A limited liability company (LLC) tallies up its income and deductions for the year. The net earnings of the LLC are then allocated to each LLC member based on the member’s percentage of ownership of the LLC. LLC members report and pay tax on their share of the LLC’s net earnings for the year.
There are four different ways to file taxes for an LLC. An LLC can be treated as a sole proprietorship, as a partnership, as an S-corporation, or as a C-corporation. LLCs with just one owner are treated as a sole proprietorship for tax purposes. LLCs with two or more members are treated as partnerships. Optionally, LLC members can elect to have the LLC treated as an S-corporation or as a C-corporation.
Below, you will find a brief description of each of these four LLC tax return options, along with their federal tax reporting responsibilities:
For tax purposes, a single-member LLC is, by default, treated like a sole proprietor. All business income, deductions, and credits must be reported on Schedule C, which will carry over to the owner’s personal tax return. In addition, the owner must also pay self-employment tax on their net earnings.
A multi-member LLC is treated like a partnership for tax purposes by default. All income, deductions, and credits of the partnership must be reported on Form 1065 and pass through to the owner’s personal tax return. In addition, each partner is responsible for paying self-employment tax on their net business earnings.
Members can choose for their LLC to be treated like an S-corporation for tax purposes. By making this election, the income, deductions, and credits of the LLC are passed through to the owners on Schedule K-1. For LLCs treated as S-corps, the net earnings of the LLC are subject to ordinary tax rates on the owner’s personal tax return. There is no self-employment tax on the S-corporation’s net earnings. This is similar to partnership treatment, except owners who work for the LLC will be employees subject to FICA taxes on their salary.
To elect S-corp status for an LLC, you need to file Form 8832 and Form 2553. For more details, read our guide to Form 8832.
An LLC can choose to be treated like a C-corporation for tax purposes. By making this election, the LLC pays its own taxes at the corporate tax rates. The LLC’s income does not pass onto the owner’s personal returns. Instead, the net earnings of the LLC are subject to the corporate tax rate. Currently, the corporate tax rate is a flat 21% on net profits. There is no self-employment tax on the C-corporation’s net earnings. Owners pay tax only on income they actually receive from the LLC, such as salaries or dividends.
To elect C-corp status for an LLC, you need to file Form 8832. For more details, read our guide to Form 8832.