If you’re considering starting a Limited Liability Company (LLC) or restructuring your business as an LLC, it’s important to know what taxes you’re responsible for, when your taxes are due, and how to file taxes for your business entity. Keep in mind that an LLC’s tax obligations can vary greatly. Multiple factors affect an LLC’s tax filing responsibilities. For example:
- Does the LLC have one sole owner (Single-Member LLC)) or two or more owners (Multi-Member LLC)?
- Has the LLC elected to have S Corporation or C Corporation tax treatment?
- What are the state and local income and sales tax regulations?
- Does the LLC have employees?
- What industry is the LLC in and what types of goods and services does it sell?
In this article, I’ll walk you through various taxes LLCs may need to report and pay. Note that every business’s circumstances are unique, so consider talking with a tax professional who can assess your situation and identify what taxes apply to you and your LLC.
Single-Member LLC Income Taxes
By default, a Single-Member LLC is considered a “disregarded entity” for federal income tax and is taxed as a Sole Proprietorship with its tax obligations flowing through to the sole LLC member. The LLC member reports profits and losses as business activity on Form 1040 Schedule C, Profit or Loss from Business (Sole Proprietorship). The amount of tax due depends on the LLC member’s personal tax rate. An owner of a Single-Member LLC must also pay self-employment taxes (12.4% of taxable income for Social Security and 2.9% for Medicare) because the individual is not considered an LLC employee and receives no paycheck from which those taxes are withheld.
Most state and local governments also treat Single-Member LLCs the same as Sole Proprietorships for income tax purposes, but some exceptions exist. Also, some states impose a gross receipts tax in addition to or instead of income tax.
Multi-Member LLC Income Taxes
With more than one owner, the Multi-Member LLC receives the same tax treatment as a Partnership, which is a pass-through entity for LLC taxes. LLCs taxed as Partnerships report business income on Form 1065, U.S. Return of Partnership Income, which is an information return that identifies the income distributed to the owners. Then, profit and losses are passed to the LLC members’ personal tax returns. In addition to paying income tax on their share of the profits, the members must also pay self-employment taxes because they are not considered company employees and do not have those taxes taken out of a paycheck. Many Multi-Member LLCs allocate their profits and losses equally among their members. However, if its LLC Operating Agreement documents those details, an LLC can divide income based on a percentage share, duties performed, or money invested.
Most state and local governments also treat Multi-Member LLCs as Partnerships for their income taxes. Depending on the state, LLCs may have to pay a gross receipts tax instead of or in addition to income tax.
Alternatives to LLC Default Income Tax Treatment
Although a company’s legal structure is regulated by the state where the company was formed, eligible LLCs have flexibility in how federal and state income taxes are handled.
S Corporation Election
LLCs choosing to elect S Corporation status for tax purposes can potentially lower their members’ (considered shareholders’ for tax purposes) self-employment tax burden. With S Corporation tax treatment, the LLC remains a pass-through entity with profits and losses passed through to the LLC members. However, members who work in the business are on the company payroll, and only their salaries and wages are subject to Social Security and Medicare taxes with half withheld from their paychecks as FICA and the other half paid by the business. Any profit distributions paid to the members are subject to income tax but not Social Security and Medicare taxes. LLCs can elect S Corporation status by filing IRS Form 2553, Election by a Small Business Corporation, by March 15 of the current tax year. Most states honor the S Corporation election made with the IRS; however, a few states require separate filings for the S Corporation election for the specified state. At tax time, the LLC with S Corp election files an 1120S (U.S. Income Tax Return for an S Corporation) tax return as well as any corresponding required state tax return(s), with its members receiving a Schedule K-1 form indicating their share of the profits and losses.
C Corporation Election
Another option for LLCs is to be treated as a C Corporation for federal tax purposes. As a C Corporation, the company does not pass income and losses onto its members (considered shareholders for tax purposes); instead, it files its own tax forms and pays its own business taxes. The LLC must file IRS Form 8832, Entity Classification Election, to indicate its intention to file taxes as a C Corporation. Then, the LLC files Form 1120, U.S. Corporation Income Tax Return. If the LLC chooses to disburse profits to its members as dividends, the dividends are reported on the owners’ tax returns at the qualifying dividend rate. You’ll hear this called “double taxation” because those dividends are also taxed at the corporate income tax rate before being distributed to the company’s owners. LLC members who work in the business are on the company payroll, so only their wages and salaries are subject to Social Security and Medicare taxes. You may wonder why an LLC might file taxes as a C Corporation. Despite double taxation of some profits, in some situations like if an LLC’s profits are substantial and members’ individual income tax rates are higher than the corporate tax rate C Corporation tax treatment may result in a lower tax burden overall.
