Depending on how many members are in your LLC, the IRS will treat it with a default status as either a sole proprietorship or a partnership.
LLCs Taxed as Sole Proprietorships
If your LLC is treated as a Sole Proprietorship, you will file your taxes on a Schedule C attached to your individual income tax return at the end of the year.
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If you business is involved in farming or agriculture, you will file your taxes on a Schedule F. If your business involved with rental properties, you will file your taxes on a Schedule E.
The due date for filing all of these forms is April 15th since it is attached to your personal return.
LLCs Taxed as Partnerships
If your LLC is treated as a Partnership, the LLC will file a separate income tax return, Form 1065. This filing has a due date of March 15th. This gives the business time to report each partner’s share of the profit, or loss, of the business on a Schedule K-1.
Partnerships do not pay the income tax on its return filing. Instead, the income tax is passed through to the partners, and they each pay their portion of the tax at their individual rates.
LLC Owner Distributions
An LLC, whether it is taxed as a sole proprietorship or a partnership, might have employees that it pays employment taxes on. However, the owners of the LLC are not added to payroll and do not receive paychecks. They receive owner distributions from the business when they take money out of the business. These distributions are not considered expenses for the business and do not affect the ending profit. The profit of the business is taxed on the owners’ personal returns whether or not the income is distributed to them.
Treating LLCs as S-Corporations or C-Corporations
LLCs may also file with the IRS and elect to be treated as either an S-Corporation or C-Corporation.
S-Corporations are similar to Partnerships in that the profit, or loss, is flowed from the business to the owners and reported on their personal returns.
Unlike with LLCs that are treated like partnerships, the owners of an LLC that is treated like an S-Corporation are required to pay themselves a reasonable salary for the job they are doing. This means the LLC would need to file quarterly and annual payroll tax returns and make sure they are depositing the required amounts to the appropriate tax authorities. Though this increases the reporting requirements for the business, it can save the owners more in taxes depending on the amount of profit being made by the business.
C-Corporations pay income tax on their profits at the end of the year instead of passing the amounts to the shareholders to pay on their individual returns. Under a C-Corporation election, the owners of the LLC would take a reasonable salary from the business. Any additional amounts taken by a shareholder would be paid as a dividend, which is then reported as income to be taxed again. Though this might not be the most ideal situation for some, there are reasons for electing this type of entity and you should consult your tax professional.
