Filing Business Taxes for LLC for the First Time: Everything You Need To Know

So, you’ve taken the leap into entrepreneurship and formed your limited liability corporation (LLC). Congratulations! 

Now it’s time to grasp the tax filing requirements specific to your business structure. One of the most important aspects of running a business is ensuring compliance with the IRS and avoiding penalties. 

The good news is that LLCs are taxed flexibly. But having so many options can be tricky. Here are the most crucial things to know when filing business taxes for your LLC for the first time.

Understanding LLC Tax Filing Requirements

By default, a single-member LLC is taxed as a sole proprietorship, and a multi-member LLC is taxed as a partnership. But LLCs—whether single-member or multi-member—can elect to be taxed either as a C corporation or an S corporation by filing Form 8832 or Form 2553, respectively.

Understanding the tax classification of your chosen LLC is essential. Each tax classification comes with its own set of filing requirements and obligations. These range from annual tax returns to estimated tax payments. 

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How To File LLC Taxes by LLC Type

Navigating the tax landscape can be time-consuming for first-time business owners. But learning the specific requirements of your type of LLC can prevent errors and stress. 

Remember that LLC tax forms and LLC tax benefits vary depending on the LLC type. Here’s a breakdown of which forms each type must file:

• Single-Member LLCs. Single-member LLCs are treated as disregarded entities by default. That means they’re taxed as sole proprietorships.

Owners of single-member LLCs report business income and expenses on Schedule C of their personal tax returns (Form 1040). 

Any income generated by the LLC is subject to self-employment taxes. That includes Medicare and Social Security. Note that state-level tax treatment of LLCs varies. Always check how your business is affected before filing. 

• Multiple Member LLCs. Multiple-member LLCs are taxed as partnerships by default. Each member reports their share of the business’s profits and losses on their individual tax returns.

LLCs taxed as partnerships must file Form 1065, also known as the U.S. Return of Partnership Income.

Each member receives a Schedule K-1. This outlines their distributive share of the LLC’s income, deductions, and credits to report on their personal tax returns.

• LLCs Taxed as C Corporations. LLCs can elect to be taxed as C corporations by filing Form 8832.

C corporations file their taxes using Form 1120, the U.S. Corporation Income Tax Return.

Owners of LLCs taxed as C corporations pay taxes at the corporate level. And dividends distributed to shareholders are taxed at the individual level. This results in potential double taxation.

• LLCs Taxed as S Corporations. LLCs can elect to be taxed as S corporations by filing Form 2553.

S corporations file Form 1120S, the U.S. Income Tax Return for an S Corporation.

Like partnerships, S corporations pass through their income, losses, deductions, and credits to their shareholders. They report them on their personal tax returns using Schedule K-1. 

This could simplify your taxes and, in some cases, the LLC’s corporate taxes may be lower. In turn, this makes it possible for owners to retain some earnings and funnel money toward employee benefits.

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What Other Taxes Do LLCs Pay?

It’s important to understand that LLCs may be subject to more than just federal income tax. Your LLC may have obligations to both state and federal governments. This depends on your location, industry, and tax classification.

Listed below are some common additional taxes that LLCs may encounter.

• Self-Employment Tax. LLC owners who are active in the business may be subject to self-employment tax. These fees cover Social Security and Medicare taxes. This tax is typically paid quarterly and is calculated based on the business’s net income.

• Income Taxes (Personal and Corporate). Members of an LLC that have not elected to be taxed as a corporation may be required to pay personal income tax on their share of the business’s profits. LLCs taxed as corporations are subject to corporate income tax on their net income at the federal and state levels.

• Payroll Taxes. If an LLC has employees, it must withhold federal and state income taxes from their wages. It must also pay employer taxes such as Social Security and Medicare.

• Property Tax. LLCs that own real property may be subject to property tax. This is levied by local governments based on the assessed value of the property.

• Social Security Tax. LLC employees and employers are required to pay Social Security tax. This funds retirement and disability benefits.