Some states honor these federal tax elections for state income tax purposes, while others do not acknowledge them. The states that do not acknowledge the federal tax elections are treated as LLCs unless the state offers a separate tax election that can be made for the specified state.
When are LLC Taxes Due?
Tax reporting and payment deadlines can vary depending on the LLC’s tax election and the LLC’s fiscal year.
Federal Income Tax
Most taxpayers, including LLC members, must file their year-end federal individual tax return and pay any amount due by April 15. The owner of a single-member LLC taxed as a Sole Proprietorship includes Schedule C with their Form 1040 for reporting the company’s profits and losses. LLCs taxed as Partnerships or S Corporations with a tax year in sync with the calendar year have a March 15 tax deadline for their returns. LLCs taxed as C Corporations must file their corporate tax return and pay the tax due by April 15 if they follow a calendar tax year. LLCs with a different fiscal year must file by the 15th day of the third month after the fiscal year ends (e.g., if an LLC’s fiscal year ends on June 30, its return is due by September 15). While tax returns are filed annually, LLC members must make four quarterly estimated tax payments throughout the year to cover their federal income tax and self-employment tax (Social Security and Medicare) obligations. Similarly, LLCs taxed as C Corporations must make estimated tax payments for corporate income tax owned. Deadlines for estimated tax payments typically fall on:
- April 15 , for January 1 through March 31 taxable earnings
- June 15 , for April 1 through May 31 taxable earnings
- September 15 , for June 1 through August 31 taxable earnings
- January 15 of the following year , for September 1 through December 31 taxable earnings (For LLCS treated as a C corporation, the fourth quarter corporate tax estimate is due December 15 for September 1 through November 30 taxable earnings.)
State Income Tax
Generally, states follow the same deadlines as the federal government for reporting income tax and making estimated tax payments. State rules vary, so check with your state tax agency or a trusted tax expert to know when you must file your state income tax return and pay any due taxes.
Local Income Tax
Counties and cities have their own rules which may or may not match the federal or state regulations for when income taxes are due. Research your local tax agency’s requirements or talk with a tax professional to ensure you know the deadlines.
Employment Taxes
LLCs with employees (LLC member-employees or other employees) have some tax responsibilities related to having hired workers on their payroll. An LLC uses its EIN as its ID for federal payroll taxes, and it must complete the state payroll registration process to report and remit taxes at the state level.
Employees’ Income Taxes
If an LLC has employees, it must withhold federal, state, and local income taxes from its workers’ pay and submit them to the appropriate tax authorities.
At the federal level, in addition to federal income tax, It must also withhold FICA, the worker’s portion of Social Security and Medicare taxes, from the employee’s pay and deposit those funds via the Electronic Federal Tax Payment System (EFTPS)Â along with the company’s portion of those taxes to the federal government. The employer and the employee each pay 6.2% of the employee’s earnings to Social Security and 1.45% to Medicare for a total of 12.4% to Social Security and 2.9% to Medicare. Note that there is an additional Medicare employee withholding of 0.9% (with no employer match) for wages over a certain threshold depending on filing status on the individual income tax return.
Most employers report these taxes on Form 941, Employer’s Quarterly Federal Tax Return, which must be filed by the last day of the month that follows the end of the quarter.
- Quarter 1 , January, February, March: deadline, April 30
- Quarter 2 , April, May, June: deadline, July 31
- Quarter 3 , July, August, September: deadline, Oct. 31
- Quarter 4 , October, November, December: deadline, Jan. 31
However, if an LLC has made deposits for full payment of its taxes due for the quarter, it may file its Form 941 by the 10th day of the 2nd month that follows the end of the quarter (e.g., the due date after the January – March quarter would be May 10).
State and local government deadlines may vary, so check with the appropriate tax authorities to learn what deadlines you must meet for reporting and depositing employees’ income taxes.
