How are LLCs taxed

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How are LLCs taxed?

For federal taxes with the IRS, there is no “LLC taxation” class. LLCs are taxed like existing businesses. The 4 business types are:

  • Sole Proprietorship
  • Partnership
  • C-Corporation
  • S-Corporation

LLC Default Tax Classification

Unless a different tax election is requested with the IRS, they will tax your LLC based on the number of members (owners) your LLC has.

An LLC with 1 owner is called a single-member LLC, and the IRS taxes single-member LLCs like a Sole Proprietorship.

An LLC with 2 or more owners is called a multi-member LLC, and the IRS taxes multi-member LLCs like a Partnership.

Both Sole Proprietorship and Partnership taxation are “pass-through”, meaning the business profits, losses, credits, and deductions will flow through to the personal tax return of each member.

An LLC taxed as a Partnership must also file a 1065 partnership return and issue K-1s to the LLC owners.

An LLC can also elect to be taxed as an S-Corporation or a C-Corporation. We’ll discuss these below.

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LLC Disregarded Entity

You’ll also hear the term “LLC Disregarded Entity” and wonder what this means.

The term “disregarded entity” is only used by the IRS and applies to single-member LLCs (which have not elected to be taxed as a C-Corporation or S-Corporation).

When the IRS “disregards” an LLC, it means that, although the LLC and it’s owner are separate entities (for liability purposes), the IRS “disregards” them and just taxes the LLC however its owner is taxed. The IRS treats the owner and the LLC as one and the same.

Don’t worry though, this doesn’t affect the asset protection provided by your LLC. For liability purposes, your personal assets will still remain protected.

If the single-member LLC is owned by a person, the disregarded LLC is taxed like a Sole Proprietorship and the owner will report the LLC’s activities on either a Schedule C, Schedule E, and/or a Schedule F.

If a single-member LLC is owned by another company, the disregarded LLC’s activities should be reported on the owner’s personal tax return and marked as a division of the existing company.

Husband and Wife LLC Tax Treatment

By default, the IRS taxes a Husband and Wife LLC as a Partnership just like Multi-Member LLCs. However, they can also elect to be taxed as a Qualified Joint Venture instead.

As a Qualified Joint Venture, the Husband and Wife LLC will be taxed by the IRS as a “single unit”. The spouses only need to file one return, which translates to increased tax savings, reduced accounting fees, record-keeping and other paperwork.

Also, under a Qualified Joint Venture, the husband and wife can get extra credit for social security and Medicare without paying additional taxes.

Very Important Note: Only Husband and Wife LLCs formed in “Community Property” states are eligible to be taxed as Qualified Joint Ventures. These states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

There are additional requirements and restrictions for the Qualified Joint Venture LLC. For more information, please see this lesson: Qualified Joint Venture.

LLC Taxed as Sole Proprietorship

This is the default IRS tax classification for single-member LLCs.

You don’t need to file anything with the IRS in order to make this election.

For federal tax purposes, the profits and losses of the LLC “flow through” to the owner’s individual personal income return (Form 1040).

LLC Taxed as a Partnership

This is the default IRS tax classification for multi-member LLCs.

You do not need to file anything with the IRS in order to make this election. For federal tax purposes, the profits and losses of the LLC “flow through” to the owner’s individual personal income return (Form 1040).

The LLC must also file a 1065 partnership return as well as provide K-1s to each of the LLC’s members.

LLC Taxed as an S-Corporation

This section is written in the context of single-member LLCs taxed as an S-Corp (as it’s easier to understand), but the same concept applies to multi-member LLCs taxed as an S-Corp.

An LLC doesn’t need to keep its default tax classification with the IRS. If an LLC would like to be taxed as an S-Corporation, it must file Form 2553.

(related article: instructions for LLC taxed as S-Corp)

The biggest advantage of a single-member LLC taxed as an S-Corp is how the owner will pay self-employment taxes (social security and medicare taxes).

The owner of an LLC taxed as a Sole Proprietorship will pay self-employment taxes on all profits in the company. For simplicity, self-employment taxes are 15.3% of net income (income after expenses). So if a single-member LLC has $100,000 in net income, the owner will pay $15,300 in self-employment tax.

With an LLC taxed as an S-Corp, the owner also becomes an employee of the company and must take a reasonable salary. That reasonable salary is subject to the 15.3% self-employment tax, but the leftover profits (called distributions) are not subject to self-employment taxes.

