Schedule K-1, and some may impose additional LLC taxes.
Choosing Corporate Tax Status for Your LLC
LLC members can choose for the business to be classified as a C corporation or S corporation, rather than a pass-through entity, for tax purposes. The voting procedure and consent required to make this change will be reflected in the LLC operating agreement.
Your LLC can opt to be taxed as a C corporation by filing Form 8832 with the IRS (your state might also require additional forms for a change in tax status). If you make this change, your LLC will be subject to the 21% federal corporate tax rate. You’ll need to file taxes using Form 1120, U.S. Corporation Income Tax Return. You’ll also pay state and local corporate taxes as applicable where your business is located.
To opt for S corporation tax status, file Form 2553 with the IRS. An S-corp is taxed like a pass-through entity, with some differences in how salary and distributions from the business are taxed. To file taxes for an S-corp, submit Form 1120-S, U.S. Income Tax Return for an S-corporation, to the IRS.
Note that choosing corporate tax status won’t affect your LLC from a legal standpoint. Legally, your business will continue to operate as an LLC. You should consult with a tax professional to see if you’d benefit from corporate tax status. Income in a corporation is taxed differently than in an LLC, and a corporation is eligible for more deductions and credits.
LLC Payroll Taxes
LLCs with employees are responsible for collecting and paying payroll taxes, which include unemployment, Social Security, and Medicare taxes. Unemployment taxes are paid by employers to support unemployment benefit programs.
Social Security and Medicare taxes, collectively known as FICA taxes under the Federal Insurance Contributions Act, are shared by employers and employees. Employers are required to withhold the employee’s share of these taxes, along with income taxes, from their employees’ paychecks.
To report and file payroll taxes, businesses use IRS Form 940 and Form 941. Form 940 is filed annually to report an employer’s unemployment tax obligations. Form 941, on the other hand, is filed quarterly to report withheld income taxes, as well as the employer and employee’s portion of Social Security and Medicare taxes.
It’s important to note that these taxes aren’t paid when you file the tax forms. The IRS operates on a pay-as-you-go system for payroll taxes, meaning you need to deposit your payroll taxes throughout the year according to the schedule set by the IRS. You can make these deposits using the Electronic Federal Tax Payment System (EFTPS). Unemployment taxes are typically deposited quarterly, while Social Security and Medicare taxes are deposited either monthly or semiweekly, depending on your tax liability. The IRS instructions for Form 940 and Form 941 can assist you in determining your deposit schedule.
| Tax | Tax rate | Who pays | Deadline |
| Unemployment. | 6% on the first $7,000 in wages (assuming you paid state unemployment taxes on time and in full). | Employer. | File Form 940 by Jan. 31. Deposit taxes on the last day of the month following each quarter. |
| Social Security. | 12.4% on wages up to $168,600. | Employer and employee evenly split the tax. | File Form 941 by the last day of the month following each quarter. Deposit taxes on a monthly or semiweekly basis. |
| Medicare. | 2.9% on all wages, plus a 0.9% surtax on wages over $200,000. | Employer and employee evenly split the tax. Only employees pay the surtax. | File Form 941 by the last day of the month following each quarter. Deposit taxes on a monthly or semiweekly basis. |
In addition to federal payroll taxes, states and local governments often impose extra payroll taxes. For taxes that fall under the employee’s responsibility, you’ll need to make the required withholdings and send the payment to the state or local government. Employer taxes, on the other hand, are paid directly to the tax agency.
LLC Self-Employment Taxes
Members of an LLC aren’t classified as employees. However, under the Self-Employment Contributions Act (SECA), you’re still responsible for paying Social Security and Medicare taxes to the IRS. These taxes, known as self-employment taxes, are paid directly to the IRS. The total self-employment tax amounts to 15.3%, which is divided into three parts:
- 12.4% Social Security tax on earnings up to $168,600.
- 2.9% Medicare tax on all earnings.
- 0.9% Medicare surtax on earnings over $200,000.
You can use Schedule SE to calculate your tax liability, which should be attached to your tax return.
LLC Sales Taxes
If your LLC sells taxable goods or services, you’ll need to collect sales tax from your customers and send it to the state or local tax agency. What goods and services are taxable varies depending on the state and locality where you operate. Forty-five states enforce sales tax laws. Alaska doesn’t have a state sales tax, but several cities in Alaska impose local sales tax.
Determining whether you’re required to collect sales tax hinges on the concept of “nexus.” Sales tax nexus means you have enough connection with a state or locality that you’re obligated to collect and remit sales tax there. This connection could be having a physical store in the area, employing people there, or shipping goods into the area. Even online businesses might need to collect sales tax in a state simply because they ship goods there.
Most states follow destination-based tax rules, meaning the sales tax rate is based on the final delivery location of the product or service. However, a few states follow origin-based tax rules, where the sales tax rate is determined by the location of the business selling the goods or services. It’s a good idea to reach out to the revenue departments in the areas where you sell to understand the specific rules that apply to your business.
LLC Tax Forms and Deadlines
The specific tax forms you’ll need for your LLC taxes depend on three factors:
- Whether your LLC has one owner or multiple owners.
- Whether you opt for the default (pass-through) tax status or corporate tax status for your LLC.
- Whether your LLC has any employees.
| Tax form | When to use | IRS filing deadline |
| Schedule C. | A single-member LLC reports all business income and losses on a Schedule C. | April 15 (attach Schedule C to your Form 1040 or personal income tax return). |
| Form 1065. | Multi-member LLCs must file this tax return for informational purposes (i.e. no payment is sent with this return). | March 15. |
| Schedule K-1. | Multi-member LLCs must issue this form to each member, outlining the member’s share of the LLC’s profits, losses, credits, and deductions. | Provide to each owner by March 15 (they will attach a copy to their personal tax return). |
| Form 8832. | File this form to elect C corporation tax status for your LLC. | The new tax status can’t start more than 75 days before filing or more than one year after filing. |
| Form 2553. | File this form to elect S corporation tax status for your LLC. | Two months and 15 days after the start of the tax year in which you want the election to take effect. |
| Form 1120. | Corporate income tax return for LLCs that opt to be taxed as a C corporation. | April 15. |
| Form 1120-S. | Informational tax return for LLCs that opt to be taxed as an S corporation. | March 15. |
| Form 940. | File this form to report and pay federal unemployment taxes. | January 31 (you get an extra 10 days if you deposited all your unemployment taxes on time). |
| Form 941. | File this form to report income taxes withheld from employees’ wages, as well as the employer and employee share of Social Security and Medicare taxes. | April 30, July 31, October 31 and January 31. |
Keep in mind that if a tax deadline lands on a Saturday, Sunday, or federal holiday, you can submit the document on the following business day. Additionally, if you need more time to file your taxes, you can request an extension. With an extension, you’ll have an extra six months to file. If you’re a single-member LLC taxed as a disregarded entity, use Form 4868 to ask for an extension. For all other situations, use Form 7004 to request an extension on your business tax filing.
LLC Tax Tips for Business Owners
Here are some tips to help reduce your tax bill and simplify the filing process:
- Make sure to utilize any tax deductions and credits that your LLC qualifies for.
- Stay ahead of business tax deadlines by checking them in advance and marking down important due dates.
- Consider hiring a certified public accountant (CPA) or tax professional to help you with filing your taxes.
- Discuss with your CPA or tax professional the advantages of opting for corporate tax status for your LLC.
- Familiarize yourself with the tax obligations specific to your state and local area.