If you’re filing business taxes for a limited liability company (LLC) for the first time, it’s important to understand how your choice in business entity impacts your tax liability and filing process.
Whether you’re a single-member or multi-member LLC, identify the necessary tax forms you need and how to optimize the filing process to gain confidence during tax season.
What Is an LLC? Understanding Taxes for Your Entity
An LLC is formed at the state level, and each one sets their own guidelines and fees. LLCs are legal entities that allow their owners to legally separate the assets and liabilities of the LLC from the personal assets and liabilities of its owners.
The owners of LLCs are called members, and they may include individuals, corporations, other LLCs and foreign entities. Since LLC rules are governed by each state, those considering forming an LLC should contact their state’s corporation commission for details about the qualifications and responsibilities of the entity and its owners.
The Default Tax Designations by the IRS
The IRS automatically classifies LLCs for taxation purposes unless a form is filed selecting an alternative. Single-member LLCs are treated as sole proprietorships by default. LLCs with two or members are treated as partnerships, unless a different designation is made.
A Guide to LLC Types: Taxation, Tax Forms and More
The number of members influences an LLC’s tax structure. The main difference between single and multi-members lies in who pays what kind of income taxes. Single members and partnerships are required to pay self-employment taxes, while multi-members LLCs taxed as corporations must follow distinct corporate tax rules.
Single-Member LLCs
Single-member entities typically file their business tax information on Schedule C and report their profit or loss on Form 1040—the same form filed by other individuals that are employed, unemployed or retired. When business results are reported on Schedule C within an individual tax return, they’re considered a disregarded entity, also called a pass-through entity. This means that their net profit or loss gets passed through to the individual and the entity itself does not pay taxes.
C Corporations
A C corporation will file Form 1120. Your tax return also involves reporting all of your corporate income and expenses.
C corporations pay their own income taxes, separate from their owners—double taxation. This means that profit left after paying corporate-level taxes could be subject to personal income tax when they are distributed to members.
S Corporations
S Corporations are pass-through entities—which means they escape the double-taxation scenario. S corporations file annual tax returns using Form 1120-S.
This form reports the entity’s income, gains, losses, deductions, credits and allocates the profits or losses among each member according to their ownership shares on Schedule K. Members are each sent Schedule K-1 (Form 1065) which details each member’s share of taxable earnings so they can report it on their personal returns.
Choosing the Right Business Structure for Your LLC
Your Limited Liability Company (LLC) could be a sole proprietorship, partnership or corporation. Each option has its unique tax implications, which you may want to change at some point to minimize your tax liability.
Changing Your Tax Classification
The IRS automatically assigns your LLC’s tax structure based on membership. Single-member LLCs are treated like sole proprietors, while multi-members default to partnerships.
You can alter this by filing an IRS Form 8832. For instance, if you’re a single member but want corporate status benefits, submit the form and use the taxation rules that apply to the new entity’s status going forward. S corporations require a separate form and IRS approval.
A change in classification may lead to different tax forms and payments due at various times of the year. So always stay informed about these shifts.
C Corporation vs. S Corporation: What’s The Difference?
If you decide to establish your business as a corporation, it’s essential to understand the distinction between C corporations and S corporations.
Not everyone qualifies, but an S corporation avoids double taxation, unlike C corporations where income taxes apply both at company level and on the shareholders’ personal returns when dividends get distributed. Those wanting to become an S corporation need to file Form 2553, which the IRS will then need to approve before the S corporation rules and benefits are allowed.
Note: When filing business taxes for an LLC for the first time, decisions should never be taken lightly. It’s worth consulting with experts before making critical choices, because they will significantly impact your tax savings.
Steps to File Business Taxes for Your LLC
Review these practical steps for filing business taxes for an LLC for the first time.
1. Identify Your Tax Structure or Corporation Status
Your first step is understanding how your LLC pays taxes. A single-member LLC files taxes like sole proprietors, using Schedule C on their personal income tax return to report profit or loss. If you are part of a multi-member LLC, you can file as partnerships or decide to be taxed as corporations.
If you elect to be taxed as a corporation, know that it’s not automatic. You can elect this status by filing IRS Form 8832. The primary reason an LLC would choose corporate taxation is because it could help avoid self-employment tax obligations while providing access to certain deductions and credits only available at the corporate level.
2. Gather Information and Complete Forms
Once all decisions have been made, start gathering necessary information about your business income and expenses during the year so that everything is in one place when preparing forms.
Remember, every dollar counts towards reducing taxable income. Staying organized helps ensure accurate filing.
3. File and Pay Your Taxes
Of course it is essential that you need to file your forms and pay any owed taxes. The IRS provides an online payment portal for businesses which makes it easy to settle up from the comfort of your own office.
Sorting out your business taxes doesn’t have to be a headache. By taking the right steps, filing taxes for an LLC can be simplified.
Deductions and Credits for LLCs
Your business expenses are necessary to run your company—and they also help lower your tax bill. Most costs that are ordinary and necessary for doing business can be deducted from your profits when it’s time to pay taxes.
A Look at Deductions
Painful startup costs can literally pay off. You’re able to deduct many of your business start-up costs. Consider which costs, from home office space to vehicles, can be written off as deductions on your return.
Tax Credits Are Not Just for Big Businesses.
Tax credits are not only available for big corporations. Tax credits directly reduce what you owe—dollar-for-dollar—so even small businesses should take full advantage of them.
From energy efficiency credits to the Work Opportunity Tax Credit that offers incentives for hiring individuals from certain groups, there are numerous opportunities to reduce your tax bill. Understanding available deductions and credits is key in managing your small business taxes.
Managing Tax Payments and Deadlines for LLCs
Filing taxes for an LLC can be challenging—especially when juggling payment deadlines.
Filing deadlines for LLCs vary based on how you classify your LLC.
- March 15, 2024: Filing deadline for C corporations and single-member LLCs
- April 15, 2024: Filing deadline for partnerships/multi-member LLCs and S corporations
Paying Estimated Taxes
Once you have identified your business structure—sole proprietor, C-corporation or S corporation—you must follow the dates established for that entity type.
The IRS requires businesses to make estimated tax payments if they expect to owe $1,000 or more when their return is filed. If your LLC has had a successful year, you may need to consider making estimated income tax payments. It means you need to think about making estimated income tax payments during the year.
Those who file their LLC taxes as part of their Form 1040 will use Form 1040-ES to understand their estimated tax payment obligations. It will guide you on calculating these estimates based on expected adjusted gross income, taxable income, deductions and credits.
Schedule of Payments
Businesses that file corporate tax returns will make their payments quarterly. When they use a calendar tax year, this is the schedule.
- First Payment: April 15
- Second Payment: June 15
- Third Payment: September 15
- Last Payment: January 15th of the following year
If these dates fall over weekends or holidays, the due dates move to the next working day.
Making Tax Payments Online
Making payments online is recommended and often required. Payments to the IRS are made through the EFTPS (Electronic Federal Tax Payment System). Timely payment will avoid penalties and interest expenses.
File Your Taxes Effortlessly With Expert Support
Filing business taxes for an LLC for the first time is best done with some early preparation and research. Different tax structures—from sole proprietorships to corporations—influence your tax setup, and changing your IRS classification is possible if another structure becomes more beneficial. Each IRS form, deduction and credit will help you meet your tax obligations and minimize your obligations.
If you need guidance in preparing your tax returns, paying estimated taxes or optimizing your deductions, engage a Paro fractional tax expert. Our CPAs and certified tax preparers can help you streamline your tax preparation, advise on important tax matters and clean up tax issues with the IRS. Get matched with an expert quickly and hit the ground running.
