When deciding on the best business entity for your company, the way each option will affect how you pay taxes is a vital consideration. For many business owners, LLCs offer unique tax benefits compared to alternative corporate entities.
Understanding how different LLCs are taxed, how to calculate LLC tax rates, and how to file tax returns as an LLC will allow you to take full advantage of the benefits they provide.
In this guide you’ll learn more about the different types of LLCs and how they are taxed, as well as:
What is an LLC and how are LLCs taxed?
A limited liability company is a business structure that combines the benefits of a sole proprietorship with the protections typically only offered to a corporation.
One of the advantages afforded to LLCs is that they are classified as pass-through entities for federal income tax purposes by the Internal Revenue Service (IRS). Pass-through LLCs don’t have to pay taxes on their business income.
Instead, members (the LLC’s owners) only pay taxes on their share of the business entity’s profit as part of their personal income tax returns.
Depending on the type of LLC you own and the state in which it is registered, you may be taxed differently.
Single member LLC
By default, the IRS considers any single member LLC a disregarded entity and a sole proprietorship for federal income tax purposes.
If you own a single-member LLC, you won’t have to file a separate tax return reporting your business expenses or income. Instead, you can simply claim the profits from your LLC on your personal income tax form (Form 1040) via Schedule C.
Unless your LLC is set up for passive activity like real estate investment, you’ll be classified as self-employed by the IRS. This classification means you’ll also have to pay self-employment taxes on your profits by filing Schedule SE.
Multi-member LLC
Unless specified otherwise, the IRS treats multi-member LLCs as partnerships for tax purposes. Similar to one-member LLCs, this means your business itself doesn’t pay any taxes or file tax returns of its own.
Instead, a multi-member LLC reports its business income and expenses on a partnership income tax return (Form 1065). Each member of the LLC then pays individual taxes on the share of profits they receive and report on their personal income tax returns.
Like a single-member LLC, owners of a multi-member LLC also have to pay self-employment taxes on their share of the profit, unless the LLC is set up for passive activity.
LLC taxed as an S corp
LLCs can opt to be treated as an S corp for federal tax purposes by submitting Form 2553 to the IRS. Like standard LLC taxation, an S corp is considered a pass-through entity and does not have to pay corporate income tax on its profits. Instead, members are taxed according to the share of the company’s profits they receive and their individual tax bracket. Learn more about S corp tax benefits.
However, unlike a sole proprietorship or partnership, members of an LLC taxed as an S corp do not have to pay self-employment tax on the profits they receive.
LLC taxed as a C corp
Although uncommon, LLCs can choose to be taxed as a C corp for federal tax purposes by filing Form 8832 with the IRS. The company will subsequently have to pay corporate income tax while its members also have to pay individual income tax on their capital gains.
As a result of this double taxation, members of an LLC taxed as a C corp do not have to pay self-employment tax on the share of profits they receive.
What is the LLC business tax rate?
Except for LLCs taxed as C corps, most LLCs aren’t subject to paying corporate tax on their own. Instead, their business taxes are passed through and included in the personal income tax of the LLC members.
As a result, there is no single benchmark LLC business tax rate across the board.
The taxes you pay as a member of an LLC vary depending on the following factors:
- The type of LLC you own
- The state in which it is registered
- How it is classified for tax purposes
- The type of business activities it is used for
Federal income tax rates for personal income
As taxes for an LLC are passed through to its members, the federal income tax rate effectively becomes the functional tax rate for LLC owners.
Here are the most recent federal income tax rates and brackets for taxes due in April 2023:
However, federal income tax isn’t all you need to file for and pay as an LLC owner.
Depending on the factors mentioned above, you may have to also pay:
- State income tax or fees
- Self-employment tax
- Payroll tax
- Sales tax
State income tax on LLCs
In most cases, states tax LLCs the same way the IRS does – by passing the taxes on to LLC members. However, some states do require LLCs to file state income tax returns and pay an annual tax or fee.
One example of this is California, where LLCs that make more than $250,000 a year are subject to state taxes on gross receipts, ranging from $900 to $11,790. California-based LLCs also pay an annual fee, or franchise tax, of $800 that’s not based on income and is due whether the LLC turned a profit or not.
These additional fees can be avoided by electing to be taxed as a corporation.
Additional taxes paid by LLCs and members
Besides federal and state taxes, LLCs and their members may be subject to additional taxes, including:
- Self-employment tax: LLC members are considered self-employed by the IRS unless the business is set up for passive activity like real estate investment. As a result, LLC members must file for and pay self-employment taxes (including social security and Medicare taxes) using Schedule SE. The current self-employment tax rate is 15.3% of your net earnings from your LLC.
