How should my LLC be taxed


The limited liability company (LLC) in the form of business is the latest invention in business forms that add simplicity to the organization of liability insurance. An LLC can be taxed in several ways to save taxes for the company and its owner.,

In this article, we're going to look at the LLC form of business, how an LLC is typically taxed, how corporate or corporation taxation can benefit your business, and the process of choosing that tax option.

How LLCs Are Taxed

By default, your LLC is taxed in one of two ways, depending on the number of owners (called "Members") in the LLC:

  • A single member LLC is considered a disregarded entity and is taxed as a sole proprietorship, with Schedule C filing for the individual's personal tax return.,
  • A multi-member LLC is taxed as a partnership. The partnership places an information return on Form 1065 with schedule K-1 for each member / partner.

LLC member taxes are based on their share of the company's income for the year. No matter how much or how little LLC members take out of business for personal use, they will be taxed on the full amount of the annual net income from that business.,

LLC Owners and Independent Taxes

In addition to paying income taxes based on their business income, LLC owners are usually considered self-employed and must pay a self-employed tax (for Social Security and Medicare) on their LLC income.

FICA tax vs. self-employment tax

Social security and Medicare tax is called FICA tax for employees and self-employed tax for self-employed, including entrepreneurs. It is the same tax and total amount, except that FICA taxes are shared by employees and employers and self-employed the full Pay the amount of tax.

If the LLC opts for corporate taxation, corporate tax rules apply. That means the company itself is taxed. The company pays income tax on its net profit and the owners / members pay income tax on dividends they receive.,

If the LLC elects to be taxed as an S Corporation, the owners are not required to pay self-employed tax as S Corporation owners are not considered self-employed. Most S Corporation owners work in the business as employees and they pay FICA taxes on that employment income.

LLC Taxed as a corporation

Many LLCs choose to be taxed as corporations to save taxes. In this tax situation, the LLC members become shareholders and are not independent.,

For those with higher incomes or those with profitable LLCs, the fact that corporate shareholders do not have to pay taxes on their company's stock income is a tax benefit. The corporate income tax rate (flat rate of 21%, starting with the tax year 2018) can be lower than the higher tax rates for income taxes.

You also avoid paying self-employed tax unless you work as an employee in the company (and pay FICA tax).

Let's look at a scenario:

Your LLC has net income of $ 50,000 for the year. If you are the sole owner of the LLC, you must include all of that profit on your personal income tax return. If you taxed the LLC as a corporation, the corporation pays tax on that income, but you, as a shareholder, only pay tax when you receive dividends.

A major advantage of an LLC over corporations is that owners avoid double taxation, where the corporation pays tax on its net income and shareholders pay tax on dividend income.,

The main advantage and disadvantage of an LLC taxed as a corporation

The main benefit of an LLC that is taxed as a corporation is the benefit to the owner of not having to include all of the business revenue on your personal tax return. You also do not have to pay any independent tax on your income as the owner of the business.

The main disadvantage is double taxation. The company must pay tax on its net income and you, the owner, must pay tax on any dividends you receive.,

LLC Taxed as S Corporation

An S corporation is a special type of company that has some tax advantages. Owners can split their S Corporation income between a distribution (in the same way as a partner in a partnership) and employee status. An S Corporation owner who works for the company must earn a reasonable salary as an employee and pay taxes and FICA taxes on that salary.

Since the profits of the corporation are distributed to the owners, this tax status avoids double taxation.,

To be taxed as an S Corporation, the company must meet certain requirements:

  • The company cannot have more than 100 shareholders
  • No shareholder can be a non-resident foreigner (non-citizen who does not live in the United States).,
  • There can only be one class of shares
  • All shareholders must be individuals (no other companies)

Another benefit of S corporation status is that an S corp owner can make a tax deduction of 20% from his share of business income in addition to the usual deductions for business expenses. This QBI (Qualified Business Income) deduction is calculated on the income of the owner as an employee. This deduction is not available for personal service businesses such as accounting, law, consulting, or financial services., Also, the QBI deduction is limited or not available for higher income entrepreneurs.

Many LLC's choose S Corporation for their tax status because:

  • It avoids double taxation of companies
  • S Corporate owners can take the QBI deduction from corporate income (not employment income)
  • Owners pay Social Security / Medicare tax only on earned income.,

So make the choice

If you decide to make this choice, here is some more information you need to know:

To be taxed as a business, use the IRS - Form 8832 Entity Classification Option. The option to be taxed as the new unit will take effect on the date entered on line 8 of Form 8832. The election must not take effect more than 75 days prior to the date of submission of the election, nor can it take effect later than 12 months after the date of submission of the election.,

The form contains a declaration of consent that can be signed by all members or by one member on behalf of all members. If a member signs, it should be recorded in the general assembly that all members have approved this election.

You must provide the name (s) and number (s) of the owner (Social Security Number for a single member LLC and Employer ID number for a multi-member LLC).

To be taxed as an S Corporation, use the IRS - Form 2553 election by a Small Business Corporation. To begin the new tax classification for a year, you must be by 15. You must provide information about each shareholder: name and Address, shares owned, social security number, the owner's tax year date, and a consent form.,

What happens to the old company

For a move to a company when your corporate status option becomes effective, the IRS determines that all assets and liabilities of the previous business (sole proprietorship or partnership) be contributed to the company in exchange for shares in the company's stock.

Disclaimer: This information is provided to provide you with a general understanding of the subject and to provide information to discuss with your attorney, CPA, or tax advisor., Every business situation is unique and taxes and laws change regularly.