LLC Tax: Understanding How LLCs Are Taxed

A Limited Liability Company (LLC) is typically treated as a pass-through entity for federal tax purposes, meaning the business itself doesn’t pay taxes on its income. Instead, profits are passed to LLC members, who report their share on their personal tax returns. However, LLCs may also be subject to state and local taxes, and members can choose to have the LLC taxed as a corporation instead of a pass-through entity.

How LLCs Pay Income Taxes

The taxation of an LLC depends on its ownership structure:

Single-Member LLC Taxes

By default, a single-member LLC (SMLLC) is considered a disregarded entity by the IRS, meaning it doesn’t file a separate tax return. Instead, the owner reports income and expenses on Schedule C of Form 1040, just like a sole proprietorship. The owner pays personal income tax on profits and can deduct business losses. Some states, like California, impose additional LLC taxes and fees, so it’s important to factor these costs into your business planning.

Multi-Member LLC Taxes

A multi-member LLC is taxed as a partnership, meaning the LLC itself doesn’t pay income tax. Instead, profits and losses are divided among members based on ownership percentages, and each member reports their share on their personal tax return. The LLC must file Form 1065 (U.S. Return of Partnership Income) and provide each member with a Schedule K-1 by March 15, detailing their share of income, deductions, and credits.

Electing Corporate Tax Status for Your LLC

LLCs can choose to be taxed as a C-Corporation or S-Corporation, which can offer tax benefits in certain situations:

✔ C-Corp Taxation – Filing Form 8832 allows an LLC to be taxed as a C-Corporation at a flat 21% corporate tax rate. However, corporate profits distributed as dividends are taxed again at the individual level.

✔ S-Corp Taxation – Filing Form 2553 elects S-Corp status, which retains pass-through taxation but allows members to classify earnings as salary and distributions, potentially reducing self-employment taxes.

Choosing the Right Tax Structure

The right tax structure depends on your business goals. While pass-through taxation benefits many small businesses, some LLCs may find corporate taxation advantageous. At iTax Filer, we help business owners navigate LLC taxation, ensuring compliance while optimizing tax savings. Get expert guidance today and make the best tax decision for your LLC! 🚀