So for this example, if the LLC has $100,000 in net income, but the owner takes a $60,000 salary, the owner will only pay $9,180 in self-employment tax ($60,000 x 15.3%). The remaining $40,000 is not subject to self-employment tax (for a savings of $6,120).

Now, it’s not all pure tax savings. The LLC owner will incur additional expenses being taxed as an S-Corporation. These include payroll processing, payroll tax returns, additional bookkeeping, accounting fees, and filing a 1120S corporate tax return. These expenses can range from $1,500 to $2,500 so there will usually still be self-employment tax savings for LLCs with net income of at least $75,000 to $80,000. Of course, the higher your profits, the higher your tax savings.

There are additional advantages and disadvantages not covered in this brief overview so make sure to speak to your accountant before making any changes to your LLC’s tax classification.

LLC Taxed as a C-Corporation

An LLC doesn’t have to keep its default tax classification with the IRS. If an LLC would like to be taxed as a C-Corporation, it must file Form 8832.

(related article: LLC taxed as a C-Corp)

Note: LLCs taxed as C-Corps are not that common and usually only apply to a small range of business owners. We are including this information for reference, but please speak with an accountant about the best tax classification for your LLC.

An advantage of an LLC taxed as a C-Corp is something called “income splitting”. This is when a business owner makes enough money that they can leave some in the business. They take a reasonable salary, but not such a big salary that it completely eliminates the company’s profits. By “splitting the income”, an owner can keep themselves in a lower tax bracket. However, this strategy is not for the inexperienced. You’ll need to work with your tax professional closely to make sure you do not become subject to the Accumulated Earnings Tax (for leaving profits in the company for too long).

The biggest disadvantage of an LLC taxed as a C-Corp is what’s known as “double taxation”. Unlike a pass through entity (LLC taxed as Sole Proprietorship, LLC taxed as Partnership, and LLC taxed as S-Corporation), an LLC with C-Corp tax classification must file a return federally with the IRS and the owners must also file federally with the IRS. This means you are taxed on the corporate level as well as the personal level.

There are other advantages and disadvantages not listed above, but we are keeping this section as a brief overview since 95% of our readers do not benefit from having their LLCs taxed as C-Corporations. This type of taxation usually applies to much larger and sophisticated businesses; not small business owners.

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Matt Horwitz
Founder & Educator at LLC University
Forming an LLC shouldn't be so complicated. Our step-by-step guide will make the process a breeze – and no complex legal jargon! We teach people how to form an LLC for free in all 50 states. We hope you find our free guides and resources helpful in your entrepreneurial journey.

16 Comments

  1. Lennox Reid November 11, 2017

    Can a non USA resident form an LLC for the purposes of selling online where goods would be stored in a USA warehouse e.g Amazon FBA warehouse . If the answer is Yes then which state is the best state to do this in?

    reply
    • Matt Horwitz November 13, 2017

      Hey Lennox, yes, a non-US resident can form an LLC in the US for an online Amazon FBA business. Do you have any friends or family in the US? Is there a state you visit often? What country are living in now? Will you have an actual office in any state? Will you have local employees in the US? Let me know the answers to these questions, and I should be able to help guide you further.

      reply
      • Malick March 6, 2018

        Hi Matt, First of All, thumbs up for great articles throughout your website. I am a Non-US, planning to form single member LLC, for Amazon FBA, in WY (due to low tax/cost), but have a friend in NJ for bank a/c opening. I will use regtd. agent address for LLC and friend’s address of NJ for Amazon id & work over internet. I am a bit concerned over sales tax filings as to how wud i do that. Tried to find few accountants using your “how to find an accountant” but didnt got great help. My questions were (below). Can u help me in them?
        -Do u deal currently with any client i.e. single member LLC (manager managed) selling on Amazon? Where are they registered?
        -What are my filing requirements as a single member LLC (manager managed) selling on Amazon?
        -under my condition (non-US) Which one is better, Delaware or WY? from sales tax & state tax perspective?
        -In WY, Sales tax is applicable but on internet / Amazon seller (under LLC) isnt sales tax exempt (as I’ve heard that 1$Million below gross annual sales is exempt from Sales tax)
        -For sales tax, what permit/registration is required separately or not? When is the sales tax filed
        -Is there any exemption for Non-US holders of single member LLC on Federal income tax or sales tax?
        -qoutation for monthly bookkeeping, sales tax filing & annual report +annual income tax (i.e. form-c)