• Excise Tax. Certain types of LLCs, such as those involved in specific industries like alcohol, tobacco, or gasoline, may be subject to excise taxes on the sale or use of certain products.

• Sales Tax. LLCs that sell goods or services may be required to collect and remit sales tax to state and local governments.

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How To Change Your Tax Classification

Changing your LLC’s tax classification affects your business’s tax obligations and financial structure. Whether you’re looking to switch from a sole proprietorship to an S corporation or from a partnership to a C corporation, it’s essential to understand the process involved. 

Bear in mind that changing the structure at the beginning of a new tax year tends to be best. This allows enough time to complete the conversion process. Plus, it means that your business operates under the new tax classification for the entire tax year. Ultimately, this makes it easier to file.

Here’s a step-by-step guide to changing your LLC’s tax classification:

1. Pick the Structure Best Suited for Your LLC

Evaluate the different tax classifications available for your LLC.

Consider factors that affect each structure. That includes taxation, liability protection, and administrative requirements to determine the best structure for your business.

2. Convert Your Business Structure

Once you’ve chosen a new tax classification, you’ll need to convert your LLC to the new structure.

What forms to file depends on the desired classification. You might need to complete form 8832 (Entity Classification Election) or Form 2553 (Election by a Small Business Corporation).

3. File After Your Effective Date of Election

Your LLC’s new tax classification becomes effective on a specified date after your paperwork is submitted.

Ensure that you file your tax returns and comply with any additional requirements associated with the new classification after the effective date of election.

FAQs

Navigating the tax filing process for your LLC can raise several questions, especially if you’re a first-time business owner. Here are some frequently asked questions to help you understand your tax obligations.

Can I file my business taxes online, or do I need to mail them?

In most cases, you can file your LLC’s taxes online through the IRS website or using authorized tax filing software. Online filing offers convenience, speed, and electronic confirmation of receipt. However, some circumstances may require you to file paper returns by mail, such as certain tax elections or amendments.

How do I determine which tax form to use for my LLC?

The tax form you use for your LLC depends on its tax classification and structure. For example, single-member LLCs may file taxes using Schedule C (Form 1040) as part of their personal tax return. But multi-member LLCs may file Form 1065 (Partnership Return) and issue Schedule K-1s to members. Find out more on the IRS website or by speaking with an accountant. 

Can I get a tax refund for my LLC?

LLC tax refunds are rare. Instead, any tax liabilities or overpayments are generally passed through to the LLC’s members or owners. They must then report them on their individual tax returns. 

But certain tax credits or deductions may reduce the LLC’s overall tax liability. That could result in a refund for its members. 

Do I file LLC and personal taxes together?

By default, a single-member LLC is considered a “disregarded entity” for tax purposes. This means the LLC’s income and expenses are reported on the owner’s personal tax return using Schedule C (Form 1040). In this case, LLC and personal taxes are filed together.

But multi-member LLCs are taxed as partnerships by default. That requires the filing of a separate partnership tax return (Form 1065). In this case, each member receives a Schedule K-1 indicating their share of the LLC’s profits and losses.

What if my LLC makes no money its first year?

If your LLC generates no income in its first year of operation, you could still have tax obligations. 

While you won’t owe income taxes on zero income, you might still need to file informational tax returns or reports. It depends on your state’s requirements. Plus, if your LLC is classified as a partnership or S corporation, you might need to file a tax return to report the LLC’s financial activity. This is true even if it didn’t generate any income. 

When one person starts an LLC, how does the IRS automatically tax it?

By default, the IRS automatically taxes a single-member LLC as a “disregarded entity” for federal tax purposes. This means the LLC’s income and expenses are reported on the owner’s personal tax return using Schedule C, just like a sole proprietorship. The owner pays taxes on the LLC’s profits at their individual tax rate. 

However, if the LLC elects to be taxed as a corporation, such as an S corporation or C corporation, it files a separate business tax return.

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