Navigating LLC Taxes: A Comprehensive Tax Resource for Business Owners
While forming an LLC can help protect entrepreneurs from personal liability for debts owed by the business, navigating LLC taxes can complicate owners’ individual tax returns and business operations. Fortunately, understanding the requirements and tax-saving techniques available to LLCs can help reduce your tax liability and overhead.
What is an LLC?
A limited liability company (LLC) is a business structure in the United States that protects its owners, known as members, from personal liability for the company’s debts and liabilities. LLCs appeal to many entrepreneurs because they combine the protection of a corporation with the flexibility and simplicity of a partnership or sole proprietorship.
Introduction to LLC Taxes
LLCs are considered pass-through or disregarded entities, meaning they are exempt from direct taxation. Instead, profits are passed through to the LLC’s owners, who then pay taxes on the earnings received from the business.
LLC taxes come in several forms. LLC members must pay self-employment taxes in addition to federal, state, and local income taxes. Depending on the type of business, LLCs may also be required to remit payroll taxes for employees and sales taxes in the states where they do business.
LLC Filing: The Basics
How LLCs are taxed depends on the number of members and the tax treatment elected. At a high level, there are four different ways for LLCs to be taxed: as a sole proprietorship, as a partnership, as an S-Corp, or as a C-Corp. Read on to learn more about each tax treatment.
| Entity Type | Tax Treatment | Tax Rate |
|---|---|---|
| Single-member LLC | Sole proprietorship | Individual tax rate |
| Multiple-member LLC | Partnership | Individual tax rate for each |
| LLC taxed as an S-Corp | S-Corp | Individual tax rate |
| LLC taxed as a C-Corp | C-Corp | Corporate tax rate for the entity; Individual tax rate for shareholders |
The Different Types of LLCs and Their Tax Implications
In most cases, the tax treatment of an LLC is determined by whether the organization has a single member or multiple members.
Single-Member LLC Taxes
By default, the IRS treats single-member LLC taxes as a pass-through entity. Owners of single-member LLCs report business income on their personal tax returns in the same manner a sole proprietor would.
Multi-Member LLC Taxes
Like single-member LLCs, the IRS treats multi-member LLCs as disregarded entities by default. This means that multi-member LLCs pay taxes the same way partnerships do. Each LLC member pays taxes on a portion of the business’s earnings according to their ownership stake. Members also claim tax credits and deductions for business expenses in proportion to their ownership stake.
Electing a Corporate Tax Status for Your LLC
While being treated as a disregarded entity is the default for LLC taxation, LLCs can elect to be taxed as an S-corporation or a C-corporation for tax purposes by filing Form 2553 or Form 8832, respectively. It is important to note that electing to treat your LLC as an S-Corp or C-Corp for tax purposes has no impact on its legal status. From a legal standpoint, your business will still function as an LLC.
LLC Taxed as an S-Corp
An LLC may elect to be taxed as an S-Corp by filing Form 2553. For new entities, Form 2553 must be filed no more than two months and 15 days after the beginning of the tax year in which the election to S-Corp is to take effect. For existing entities, it can be filed anytime during the prior tax year or by the 15th of the third month of the tax year in which the election is to take effect.
S-corporations continue to be treated as pass-through entities. However, different tax rules apply to salaries and distributions. For instance, the members of an LLC taxed as an S-Corp are considered employees, which means they are not responsible for paying the full 15.3% self-employment taxes (Social Security representing 12.4% and Medicare representing 2.9%). Instead, the business is required to set up a payroll to pay each member as an employee. Then, the LLC pays half of the Social Security and Medicare amounts in payroll taxes, while member employees pay the other half in the form of withholdings from their paychecks.
LLC Taxed as a C-Corp
Alternatively, an LLC can choose to give up its disregarded status and be treated as a C-Corp for tax purposes by filing Form 8832. An eligible business can file it at any time. Filing depends on when the C-corporation wants its new tax classification to take effect. The date of the new tax classification must not be more than 75 days after the date on which the form is filed or more than 12 months after filing. If the new classification is to take effect upon filing, do not fill out Question #8 of Form 8832.
C-corporations are required to file a separate tax return for the entity and pay LLC taxes at the corporate rate. LLC members must then also report distributed earnings from the business on their individual tax returns, resulting in a form of double taxation. Alternately, members can pay themselves through payroll, similar to an S-Corp, thereby reducing the amount of taxable income subject to double taxation as dividends.
