How Are LLCs Taxed?

Taxation of an LLC depends on several things including the number of members, the percentage of ownership and the type of tax election made by the LLC.

How LLCs are taxed depends on whether or not the LLC is a single member, multi-member or consists of a husband and wife. The one thing in common to all of these is that the LLC itself is not taxed separately and is not treated as its own entity by the IRS.

Single Member LLC Tax Rates

How a single member LLC gets taxed is quite different than the way other LLCs are taxed. If you are a single-member LLC, the IRS will disregard the LLC. Instead, you are treated like a sole proprietorship and income from your company is taxed not as a salary and you will have to pay self-employment tax. Income made by the LLC is paid to the single member without Social Security and Medicare tax taken out. Instead, the single-member has to pay this estimated amount as self-employment tax to the IRS over the year. Alternatively, it can be paid when your tax return is filed. This is where the Schedule SE and Schedule C comes in.

Schedule C Form

The IRS will treat your LLC is as either a sole proprietorship or a partnership. As you can guess, if your LLC only has one member, the IRS will treat the LLC as a sole proprietorship (though there is still the option to treat the LLC as a Corporation, in which case Corporate tax rules apply). With more than one member, it is treated as a partnership. As a single member LLC, your tax return must include all profits and losses. To report this, a Schedule C must be filed. The Schedule C form is used by everyone who is self-employed and is not legally set up as a corporation or a partnership.

A Schedule C is not complicated to fill out though there are five parts to it. Part 1 is where all the business income is calculated to figure out the LLC’s gross profit. Part 2 is where the net profit (or loss) is calculated by subtracting all business expenses from the gross profit number in Part 1. This number (net profit) is what needs to be reported in your tax return. Parts 3 and 5 need only to be filled out if your company purchases inventory or if there are other business expenses that you can claim that are not listed in Part 2. Part 4 is where you calculate the mileage you used your car for in connection with business purposes.

Schedule C-EZ

The IRS provides a simpler way for small businesses to file a Schedule C, using a shorter form called the Schedule C-EZ. This form can be used if your expenses are under $5,000, you do not have any inventory or employees and are not deducting the cost or depreciation of your home as an office, you aren’t reporting a loss and you are only operating one business. One of the major advantages, and ways it is simpler, is that expenses are reported on one line and do not need to be broken down in to categories, such as rent and marketing, as required in the regular Schedule C. It’s basically the Schedule C minus with only parts 1 and 2. Be careful, as not fulfilling every single requirement means you must file a Schedule C. Also qualifying to file a Schedule C-EZ one year does not automatically mean you are qualified to file it in a subsequent years. Every year you must evaluate whether or not your business satisfies all the requirements.

Schedule SE

The IRS imposes a self-employment tax at a rate of 15.3% of up to 92.35% of your net earnings from self-employment. While this might seem to be excessive, bear in mind that half of the amount of your self-employment taxes can be deducted as a business expense on your federal taxes.

Husband & Wife Owned LLC

As a general rule, an LLC that is owned by a husband and wife is treated by the IRS as a partnership for tax purposes (again, unless the LLC elects to be treated as a Corporation), since the company is owned by two people, not by one entity. However, depending on the state where the husband and wife reside, and if the LLC is a “qualified entity,” the LLC may be entitled to be treated as a sole proprietorship and have the LLC disregarded for tax purposes.

If the husband and wife live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), then there is an option to have the LLC treated a s a sole proprietorship but in order to do so, must be a “qualified entity.” A qualified entity must only be owned by the husband and wife under the laws of a community property state with no other person other than the spouse considered an owner and the business is not treated as a corporation. If your LLC meets these qualifications, then you can file taxes as stated above for single member LLCs.

Multiple Member

An ordinary, non-single member LLC is taxed by the IRS as though the LLC is a separate entity where the income of the LLC is passed through the company entity and goes through the members of the LLC. The LLC is the “pass through” entity because the LLC itself does not have to pay taxes. Therefore, the LLC does not have to file a separate tax return. However, the members do have to pay taxes themselves. LLCs with multiple members are treated by the IRS as a partnership. Each member of the LLC will have to file their own taxes on their share of the profits, but not on a business tax return – on their own personal tax return. The LLC does not file a separate tax return. Form 1065 (U.S. Return of Partnership Income) is used by the IRS additionally for reporting the income and deductions of each partner as well as other general information regarding the LLC. If the LLC elects to file as a corporation, then a form 8832 must be filed, rather than the Form 1065.