Filing taxes for the first time as a new limited liability company (LLC) owner can feel overwhelming. Between understanding your tax obligations, gathering the required documentation, and making the right deductions, the process may seem daunting. However, with the right information, filing your LLC’s small business taxes can be a manageable task.

Table of Contents:

  1. Understanding Limited Liability Company (LLC) Taxation
  2. Choosing the Right LLC Tax Structure
  3. LLC Forms for Federal Income Tax Purposes
  4. Important Tax Deadlines for LLC Tax Filing
  5. Filing Taxes for LLCs: A Step-by-Step Process
  6. Tax Deductions and Credits for LLCs

Understanding Limited Liability Company (LLC) Taxation

When a corporation pays taxes, its business structure can significantly impact its taxable income. One of the primary advantages of forming a Limited Liability Company (LLC) is its flexibility in taxation. LLCs are unique in that they can choose from various taxation methods based on what makes the most sense for the business structure and revenue.

As an LLC, your business can be taxed as:

1) Single-Member LLC (Disregarded Entity)

When a single-member LLC is formed, it is automatically taxed as a sole proprietorship. This means that the IRS considers the LLC a “disregarded entity,” not recognizing it as a separate entity from its owner. As a result, the LLC does not file a separate business tax return. Instead, the owner reports the business’s income and expenses on their personal tax return (Form 1040) using Schedule C (Profit or Loss from Business).

Tax Implications: The owner pays personal income tax on the net income of the business, and is also subject to self-employment taxes, which include Social Security and Medicare contributions.

2) Partnership (Multi-Member LLCs)

A multi-member LLC, by default, is taxed as a partnership. The LLC itself does not pay income tax; instead, it files an informational tax return (Form 1065). The profits and losses of the business are then passed through to the members (owners), who report their share of the profits on their personal tax returns using Schedule K-1, which outlines each member’s share of the partnership’s income, deductions, and credits.

Tax Implications: Each member pays personal income tax on their share of the LLC’s income, and is also subject to self-employment taxes.

3. S Corporation (S Corp)

An LLC can choose to be taxed as an S Corporation by filing Form 2553 with the IRS. Under this tax structure, the LLC’s profits and losses are passed through to the owners (similar to a partnership), but the business files a separate tax return, Form 1120S.

Tax Implications: Owners receive salaries and distributions. The salaries are subject to payroll taxes (Social Security, Medicare), but the distributions (profits) are not subject to self-employment taxes, potentially resulting in significant tax savings. However, the IRS requires that owners receive a “reasonable salary” for their work performed for the business, meaning not all income can be taken as distributions to avoid taxes.

4. C Corporation (C Corp)

An LLC can opt to be taxed as a C Corporation by filing Form 8832 with the IRS. In this case, the LLC becomes a separate tax-paying entity. The business files Form 1120 and pays corporate taxes on its profits.

Tax Implications: The LLC’s profits are subject to corporate income tax at the corporate tax rate. Additionally, if the LLC distributes dividends to the owners, those dividends are taxed again on the owners’ personal tax returns, resulting in “double taxation”—the income is taxed once at the corporate level and again when distributed to shareholders. However, C Corps can offer more flexibility in terms of reinvesting profits back into the business without paying them out as dividends.

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Choosing the Right LLC Tax Structure

Each LLC business entity has different advantages when it comes to state and federal taxes. For example, electing to be taxed as an S Corporation can reduce your self-employment taxes. On the other hand, C Corporation taxation may be beneficial if you reinvest profits back into the business without paying out dividends.

Advantages and Disadvantages of Limited Liability Company Tax Structures

Each option comes with its own benefits and tax liabilities, so consulting a tax professional is crucial to ensure you’re selecting the most beneficial taxation structure for your LLC.

LLC Forms for Federal Income Tax Purposes

One of the most critical aspects of filing your LLC’s taxes is ensuring you submit the correct forms by their respective deadlines in alignment with federal tax regulations. 

