LLC taxed as a Sole Proprietorship

Note: This article only applies to Single-Member LLCs owned by US residents and US citizens.

A Single-Member LLC is taxed like a Sole Proprietorship by the IRS for federal tax purposes.

A Single-Member LLC doesn’t report taxes to the IRS. It also doesn’t pay taxes to the IRS. Instead, the owner of the LLC reports and pays the taxes on their personal tax return.

This is because a Single-Member LLC is a Disregarded Entity and has pass-through taxation.

What is a Disregarded Entity?

Disregarded Entity is a confusing term. We prefer to use the term “Ignored Company“.

This means the IRS doesn’t expect the Ignored Company to file its own tax return. Instead the owner of the Ignored Company has to report the company’s activity on their personal tax return.

What is pass-through taxation?

Pass-through taxation means your Single-Member LLC doesn’t pay its own taxes.

In order to explain pass-through taxation, it’s easier to understand double taxation first.

Double taxation exists for Corporations. The Corporation itself pays taxes on its income. And then the owners of the Corporation each pay taxes again on their share of the profits.

On the other hand, LLCs have pass-through taxation. This means the LLC doesn’t pay its own taxes. Instead, the LLC owner pays the taxes for the LLC. Therefore, pass-through taxation avoids double taxation.

For example: Let’s say Justin owns Timber Tunes LLC, a Single-Member LLC. Timber Tunes LLC doesn’t pay any taxes to the IRS. Instead, Justin must pay the taxes for the LLC on his personal tax return.

What is a Sole Proprietorship?

A Sole Proprietorship is a type of business structure with one business owner. Sole Proprietorships are an informal structure (or unincorporated business).

To learn more, check out What is a Sole Proprietorship?

If my LLC is a Sole Proprietorship, are my personal assets still protected?

Remember, your LLC isn’t a Sole Proprietorship. It’s just taxed like a Sole Proprietorship.

The reason an LLC is taxed like a Sole Proprietorship is because there is no “LLC tax classification” with the IRS. Meaning, the IRS doesn’t tax an LLC “like an LLC”.

Instead, they tax LLCs under already existing classifications (like Sole Proprietorships, Partnerships, and Corporations). And for Single-Member LLCs, the classification that the IRS automatically uses is Sole Proprietorship taxation.

Said another way, your LLC is still an LLC (a separate legal entity). It’s just that the IRS is treating your LLC like a Sole Proprietorship for federal tax purposes.

Does an LLC pay more taxes than a Sole Proprietorship?

No, an LLC doesn’t pay more taxes than a Sole Proprietorship. In fact, having a Single-Member LLC doesn’t affect your taxes at all. It’s no different than if you operated without an LLC (aka as a Sole Proprietorship).

You will simply pay your regular tax rate (based on your individual tax bracket) on the LLC’s net income.

Do I pay more taxes with an LLC? No, you don’t pay more taxes with an LLC than you would as a sole proprietor.

Do I save money on taxes with an LLC? No, you don’t save money on taxes with an LLC.

Do I have to pay taxes for my LLC if it has no income? No, if your Single-Member LLC has no income (technically anything less than $400 in net income):

• you don’t have to report your LLC activities on your personal tax return
• you don’t have pay any taxes for your LLC
• you don’t need to pay quarterly estimated taxes for your LLC

When are my LLC taxes due?

Remember, your LLC doesn’t file or pay its own taxes. It’s a Disregarded Entity. You pay the LLC taxes on your personal tax return.

Think about it this way: Your LLC tax return and tax bill are due by April 15th every year. This is because all you need to do is include the LLC’s information on your personal tax return.

When are my first LLC Sole Proprietorship taxes due?

Your first LLC taxes are due on April 15th of the year after you started doing business.

Does my Single-Member LLC have to pay quarterly estimated taxes?

No, LLCs don’t pay estimated taxes. Only individuals pay estimated taxes.

Quarterly estimated taxes have nothing to do with whether or not you have a Single-Member LLC. But rather, it’s all about how much money you make (including your income from the LLC). If you owe more than $1,000 in taxes, the IRS requires you to pay quarterly estimated taxes.

Why do things work like this? When someone is employed by a company, taxes are withheld from their paycheck. But now that you’re self-employed (own an LLC), you need to “withhold” your own taxes by making quarterly estimated tax payments. Also, it’s a smart idea to pay throughout the year instead of being surprised by your tax bill in April.

How do I calculate my quarterly estimated taxes? We recommend working with an accountant to determine quarterly estimated taxes. But if you want to do it on your own, you can. First you will need to calculate your expected adjusted gross income, taxable income, and taxes due. Then account for any deductions and credits. This can be done in the Worksheet of IRS Form 1040-ES.

How do I pay quarterly estimated taxes? You can pay quarterly estimated taxes by mail or online.

