Readers who have been reading my blog posts for a while know I’ve addressed LLCs and taxes before. Questions about how to file taxes for an LLC still come up all the time. Consequently, I’ve pulled up a blog from last summer and updated it to share again.
New business clients often tell me that they have an LLC. But that isn’t enough information for me to know how to file their business taxes. An LLC is a legal definition for a limited liability business structure.
An LLC can file income taxes in one of three ways:
- Sole Proprietorship
Individual business owners that have not incorporated will report income and expenses on IRS Schedule C, “Profit or Loss from Business,” filed with the owner’s individual income tax return. A separate Schedule C must be filed for each business. Net business profits are also subject to the employer and employee portions of Medicare and Social Security taxes (i.e., 15.3% in 2017).
- Partnership
Two or more individuals in business together without incorporating must operate as a partnership. Partnerships file a separate income tax return, IRS Form 1065. Partners receive an IRS Form K-1 for their pro rata share of non-wage income and expenses. Partners are responsible for tracking the basis of their shares, which impacts how distributions are taxed.
- Subchapter S Corporation
Qualifying businesses can take the Subchapter -S election and avoid the double taxation of a C Corp. Additional legal documents are required. No outside capital funding is allowed. Sub-S Corporations file a separate income tax return, IRS Form 1120S. Shareholders receive an IRS Form K-1 for their share of non-wage income and expenses. Owner/employees earn wages and get a W-2. Owner’s basis must be tracked.
Taxes can be complicated. Knowing how to file your business taxes might not be as simple as you think. Consult a qualified tax professional to keep it all straight, minimize errors, and leave more time for managing your business.