        reply
        • Matt Horwitz March 10, 2018

          Hi Malick, thanks for the kind words! You won’t be able to open a bank account in New Jersey for your Wyoming LLC unless you either register your Wyoming LLC as a Foreign LLC in New Jersey or you do a “cross branch opening” where you coordinate opening a Wyoming bank account with a bank located in both Wyoming and New Jersey. I appreciate you neatly laying out questions, but they are not something we can answer. This is all taxation-based and will be unique to your situation. You’ll need to continue on your search for an accountant. One who can not only only help answer your questions, but one who can also prepare your returns as well as answer your questions throughout the year. Keep searching. It does take time and effort, but you’ll soon find a solid accountant. Best wishes :)

          reply
  2. Leyla February 3, 2018

    Hi Matt,

    My husband’s freelancing is officially recognized as a (single member) LLC as of Jan 3rd, 2018. I understand that since it’s is a disregarded entity, we file income/loss through our personal 1040 tax return. Since the LLC didn’t technically start til 2018, when we fill out the 2017 Schedule C, do we include the business name (line C) and EIN (line D)? Or do we leave that blank, since the LLC wasn’t technically registered until 2018? Thanks for your help!

    reply
    • Matt Horwitz February 9, 2018

      Hi Leyla, we can’t inform exactly how to complete a tax return (we recommend speaking with an accountant), however, you should’t be filing a 2017 return with the LLC name since the LLC didn’t exist or do business in 2017. Hope that helps.

      reply
  3. Robert March 24, 2018

    Hi Matt,
    Quick question for you… if I have a tax hold back (I don’t get my return at the moment) and I file taxes under my LLC as a Sole using the EIN and my SS?, what happens to the return that would be due back to the Company\me? I’m trying to figure out if the S Corp is the way to best manage this or if it makes no difference. Thank you and I’ve certainly learned lots from your great responses and everyone’s equally good questions. Super helpful web site!

    reply
    • Matt Horwitz March 26, 2018

      Hey Robert, awesome to hear! Thanks for the kind words. I don’t know the answer to this one. Apologies I couldn’t be of more service here, but I recommend speaking with an accountant. Hope that helps, somewhat ;)

      reply
  4. sjk April 20, 2018

    Thanks for your great help to the LLC beginners & Owners, via this LLC University. It means a lot to people like me.

    I have couple of questions around EIN.

    As LLC is a disregarded entity from the IRS perspective and also LLC not necessarily need an EIN, if in case LLC gets an EIN:

    1. Are the taxes still paid through personal tax returns i.e. Schedule C? or does EIN obligates the LLC to make separate corporate tax returns?
    2. Usually if LLC doesn’t make any income in any particular year, it doesn’t need to be included in Schedule C, correct? Does condition change if LLC has EIN with have no income.

    Appreciate your help

    reply
    • Matt Horwitz April 21, 2018

      Hey SJK, thanks for the kind words! 1.) Yes, a single-member LLC (with an EIN) is taxed as a Sole Proprietorship and files income/losses/deductions/credits on their personal 1040 return, on a Schedule C and any other applicable schedules and forms. 2.) Correct. Doesn’t make a difference if the LLC has an EIN or not. Hope that helps.

      reply
  5. Zheen Trixia April 23, 2018

    Hi Matt, I am a Non-US resident, if I file my LLC, and hired a commercial registered agent, will I have monthly or annual fees? If there’s any, will it be for the registered agent I hired or for the LLC taxes?

    reply
    • Matt Horwitz April 29, 2018

      Hi Zheen, most Registered Agents charge annually. What state did you form the LLC in? Your tax responsibilities will be your requirement to take care of work with an accountant on. The Registered Agent and the state will not be notifying you to pay your taxes.

      reply
  6. melinda chavez July 5, 2018

    Hi there I have a question , is a sole proprietor & a LLC ( one member ) taxed the same way ? ( Can they both do business deductions etc ? )
    I am trying to figure out which to start my online store as , i do not have anything under my name so i believe i don’t need the financial protection until my business grows . Can you help , please

    reply
    • Matt Horwitz August 12, 2018

      Hi Melinda, yes, a Single-Member LLC is taxed like a Sole Proprietorship, so the taxes are filed and paid in the same manner as a regular Sole Proprietorship. More info here: Sole Proprietorship vs LLC. Hope that helps.

      reply
  7. Heenaah August 23, 2018

    Just want to thank you for providing such a valuable information.

    reply
    • Matt Horwitz August 31, 2018

      Thanks Heenaah! You’re very welcome :)

      reply

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