LLC Tax Guide for Beginners: How to Do Taxes For Your LLC

There are a million different reasons why people start businesses. Maybe you started yours because you were passionate about making a particular product or providing a certain service. Maybe you just wanted the satisfaction that comes from running your own team and creating your own brand.

Very few people get into business for the joy of paying corporate taxes. 

In fact, filing business taxes is probably one of the least rewarding parts of entrepreneurship. The silver lining is that certain business structures can make tax season a little easier to navigate. That’s certainly true of the Limited Liability Company (LLC).

Whether you start an LLC in Texas, Rhode Island, or anywhere else, you’ll enjoy certain tax benefits. Most notably, an LLC allows you to avoid paying taxes at the corporate rate. 

Instead, your LLC enjoys what’s called pass-through taxation. This means the profits and losses “pass through” the business and is reported on your personal tax returns (at your personal tax bracket).

So what does that mean for tax filing season? Here’s a rundown.

The Default Designations by the IRS

The easiest way to think of this is that the IRS “ignores” LLCs for tax purposes. This is because there is no “LLC tax classification” status with the IRS.

Instead, the IRS will treat your LLC (depending on how many owners there are) like existing business tax classifications:

• Sole Proprietorship
• Partnership

So if you have a Single-Member LLC, this is by default treated by the IRS like a Sole Proprietorship for tax purposes.

And if you have a Multi-Member LLC, this is by default treated by the IRS like a Partnership for tax purposes.

Noticed I bolded “like a”. 

This means that as far as state law (and the liability protection benefits LLCs provide), all remain intact. 

It’s just the IRS treats LLCs like other types of existing tax classifications to make taxes easier. 

The above is what’s known as default classification. Meaning, they occur automatically. However, there are also elective classifications. Meaning, instead of the default treatment, you can request for your LLC to be taxed like a Corporation. And there are two types of corporate taxation.

An LLC can alternatively elect to be taxed like a:

• C-Corporation
• S-Corporation

An LLC taxed as a C-Corporation is very rare, and not recommended for most small business owners. Some large employers with lots of healthcare fringe benefits may find some benefits, but again, for most, you’ll end up paying more in taxes.

As for an LLC taxed as an S-Corporation, while it’s more common than C-Corporation taxation, it doesn’t mean it’s a good fit for all business owners. The main benefit of having an LLC taxed like an S-Corporation is that you can save money on self-employment taxes. 

However, S-Corporations are more complicated to set up and more complicated to maintain. And they cost more. They are only worth exploring with a qualified accountant once there is at least $70,000 of net income (profit) per LLC owner. Otherwise, the cost and headache of setting them up and maintaining them are not worth the self-employment tax savings.

What Tax Designations Mean for Your LLC

So what do each of these designations mean for your LLC come tax season? Here’s a quick summary of each tax designation.

LLC taxed as a Sole Proprietorship

If you have a Single-Member LLC, the IRS will tax your LLC like a Sole Proprietorship.  

There is no “LLC return” to file with the IRS. Instead, the LLC’s profits, losses, credits, and deductions will be reported on the owner’s 1040 tax return.

Most small business owners report their LLC taxes on a Schedule C. However, if you have rental real estate income, that’ll be reported on Schedule E. And if you have other types of capital gains, those will be reported on Schedule D. 

There may certainly be more forms required for your personal tax return, so we recommend hiring an accountant.

LLC taxed as Partnership

If you have a Multi-Member LLC, the IRS will tax your LLC like a Partnership.

And unlike an LLC taxed as a Sole Proprietorship, where the LLC does not file its own return, for an LLC taxed as a Partnership, there is an entity-level return. It’s the 1065 Partnership Return.

And along with the 1065 Return, you’ll also need to issue K-1s to all the LLC Members (owners). The K-1 shows each owner’s share of the profits or losses.

Now, there are no taxes due with the 1065 Return. It’s just an “informational return”.

Instead, each owner will pay their own taxes (at their own tax bracket) based on their share of the LLC’s income, which is reported on the K-1.

LLC taxed as an S-Corporation

For LLCs with established profits, it might be worth evaluating the pros and cons of S-Corporation (aka S-Corp) treatment with a qualified accountant.

The pro of an LLC/S-Corp is that you can save money on self-employment taxes.

The cons of an LLC/S-Corp are that they cost money to set up and maintain. And you need to run payroll, file quarterly payroll returns (federal and state), keep accurate books and a balance sheet, and you should hire an accountant to file your corporate tax return (Form 1120S, K-1s for shareholders/owners, and any additional Schedules).

LLC taxed as a C-Corporation

This type of tax treatment isn’t common and is not recommended for small business owners.

This is because an LLC taxed as a C-Corporation will pay double taxes. Meaning, the LLC will pay taxes at the corporate rate, and then the owners pay taxes again at their personal tax bracket.

An LLC/C-Corp may only be worth exploring if a company is looking to raise money, go public, or has large healthcare expenses.

Which Option is Best for You?

For the vast majority of people, leaving their LLC in the default tax status is easiest and best.

This means for Single-Member LLCs, they’ll be treated as Sole Proprietorships for tax purposes.

And for Multi-Member LLCs, they’ll be treated as Partnerships for tax purposes.

Once an LLC begins to make a consistent profit, you can explore the S-Corp election with a qualified accountant. And while they do cost more money to set up and maintain, you can save a few thousand dollars (or more) on self-employment taxes. The tax savings aren’t worth the costs though until the LLC is making around $70,000 in net income (profit) per LLC owner.

And for most people, you can just skip over having your LLC taxed as a C-Corporation. It rarely makes sense and it may only be a fit for very large businesses.

Of course, we recommend speaking with an accountant (or a few) to see which tax classification is right for your LLC.

Author Bio

Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing.