Posted by Fred Lake

Why Don't All LLCs Pay Taxes The Same Way

Why Don't All LLCs Pay Taxes The Same Way

LLCs (limited liability companies) are types of business organizations that every state recognizes. These organisations offer limited liability cover for entrepreneurs, who pay their own rate of personal tax. LLCs are not taxing entities, and the IRS (Internal Revenue Service) does not recognize them for tax purposes. Therefore, how are LLC taxes paid?

According to the IRS, LLCs can be taxed as corporations (if they have multiple members) or as partnerships. Alternatively, they can be counted as entities separate from their owners (for single member LLCs).

The Payment Process for LLC Taxes

How LLCs pay income tax is dependent on whether they have multiple members or one member:

Income tax Payments for Single Member LLCs

LLCs with one member are taxed as sole proprietorships. In other words, a Schedule C is used to prepare the data concerning the LLC's expenses and income, along with the net income. The Schedule C net income is transferred to Line Twelve of the owner's tax return (usually on Form 1040). Single member LLCs can choose to be discounted as entities for the purpose of income tax. This means that the owner and LLC are classed as distinct entities. 

Income tax Payments for Multiple Member LLCs

LLCs with several members pay income tax as partnerships. The IRS does not receive taxes directly from these partnerships. Instead, each individual partner pays tax, depending on their ownership share. Form 1065 is used to file a tax return for the partnership. Schedule K-1s are then prepared for all partners, indicating their share of the profit or loss. K-1s are filed, along with the individual returns for each partner, and the profit or loss is displayed on Form 1040.

How LLCs Categorized as S Corporations or Corporations pay Income tax

LLCs might choose to be classed as S corporations or corporations for tax reasons. Normally, they do this to benefit their business, in terms of the applicable tax rate. This choice is indicated on the Entity Classification Election Form 8832. Then, LLCs pay income tax in line with their new tax status. This includes state income taxes. 

Further Details About Income tax Payments by LLC Owners

Taxes from LLCs are transferred to the members (owners), to be recorded on individual tax returns. The LLC's net income percentage is shared out among the owners, based on their specific share. The LLC's profit or loss is taken into account, along with the member's other income, to determine the total amount of tax owed. Profits from LLCs are used to calculate the self employment tax liabilities of members. Self employment tax will not be due, in the event that LLCs fail to make a profit during the year.

State Income LLC Taxes

All states have unique ways of categorizing LLCs for the purpose of state income tax. The majority of states adopt the IRS (federal) classification, however they normally amend the tax rates or impose flat rates. 

Fred Lake
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