What Being An LLC Means For Your Taxes
by Abdul Aziz Mondal Finance 28 September 2023
We hear it all the time in the tax industry, “I need to file as an LLC.”
There is a common misconception at play here, a Limited Liability Company (LLC) has no bearing whatsoever on what entity you file with the IRS! An LLC is a state designation with the purpose of protecting the owners’ personal finances from being at risk if the business goes belly up.
So you might be wondering, “Which entity type am I?” The following questions can help you determine what designation the IRS thinks you are and what Forms and Schedules you might be expected to file.
Do You Have An EIN?
An EIN is required for many business entities to be established, one of which is an LLC with partners. Filing for an EIN is also one of the first ways in which you indicate to the IRS what entity you will be designated as. So if you have an EIN, the IRS knows you exist and already expects certain Forms or Schedules from you during your next tax year.
If you do not have an EIN, there is no other designation that you would be eligible for other than a Sole Proprietor, although you can still have an EIN and be a Sole Proprietor. If you think you are a C-Corp, S-Corp, or Partnership but you do not have an EIN, you missed a step during your company formation process.
Do You Have Partners?
If you have partners but have not yet elected to file as a S-Corp or C-Corp with the IRS, then you will be considered a partnership. If this is the case, you can expect to file a Form 1065 by the tax deadline for partnerships, which is generally March 15th (sometimes later than weekends). After filing a Form 1065, each partner receives a K-1 which designates their portion of the profit/loss and is entered on that partner’s individual tax return, 1040.If you do not have partners and have not filed for a C-Corp election you would be considered a Sole Proprietor and can file a Schedule C as part of your individual tax return.
Have You Made A Formal Election?
If you file for an EIN the IRS already has a designation in mind for you as discussed above. You can now, however, make a formal election to be considered an
S-Corp or C-Corp based on whether you fit the required criteria. A S-Corp is a specific type of corporation that fits a few specific requirements noted under IRS code SubchapterS. Make sure you are aware of the pros and cons of the potential designations before you make an election as you can not change it back and forth at will.
The Common Forms And Schedules By Entity Type
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Now that you hopefully have a good idea as to what entity type the IRS has you designated as, we can provide some insight into what forms and schedules you might be expected to file.
Sole Proprietor
As a sole proprietor, you will be required to fill out a Schedule C if there was any income or deductible expenses for the year. Any net profit or loss from your business (this includes side gigs like Uber), comes from the calculations on your Schedule C and ends up on your personal tax return (1040). This of course means that if you have to fill out a Schedule C, you have to file your 1040 as well.
Partnerships
There are several different types of partnerships but today we will just focus on partnerships in general. With a partnership, you can expect to file a Form 1065. Since partnerships have multiple individuals who need to account for the profit/loss on their individual tax returns, their returns are due about a month prior to your personal tax return.
By filing a 1065, a K-1 is generated and sent to both the IRS and the individual partners. This K-1 tells you what you need to enter on Schedule E to be submitted with your year’s 1040 personal return. The K-1 also tells the IRS what to expect on Schedule E.
S-Corps
S-Corps are sort of like half a corporation and half a partnership. You have to file a 1120S, and the profit/loss passes on to the shareholders to be included in their personal return. Being an S-Corp requires that you pay any owners who work for the business a “reasonable salary” which includes payroll taxes.
The benefit of an S-Corp is that any distributions paid out are not subject to payroll tax and are instead taxed as a Qualified Dividend. The benefit of an S-Corp over a C-Corp is you avoid double taxation, whereas its benefit over a Partnership is you avoid a portion of the payroll tax.
C-Corps
A C-Corp files 1120 with any wages paid to you showing up in a normal W2 and any distributions generally being taxed as Qualified Dividends using the capital gains rate and showing up in a 1099-DIV.
During this process, the owner of the C-Corp will see corporate-level taxes at the corporate tax rate, individual and payroll taxes through their salary (if they work there), and then a capital gains tax for any distributions received during that year.
So Now You Know What Your Filing For Your LLC
Now that you know how the IRS categorizes your business, and what forms you are likely to file, it is important to note that any errors in this process are often penalized heavily by the IRS.
It is for this reason that we recommend you contact a professional tax agent such as those at Vertices Accounting & Tax. We help hundreds of business owners avoid painful penalties and interest every year by filing the correct forms on time. If you choose not to use a tax professional, that’s ok too! We hope we were able to clear up the confusion behind “filing taxes as an LLC.”
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