When are quarterly estimated taxes due? They are due 4 times per year:

• April 15th
• June 15th
• September 15th
• January 15th

Can I pay all my quarterly tax payments at once?
Yes, you can pay the taxes all at once by April 15th for the upcoming year (instead of paying four times per year).

Are there penalties for failure to pay quarterly estimated taxes?
Yes, if your payments are late or you don’t pay enough, you may receive a penalty from the IRS.

What tax forms do I file for a Single-Member LLC?

Typically, business income from a Single-Member LLC is reported on a Schedule C. Schedule C is part of the owner’s personal tax return (Form 1040). The owner’s return may also need to include these forms:

• Schedule SE (self-employment tax)
• Schedule E (real estate income)
• Schedule A (other business-purpose deductions)
• Form 1099 (miscellaneous income)
• Form 8829 (expenses for business use of your home)
• Form 8995-A (qualified business income deduction)

We recommend hiring an accountant for help with your taxes.

What expenses can I deduct for my LLC?

Expenses that you can deduct for your LLC include, but are not limited to:

• Home office expenses
  • If you rent and work from home, you can deduct a portion of your rent.
  • You can deduct office supplies and office equipment. For example, a printer and paper.
• Phone
  • You can deduct a portion of your cell phone bill.
  • If you buy a second line for business use, you can deduct the entire bill.
• Internet
  • You can deduct a portion of your internet bill.
• LLC costs
  • You can deduct the state LLC filing fees, LLC Registered Agent fees, and other LLC expenses.
• Travel
  • You can deduct expenses when traveling for business.
• Professional fee
  • You can deduct expenses for an accountant, attorney, or any other professional your business hires.
• Education and training
  • You can deduct the costs for any training related to your business, like seminars and online courses.
• Contractors and employees
  • You can deduct fees paid to contractors and/or employees.
• Business insurance
  • You can deduct any business insurance costs.
• Health insurance
  • You can deduct your health insurance premium (unless you’re eligible for health insurance from your spouse’s employer).

The list above doesn’t include all applicable tax deductions. We recommend working with an accountant to make sure you are taking the appropriate deductions.

What do I pay taxes on?

Taxes are paid on net income. Net income is the profit left over after expenses are paid.

Does a Single-Member LLC need an EIN?

Simple answer: Your Single-Member LLC should get an EIN.

There is confusion in the LLC industry because the IRS says most Single-Member LLCs don’t need an EIN.

Our thoughts: The IRS position is irrelevant, because you’re going to need an EIN to open an LLC bank account. You will also need an EIN if your LLC hires employees. And an EIN is free from the IRS and takes 5 minutes to get online. So we see no point in arguing whether or not a Single-Member LLC should get an EIN.

Tip: Make sure you form an LLC first before applying for an EIN for your LLC.

Single-Member LLCs can be taxed as a Corporation (optional)

Instead of being taxed in the default classification (LLC taxed as Sole Proprietorship), you have the option of having your LLC taxed as a Corporation (S-Corporation or C-Corporation).

This can be done by making an “election” with the IRS. This election asks the IRS to treat your Single-Member LLC like one of the following for tax purposes:

• LLC taxed as an S-Corporation
• LLC taxed as a C-Corporation

Both of these tax elections are more complicated than Sole Proprietorship taxation. And they should only be made after consulting with an accountant.

LLC taxed as an S-Corporation:
If your LLC pays taxes as an S-Corporation, this can save you money on self-employment taxes. We only recommend this type of taxation if your LLC has at least $70,000 of net income.

LLC taxed as a C-Corporation:
And while an LLC can be taxed as a C-Corporation, it’s very uncommon. This typically only makes sense for larger employers who are looking to optimize taxes on health insurance premiums for employees.

What do most people do?
Most people, especially new business owners, keep their LLC taxed in its default classification (LLC taxed as Sole Proprietorship).

Don’t forget about state and local taxes

Keep in mind that most people with Single-Member LLCs need to file state and local taxes (like county or city taxes).

This will depend on where you live and how your LLC makes money.

Lastly… Don’t let taxes stop you

We know that all this tax stuff can feel a little overwhelming. Don’t worry, though! You don’t have to figure all this out right away. And you don’t have to do this all yourself (most people hire an accountant for help).

We write articles like this so you’re aware of what’s to come, but don’t let this slow you down! It’s more important that you get your LLC formed, get your business off the ground, and start making money. Besides, your taxes aren’t due for quite some time (not until April of next year). So you can read this page to understand the basics, then form your LLC, and get started on your business.

Again, while most people do hire accountants, you don’t need to find an accountant before forming your LLC. Most people do that many months after they form their LLC.

IRS contact info

You can call the IRS at 800-829-4933.

Their hours of operation are 7am to 7pm, Monday through Friday.

Tip: Press option 1 > option 1 > option 3 to speak to someone. We recommend calling as early as possible for the shortest hold times.

Frequently Asked Questions about Single-Member LLCs

Does a Single-Member LLC file a tax return?