Below is a breakdown of the forms based on your LLC’s tax classification:

Important Tax Deadlines for LLC Tax Filing

For LLC taxes, the following are important dates throughout the year to keep in mind, depending on your tax structure:

Deadlines for Paying Estimated Taxes:

According to IRS tax law, if you’re a sole proprietor, partner, or S corporation shareholder, you’re likely required to make estimated tax payments throughout the year if you expect to owe $1,000 or more in taxes when you file your return. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.

The IRS likes to say, “Pay as you go, so you won’t owe,” and provides LLC businesses estimated tax guidance around paying estimated taxes for the following deadlines:

Note: Always keep track of IRS updates or consult with your tax preparer for any specific changes to the filing deadlines.

Filing Taxes for LLCs: A Step-by-Step Process

Filing taxes for an LLC can be broken down into three main steps. The exact details can be very complicated, especially to ensure that you take advantage of all deductions and credits along with accurately reporting income and expenses. A tax professional with experience in LLC tax filing can help you navigate your situation. 

1) Gather Necessary Documentation

To file your taxes accurately, you need to compile all relevant financial records for your business. This includes receipts, invoices, profit-and-loss statements, bank account statements, payroll documents, and documentation of any deductible business expenses. Having these documents organized in advance will make completing your tax return much smoother.

2) Complete the Required Tax Forms

Depending on your LLC’s tax classification (as discussed earlier), you will need to file the corresponding tax forms:

3) Pay Any Taxes Owed or Request an Extension

Once you’ve completed your tax forms, you need to pay any taxes due by the filing deadline. If you’re unable to pay the full amount, the IRS allows for installment plans. Additionally, if you need more time to prepare your tax return, you can file for an extension using Form 4868 for individuals and LLCs or Form 7004 for corporations and partnerships. Extensions give you more time to file, but remember that they don’t extend the time you have to pay any taxes owed.

Tax Deductions and Credits for LLCs

Maximizing your available deductions and credits is a critical part of managing your LLC’s tax liability. Here are some common deductions and credits that may be available to you as an LLC owner.

Common Deductions

With LLC tax filing, your business may be able to claim the following deductions to help reduce your tax liability.

  1. Business Expenses: Ordinary and necessary business expenses such as office rent, utilities, supplies, and marketing costs are deductible.
  2. Vehicle Expenses: If you use your vehicle for business purposes, you can deduct related expenses such as fuel, repairs, or mileage.
  3. Home Office Deduction: If you work from home and have a dedicated workspace, you may qualify for a home office deduction.
  4. Employee Salaries and Benefits: Wages paid to employees, along with any benefits like health insurance or retirement contributions, can be deducted.
  5. Depreciation and Amortization: Deduct the cost of business assets like equipment and buildings over their useful lives.
  6. Insurance Premiums: Business-related insurance premiums such as liability, property, and health insurance can be deductible.

Business Credits

When you file business taxes, you may also be able to claim the following business tax deductions:

  1. Research and Development (R&D) Tax Credit: Available to businesses that invest in innovation and developing new products or processes.
  2. Work Opportunity Tax Credit: A tax credit for businesses that hire individuals from certain target groups who face barriers to employment.
  3. Empowerment Zone Employment Credit: A credit for businesses that hire employees who live and work in designated empowerment zones.

Tax credits directly reduce your tax bill, so it’s beneficial to explore these options. if you’re a small business owner or startup founder, check out our guide: 20 Ways to Reduce Your Taxes in 2024

Harness Can Help You File Your LLC Taxes

Ready to tackle business taxes for your LLC? Tax advisors on the Harness platform can help you navigate LLC taxation, working with you to understand your business’s goals and file taxes to help maximize your business income through deductions and credits. Don’t let tax season stress you out — Harness can guide you through it with ease. By partnering with a tax advisor who has experience with startups and small businesses, you can focus on growing your business and achieving your goals. Find a tax advisor at Harness today.

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