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U.S. state statutes often permit the formation of limited liability companies (LLCs) as a business structure also recognized by the Internal Revenue Service (IRS). Each state can have different rules relevant to LLCs, so check with your state about how to go about forming one of these potentially useful business entities. The IRS provides additional information about LLCs and how they’re taxed.
How to File Taxes for an LLC: Overview
A limited liability company’s owners are known as members. Most states allow single member LLCs that have just one owner, and no maximum number of members exists. Also, the majority of states allow LLC members to be individuals, foreign or domestic entities, corporations and even other LLCs.
In general, banks and insurance companies cannot be set up as LLCs and foreign LLCs can be subject to special rules. It’s important to review relevant federal tax rules for more information before you attempt to file taxes for an LLC.
An LLC’s representatives can elect how the IRS will treat it. When the LLC has multiple owners, taxation choices include treating the LLC as a corporation or a partnership.
If the LLC has only one owner who does not elect to have it treated as a corporation, the IRS then considers it a “disregarded entity” for income tax purposes by default. This means the results for a single member LLC are included on your tax returns, just like a sole proprietorship, although it will still be regarded as a separate entity for employment tax and some excise taxes.
There are six types of entities that LLCs can be elected to be considered as for tax purposes. As an LLC owner, you will use IRS Form 8832 – Entity Classification Election to tell the IRS which of the six possible types yours will fall under:
- Domestic: Corporation, Partnership or Single Owner
- Foreign: Corporation, Partnership or Single Owner
For more information directly from the IRS on how to file tax returns for an LLC, make sure you look over IRS Publication 3402, Taxation of Limited Liability Companies.
Case #1: Steps For A Single Member LLC
If you do not elect to have your LLC treated as a corporation, the sole owner of an LLC must report all of the entity’s profits or losses on the appropriate form and submit it along with your 1040 tax return form.
- Form 1040 Schedule C, Profit or Loss from Business (Sole Proprietorship)
- Form 1040 Schedule E, Supplemental Income or Loss
- Form 1040 Schedule F, Profit or Loss from Farming
An image of the Schedule C form most commonly used for single member LLCs appears below for the 2018 tax year.
When filing federal income taxes, a single-member LLC (considered a “disregarded entity” as described in the previous section) uses its owner’s Social Security number (SSN) or employer identification number (EIN) for all income tax-related returns and reports.
For example, this means that when a disregarded entity LLC owned by an individual needs to provide a W-9 Form, the form should have the LLC owner’s SSN or EIN and not the LLC’s EIN on it.
The LLC’s EIN is only used for some employment and excise tax purposes, so needs an EIN if it has employees or excise tax liabilities, or if it needs to file forms relevant to such purposes. You can apply for an EIN by filing Form SS-4, with the IRS.
“Disregarded entity” single-member LLCs without employees or excise tax liabilities do not need EINs and can use the single owner’s taxpayer identification number (TIN) instead. Nevertheless, if such an entity needs an EIN to open a bank account or is required to have one by state tax law, then the LLC can apply for and get an EIN from the IRS.
Case #2: Steps For A Partnership LLC
The most popular way to file for a multi-member LLC is as a partnership. In this case, an LLC’s profits are reported on every LLC member’s individual tax return. Although each member’s profit share is subject to self-employment tax, the LLC itself does not get taxed on total profits like a corporation does.
When an LLC with multiple members elects to be considered a partnership, the usual partnership tax rules apply, so it needs to file a Form 1065.
Each LLC member shows their pro-rata portion of partnership income, deductions and credits on Schedule K-1 (1065). LLC members who file Partnership Returns generally pay self-employment tax on their portion of partnership earnings.
Case #3: Steps For A Corporation LLC
When an LLC’s members elect to have the entity treated as a corporation by choosing the appropriate classification on Form 8832, the usual corporation tax rules will apply. The LLC should then file Form 1120, U.S. Corporation Income Tax Return, with the IRS. This form is the same as the C corporation income tax return, so no items flow through to a 1040 return.
Alternatively, if an LLC qualifies as and is elected to be an S Corporation by its members, it would instead file Form 1120S, U.S. Income Tax Return for an S Corporation. In that case, the laws that apply to an S Corporation also apply to that LLC, and each owner of the LLC will need to report his share of corporate income, credits and deductions on Schedule K-1 of that form.
Using A Tax Professional Or Service To Maximize Refund
It may make sense for you to consult with a tax professional or hire a tax preparation service to help deal with any complicated tax situations to help minimize your overall tax payout and maximize your opportunity for a refund. You can compare a couple of our favorites below.
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For further information related to the types of tax returns to file for an LLC, as well as how to handle employment taxes and possible pitfalls, check out IRS Publication 3402, Tax Issues for Limited Liability Companies.
Though you can look up tax credits, deductions and file the right paperwork for your LLC, you may not have enough information or knowledge to do so correctly, and this is particularly true for first-time filers.
Keep in mind that you will need to do further research using the links provided above and on this IRS summary page to file your LLC’s tax returns. You might even need to use a tax preparation service or hire a professional tax accountant to do your LLC’s tax filings properly, especially if you do not have any prior experience.