A Single-Member LLC taxed as a Sole Proprietorship doesn’t file a tax return. Instead, the owner of the LLC files an individual tax return.

However, a Single-Member LLC taxed as an S-Corporation or a C-Corporation must file its own tax return (Form 1120-S or Form 1120).

Do Single-Member LLCs pay taxes?

A Single-Member LLC taxed as a Sole Proprietorship or an S-Corporation doesn’t pay taxes. Instead, the owner pays the taxes.

However, a Single-Member LLC taxed as a C-Corporation pays its own taxes (in addition to the owner paying taxes).

Does having a Single-Member LLC help with taxes?

No, having a Single-Member LLC doesn’t help reduce taxes. It also doesn’t increase your taxes.

Remember, Single-Member LLCs taxed as Sole Proprietorships have pass-through taxation. This means income from the LLC is filed on your personal tax return.

Said another way, your taxes are the same whether or not you have an LLC.

Is a Single-Member LLC the same as a Sole Proprietorship?

Technically, no. However, in the eyes of the IRS, they are treated the same for tax purposes.

Let’s define some terms:

Sole Proprietorship: When you just do business as yourself.

• Owned by 1 person
• Owner’s assets are not protected from business liabilities
• Not a formal business structure
• No paperwork required to start (once you do something to make a profit, you are operating as a Sole Proprietorship)

Single-Member LLC: A legal entity separate from its owner, formed under state law.

• Owned by 1 person
• Owner’s assets are protected from business liabilities
• A formal business structure (aka legal entity)
• Paperwork must be filed with the state to create the LLC

So while a Sole Proprietorship and a Single-Member LLC are legally different, the IRS treats them the same for tax purposes.

Which is better, LLC or Sole Proprietorship?

An LLC is better.

This is because there are no disadvantages to an LLC, however, there are disadvantages to a Sole Proprietorship.

Most importantly, with a Sole Proprietorship your personal assets are not protected if your business is sued.

However, with an LLC, your personal assets are protected if your business is sued.

And there are no tax advantages or disadvantages to either structure. Meaning, you can deduct the same business expenses and the taxes owed will be the same. This is because the IRS treats Single-Member LLCs and Sole Proprietorships the exact same way.

Then why would someone operate as a Sole Proprietorship?

• Some people aren’t aware of LLCs.
• Some people don’t realize how easy it is to form an LLC.
• Some people don’t have the money to form an LLC right away.

Some states have expensive LLC fees (ex: California LLC and Massachusetts LLC), and some people don’t want to spend the money to form an LLC right away. If you don’t have a lot of money, you can start your business as a Sole Proprietorship, and then transition to an LLC when you’re ready.

However, LLC fees can be deducted on your taxes. And for most people, the liability protection is worth the cost of forming the LLC.

In summary, a Single-Member LLC and a Sole Proprietorship are taxed the same way. However, LLCs offer additional legal protection that Sole Proprietorships lack.

Is a Single-Member LLC considered self-employed?

Yes, the owner of a Single-Member LLC is considered self-employed.

But this doesn’t mean that your LLC gives you a 1099. Instead, you’ll just pay taxes on the LLC’s net income (profit).

What is the owner of a Single-Member LLC called?

The owner of a Single-Member LLC is called a Member.

What state should I form my Single-Member LLC in?

State law requires you to form your LLC in the state where it is doing business. For most people, this is their home state.

And even though you’ll likely hear about Delaware, Nevada, and Wyoming as being the “best states”, it’s simply not true. The “protections” of these states will only apply if you live in these states or actually do business in these states.

As an example, if you form a Single-Member LLC in Delaware, but you’re doing business in your home state, you’ll need to register your Delaware LLC as a “Foreign LLC” in your home state.

This means you now have double the work and double the fees. You have to pay LLC fees in both states, file an Annual Report in both states, and maintain a Registered Agent in both states. And again, you’re not going to get the benefits of Delaware because you’re not doing business in Delaware.

For more information, please see What’s the best state to form an LLC?

Can a Husband and Wife have a Single-Member LLC?

Yes, but only in some states.

If you and your spouse live in a community property state, you have the option of how you want your LLC to be taxed:

• LLC taxed as Partnership
• LLC taxed as Qualified Joint Venture (aka Sole Proprietorship)

Community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

If you have a husband and wife LLC in a non-community property state, it can’t be a Single-Member LLC. It must be a Multi-Member LLC and it will be treated like a Partnership for tax purposes.

Matt Horwitz

Founder & Educator, LLC University®

Matt Horwitz has been the leading expert on LLC education for the past decade. He founded LLC University in 2010 after realizing people needed simple and actionable instructions to start an LLC that other companies weren't offering. He's cited by Entrepreneur Magazine, Yahoo Finance, and the US Chamber of Commerce, and was featured by CNBC and InventRight.
 
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.