LLC Taxation Rates and How They Impact Your Business
Federal Income Tax Rates for LLCs
Most LLC tax rates are the same as individual tax rates, but there are some exceptions. By default, LLCs are treated as pass-through entities that are exempt from filing taxes directly with the IRS. Business earnings pass to LLC owners, who are taxed on their share of the LLC’s income according to the standard marginal income tax brackets for individuals.
The U.S. has a progressive tax system, which means that a person’s taxable income can be taxed at different rates. The highest tax rate to which an individual’s income is subject is called the marginal tax rate.
For 2023, the federal individual income tax brackets are as follows:
| Tax Rate | Taxable Income (Single Filers) | Taxed Owed | Taxable Income (Married Filing Jointly) | Taxes Owed |
| 10% | $0 to $11,000 | 10% of taxable income | $0 to $22,000 | 10% of taxable income |
| 12% | $11,001 to $44,725 | $1,100 plus 12% of the amount over $11,000 | $22,001 to $89,450 | $2,200 plus 12% of the amount over $22,000 |
| 22% | $44,726 to $95,375 | $5,147 plus 22% of the amount over $44,725 | $89,451 to $190,750 | $10,294 plus 22% of the amount over $89,450 |
| 24% | $95,376 to $182,100 | $16,290 plus 24% of the amount over $95,375. | $190,751 to $364,200 | $32,580 plus 24% of the amount over $190,750 |
| 32% | $182,101 to $231,250 | $37,104 plus 32% of the amount over $182,100 | $364,201 to $462,500 | $74,208 plus 32% of the amount over $364,200 |
| 35% | $231,251 to $578,125 | $52,832 plus 35% of the amount over $231,250 | $462,501 to $693,750 | $105,664 plus 35% of the amount over $462,500 |
| 37% | $578,126 or more | $174,238.25 plus 37% of the amount over $578,125 | $693,751 or more | $186,601.50 + 37% of the amount over $693,750 |
As shown in the table above, an individual’s taxable income may be taxed at multiple rates unless their income falls solely within the lowest bracket of 10%. For instance, falling into the second tax bracket (12%) does not mean the individual’s total income is taxed at a marginal rate of 12%. The marginal rate is the highest tax rate at which a person’s income is taxed.
In general, non-resident aliens are subject to U.S. income tax only on income derived from sources within the U.S. They are subject to two different rates: one for effectively connected income (ECI) and another for fixed or determinable, annual or periodic (FDAP) income that is not effectively connected income. The ECI of non-resident aliens, less any allowable deductions (reported on the first page of Form 1040NR), is taxed at the same progressive rates that apply to resident aliens and U.S. citizens.
Non-residents may refer to the Tax Table in the Instructions for Form 1040. Filers of Form 1040-NR only have three filing status options: single, married filing separately, or qualifying surviving spouse; they cannot use the amounts in the column for Head of a Household. For FDAP income or gains (reported on Schedule NEC on page 4) that are not effectively connected income, a flat rate of 30% is applied unless a tax treaty specifies a lower rate. The tax rate is applied to the gross FDAP income since deductions and netting are prohibited against FDAP income.
Non-residents cannot claim the standard deduction and tax credits available to citizens and resident aliens. In effect, non-resident aliens pay more taxes than resident aliens, as the amount of income on which non-resident aliens are taxed is greater than residents and U.S. citizens, whose tax bases are reduced. Non-resident aliens must use Form 1040 R to report their U.S.-sourced income to the IRS.
Even though the vast majority of limited liability companies are taxed as pass-through entities, members may elect to have their LLC taxed as a corporation. In these instances, LLCs will be taxed at a flat rate of 21%.
Note: U.S. Sole Proprietors and non-resident aliens are required to file their tax reports using Form 1040 and Form 1040-NR, respectively. However, we do not handle the filing of individual tax returns.
State Income Tax Rates for LLCs
Generally, states apply the same tax rate to LLC income as individual income. Tax laws, rates, procedures, and forms vary widely from state to state. Some states charge a flat rate while others use a progressive system, with higher tax rates on higher income levels similar to the federal income tax. LLC state income tax rates can range from 0% to 12.3%.
As is the case at the federal level, the majority of states treat LLCs as pass-through entities by default and do not require them to file state tax returns. In these instances, LLC members pay taxes on the business’s profits according to the state’s individual income tax rates. However, if the LLC has opted to be taxed as a C-Corp, the business must file and pay taxes at the state’s corporate rate.
Fortunately, there are some states in which entrepreneurs can simplify LLC filing and avoid paying state income taxes altogether. Nine states have no state tax on individual earned income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. In addition, six states do not levy a corporate income tax: Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming.
Self-Employment Tax Rates for LLC Owners
In addition to income taxes, the majority of LLC members must pay self-employment taxes to help fund Medicare and Social Security. Typically, the 15.3% tax rate for Medicare and Social Security is split between the employer and the employee. However, since LLC members are not considered employees of disregarded entities, they must pay the full 15.3% in self-employment taxes.
Alternatively, if the LLC is taxed as a corporation, the business will pay half of the Medicare and Social Security taxes, while the members will pay the remaining half through payroll tax withholdings. However, the dividend distributions to the members are not subject to self-employment tax. This is one of the benefits of electing to tax your LLC as an S-Corp, which is still a disregarded entity but allows members to split the cost of Social Security and Medicare taxes between the business and the individual.
How to File Business Taxes for Your LLC
Knowing the tax requirements for your LLC can help simplify and speed up the filing process. To maximize your savings, choose the proper tax forms for your LLC, report its income and expenses correctly, claim all applicable tax credits and deductions, and file on time.
Choosing the Right Tax Forms for Your LLC
The forms you need to file for your LLC taxes depend on the type of entity and the tax treatment you have elected. Because single-member LLCs have the same tax treatment as sole proprietorships, you will use Schedule C of Form 1040 to report your business income and expenses. Multi-member LLCs, on the other hand, must file Form 1065, the U.S. Return of Partnership Income. LLCs with multiple members must also provide a Form K-1 for each partner to report their ownership share.
Below is a list of the tax forms that each type of LLC must file with the IRS:
| Entity Type | Federal Tax Forms |
| Single-member LLC | Form 1040: U.S. Individual Income Tax Return Schedule C (Form 1040): Profit or Loss from Business (Sole Proprietorship) |
| Multiple-member LLC | Form 1065: U.S. Return of Partnership Income Schedule K-1 (Form 1065): Partner’s Share of Income, Deductions, Credits, etc. |
| LLC taxed as an S-Corp | Form 2553: Election by a Small Business CorporationForm 1120S: U.S. Income Tax Return for an S-corporation |
| LLC taxed as a C-Corp | Form 8832: Entity Classification ElectionForm 1120: U.S. Corporation Income Tax Return |
Reporting Your LLC’s Income and Expenses
LLCs can deduct business expenses from taxable income. These deductions can help reduce or even eliminate the tax liability from the business’s income. Members of LLCs that function as pass-through entities must report their business income and expenses on their personal tax returns. Additionally, if the business records a loss during the tax year, members can deduct the loss from their personal income.
Claiming Tax Deductions and Credits for Your LLC
LLCs can claim tax credits and deductions that other corporate entities cannot. The Qualified Business Income (QBI) deduction, which was introduced in 2017, is one example. The QBI allows small business owners to deduct up to 20% of their business income when filing LLC taxes. Unfortunately, this tax deduction may not be around forever. The QBI will be retired in 2025 unless Congress extends this tax benefit.
LLCs can also deduct a variety of business expenses, including:
- Health and disability insurance
- Office supplies
- Phone and internet services
- Home office
- Business vehicles and mileage
- Charitable services
Understanding LLC Owners Self-Employment Taxes
Most LLC members pay self-employment taxes because they are not considered employees. Self-employment taxes, which are paid directly to the IRS, include contributions to Social Security and Medicare. Typically, the combined tax rate is 15.3%, though some LLC members may be required to pay a higher rate.
The self-employment tax rates for 2023/2024 are as follows:
- Social Security taxes: 12.4% on income up to $160,200
- Medicare taxes: 2.9% on all income, plus 0.9% on anything over $200,000
Filing State and Local Taxes for Your LLC
Most states and localities tax LLCs similarly to the IRS. LLCs are usually pass-through entities that are not required to file corporate tax returns unless they elect to be taxed as corporations. However, there are some key differences to know. Generally, LLCs pay state or local taxes based on the amount of business they conduct within their jurisdictions. This means that LLCs must file tax returns in multiple states. To learn more about where your business needs to file, check out our state income tax guide.