Unemployment Taxes
An LLC with employees must also pay FUTA (Federal Unemployment Tax Act) tax. FUTA works with state unemployment programs to pay benefits to workers who have lost their jobs through no fault of their own. The 6% FUTA tax (applied to the first $7,000 paid to each employee) is paid solely by the employer; no portion is withheld from employees’ wages. An LLC may be able to take a credit of up to 5.4% (credit can change depending on the required state credit reduction each year) against the FUTA tax, resulting in a net tax rate of 0.6%.
Employers report their FUTA tax responsibility once each year on IRS Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, but they must calculate their tax liability for each quarter and pay that tax quarterly if their tax responsibility is more than $500 for a quarter. Tax amounts under $500 carry over to subsequent quarters until the cumulative tax exceeds $500.
Employers must deposit tax monies by electronic funds transfer by the following IRS due dates:
- April 30 , If the undeposited FUTA Tax responsibility is over $500 on March 31
- July 31 , If the undeposited FUTA Tax responsibility is over $500 on June 30
- October 31 , If the undeposited FUTA Tax responsibility is over $500 on September 30
- January 31 , If the undeposited FUTA Tax responsibility is over $500 on December 31
The due date for filing Form 940 (the annual return) is February 10 for employers who deposited all their FUTA tax payments on time. Others must file by January 31.
In most states, SUTA (State Unemployment Tax Act) tax or SUI (State Unemployment Insurance) is paid by employers, with no money withheld from employees’ pay. SUTA rates, the maximum employee earnings subject to the tax, and due dates for reporting and paying SUTA vary by state. In many states, the deadline for filing and paying SUTA is at the end of the month following the calendar quarter.
Franchise Tax
Some states impose a franchise tax on LLCs. Franchise tax is a privilege tax that an LLC must pay annually for the right to operate in the state. Contrary to its name, franchise tax is not a tax imposed explicitly on franchises. The amount of franchise tax an LLC must pay can vary quite a bit depending on the state. Franchise tax is a flat fee that is usually uniform for all LLCs. Some states have a minimum required payment and impose a higher franchise tax on businesses that exceed a certain income threshold.
Franchise tax due dates and rates vary by state.
Sales Tax
Many states (and some cities) require companies to register for a sales tax permit and collect sales tax from the customer at the point of sale when selling taxable items or performing taxable services. An LLC subject to sales tax must report and remit those funds to the appropriate state (or local) tax authority.
Most states with a sales tax also have a use tax. Use tax is imposed on the buyer of a taxable product or service if the seller did not collect sales tax at the point of sale.
Sales and use tax rates, reporting requirements, and deposit due dates vary depending on the state. Generally, sales tax must be reported and paid monthly. But under some circumstances (such as owing a tax amount under a specific threshold), they are required quarterly, semi-annually, or annually instead.
Excise Tax
The federal government imposes excise taxes on the import, sale, or use of specific goods or services, such as airline tickets, fuel, tires, and tobacco.
Federal excise taxes must be reported quarterly to the IRS on Form 720, Quarterly Federal Excise Tax Return. The form may be filed electronically or via a paper return. Filing due dates are as follows:
- April 30 for Quarter 1 (January – March)
- July 30 for Quarter 2 (April – June)
- October 31 for Quarter 3 (July – September)
- January 31 for Quarter 4 (October – December)
Generally, the IRS requires semimonthly deposits (made by electronic funds transfer via the EFTPS system) to pay excise taxes. One payment is due by the 29th of the month for the semimonthly period running from day 1 to 15 of the month, and the second payment is due by the 14th of the following month for the semimonthly period running from day 16 to the last day of the prior month.
There are some exceptions, and I recommend referring to IRS Publication 510, which is a comprehensive guide to the types of excise taxes, payment of excise taxes, and other details.
States and local jurisdictions may also levy excise taxes on certain goods or services. The rules can vary from state to state, so it’s essential to research the regulations where your LLC does business and talk with a tax advisor for guidance if you need assistance understanding your responsibilities.
Do Your Homework and Stay in the Know
While I’ve covered many types of taxes an LLC may have to report and pay, states and local governments may have other requirements. Also, the federal tax code changes regularly. I can’t over-emphasize the importance of doing your homework and getting assistance from a tax expert to ensure you know your responsibilities and what you need to do to fulfill them.
CorXec can quickly register your new business for State Unemployment Insurance Tax (SUI) and State Income Tax (SIT). Our specialists manage the process of payroll tax registration so that virtually no work is required on your part. We do the work so you can worry about growing your business.