- Payroll tax: LLCs with employees must collect and pay payroll taxes, including unemployment, social security, and Medicare taxes. As an employer, you are responsible for paying unemployment taxes every quarter. Both you and your employees share in the payment of Medicare and social security taxes, which are done on a monthly or semiweekly basis.
- Sales tax: An LLC that sells taxable goods or services must collect sales tax from its customers, and pay that tax to the relevant state or local agency. Whether or not the goods or services you provide are taxable varies according to the state in which your LLC is registered and does business.
How to prepare and file taxes as an LLC
Doing taxes as a small business or LLC doesn’t have to be a stressful process. Using smart accounting software and taking advantage of e-filing are just some of the ways you can make your life easier once tax season comes around.
Here are five simple steps to prepare and file taxes as an LLC.
1. Monitor business spending throughout the tax year
Monitoring and recording business expenses throughout the tax year is crucial to accurately filing taxes as an LLC. Using an automated expense management platform like Ramp gives you instant, easy access to organized business expense records by:
- Automatically collecting and matching receipts to transactions made on connected corporate cards.
- Eliminating the need for manual data entry and the human error that often accompanies it.
- Instantly sorting business expenses by category, department, and employee.
- Seamlessly integrating with your accounting and tax-filing software to update tax documents on a rolling basis.
On top of making filing taxes as an LLC a breeze, Ramp supplies unlimited corporate cards so you never have to use your personal card for business again.
Not only does using a business credit card affect your personal credit and help build business credit, but all business-related fees and expenses are tax-deductible. As a result, using a business credit card could lower your tax bill as an LLC member.
2. Collect your financial records
The biggest mistake most LLC and small business owners make is putting off collecting and organizing financial records until just a few days before the filing deadline. Important documents and information to collect well beforehand include:
- Your taxpayer identification number
- Business and personal bank account statements
- Personal and business credit card statements
- The tax returns your business filed the previous year
- Your business and personal accounting records
3. Identify the right tax forms to file
The type of LLC you own and how it is taxed will determine the forms you need to file with the IRS. The required forms for each LLC type are listed below.
One-member LLC
- Form 1040
- Schedule C
- Schedule SE (conditional)
- Schedule E (conditional)
Multi-member LLC
- Form 1065
- Form 1040
- Schedule K-1
- Schedule SE (conditional)
- Schedule E (conditional)
LLC taxed as an S corp
- Form 1120S
- Form 1040
- Schedule E (conditional)
LLC taxed as a C corp
- Form 1120
- Form 1040
- Form 941
4. Maximize your tax deductions
LLC and small business tax deductions can reduce your taxable income and save your business money in the long term.
Common tax write-offs to remember include:
- Business insurance
- Commercial property rent
- Vehicle expenses
- Office supplies and equipment
- Business meals
- Business travel expenses
- Advertising expenses
5. File your tax returns on time
It’s important to file and pay income tax on time. If you don’t, the IRS can impose stiff penalties for every month they are overdue.
Depending on the type of LLC you own, your tax returns will have varying due dates. Familiarizing yourself with these deadlines will ensure you either meet them or apply for an extension in time.
- One-member LLC: April 15
- Multi-member LLCs, LLCs taxed as S corps, and LLCs taxed as C corps: March 15
Additionally, LLCs with employees may need to file and calculate quarterly taxes to stay on top of employment and unemployment tax payments and avoid penalties for underpaying.
Accurately filing and calculating your taxes as the owner of an LLC allows you to avoid penalties and unlock valuable tax benefits.
LLCs are a great legal structure for small business owners thanks to their liability protection and pass-through taxation. The key to minimizing your tax obligations is to choose a legal structure that works best for you and accurately track your expenses throughout the year.
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The Ramp team is comprised of subject matter experts who are dedicated to helping businesses of all sizes work smarter and faster.
FAQs
Yes. Unless they elect to be taxed as an S corp or C corp, LLC members must pay self-employment tax.
As LLCs are not subject to corporate taxation, they don’t have a standard tax rate. Instead, members pay federal income tax on the profits they receive from the business. The percentage you should save for your taxes as an LLC member, therefore, corresponds to your personal tax rate.
By default, all LLCs and LLCs taxed as S corps are exempt from paying corporate taxes. Simply registering your business as an LLC allows it to avoid business taxes, although each member will still have to pay personal income tax on their share of the profits received.
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