Each state or locality has its own tax forms for individuals, partnerships, and corporations, so it’s essential to check the requirements where your LLC does business. Some states also charge separate LLC taxes, which can be a flat or graduated annual fee.
Filing Deadlines for LLC Taxes
While the tax forms for LLCs vary, most will need to file a return on or before March 15 or April 15. If a tax deadline falls on a Saturday, Sunday, or federal holiday, the due date will be moved to the next business day.
| Tax Form | Filing Deadline |
| Form 1040: U.S. Individual Income Tax Return | April 15 |
| Schedule C (Form 1040): Profit or Loss from Business (Sole Proprietorship) | April 15 |
| Form 1065: U.S. Return of Partnership Income | March 15 |
| Schedule K-1 (Form 1065): Partner’s Share of Income, Deductions, Credits, etc. | March 15 |
| Form 2553: Election by a Small Business Corporation | For new entities, no more than two months and 15 days after the beginning of the tax year, the election to S-Corp is to take effect. For existing entities, anytime during the prior tax year or by the 15th of the third month of the tax year in which the election is to take effect. |
| Form 1120S: U.S. Income Tax Return for an S-corporation | March 15 |
| Form 8832: Entity Classification Election | Form 8832 is not mandatory; there is no deadline. An eligible business can file it at any time. Filing depends on when the C-corporation wants its new tax classification to take effect. The date of the new tax classification must not be more than 75 days after the date on which the form is filed or more than 12 months after filing. If the new classification is to take effect upon filing, do not fill out Question #8 of Form 8832. |
| Form 1120: U.S. Corporation Income Tax Return | April 15 |
5 Tips for Managing Your LLC Taxes
Understanding the tax and compliance rules associated with your entity’s tax classification is essential for managing LLC taxes efficiently. To meet your tax obligations, avoid penalties, and remain in good standing, you must consider not only federal taxes but also applicable state and local taxes in your home state, locality, and other states where your business generates revenue.
In other words, your tax obligations and requirements will vary depending on your tax classification, home state, and local jurisdiction, among other factors. Remember that each state has its own set of tax laws, taxes, and fees, as well as its own procedures and forms. Taxes may vary from state to state and even between localities within a state.
Here are the five key techniques to best manage your LLC taxes:
1. Understand the Requirements
Understanding the tax requirements for LLCs is one of the easiest strategies for minimizing tax liability. The penalties and interest fees associated with failing to file or reporting business income incorrectly can be significant. Knowing your obligations can help you and your business avoid a large tax bill.
2. Maintaining Your LLC’s Financial Records
Inaccurate bookkeeping can increase your risk of an IRS audit and raise your tax liability. Maintaining complete, well-organized tax records can help your LLC file on time, qualify for tax credits, and claim the maximum tax deductions for business expenses.
3. File on Time to Avoid Interest and Penalties
Penalties and interest for late filings can pile up quickly for LLCs. Even if you are a startup with zero tax liability or operating at a loss, there are still penalties for failing to file all the proper tax forms by the deadline. Filing on time is the best way to avoid interest and penalties.
4. Take Advantage of Tax Deductions and Credits
One advantage of operating an LLC is the ability to claim tax deductions and credits unavailable to other business structures. Knowing the allowable deductions, tax credits, and special tax treaties that will legally and significantly reduce your LLC taxes will allow you to save some money. Make sure to take advantage of these tax savings by familiarizing yourself with the eligibility requirements and keeping detailed records of all qualifying expenses.
5. Consult With Cleer on Your Accounting
Even when you know the basics, filing LLC taxes can be time-consuming and complex. Working with Cleer Tax can save you time and money by ensuring that you and your business meet all the requirements and seize every opportunity to reduce your tax bill.
How Cleer Tax Can Help
Cleer Tax provides a start-to-finish tax solution for LLCs that takes care of all your tax planning, bookkeeping, and filing requirements. Our accountants have helped more than 5,000 small business owners navigate their tax situations and identify additional cost-saving opportunities. You can purchase your tax package here, or if you are looking for a solution to your bookkeeping – we also offer all-inclusive bookkeeping packages, which include your monthly statements plus your federal and state tax returns.
Have additional questions? Book a consultation with one of our tax experts. If you have further questions or need assistance, feel free to contact us.
