Understanding LLCs and Taxation
An LLC, or limited liability company, is a legal business structure that protects the owner’s personal assets from the company’s debts. Owners of an LLC are called members. LLCs can be single-member or multiple-member owned. You can think of an LLC as a hybrid between a partnership and a corporation. LLCs are a common business structure for small and medium businesses and entrepreneurs because of their simplicity and flexibility.
Earned Income and LLCs
Earned income includes wages, salaries, tips, commissions, and net earnings from self-employment. Income from an LLC is considered earned income. As the sole owner of an LLC, you’ll report business income and expenses on Form 1040, Schedule C. If the LLC generates a profit, the owner will owe taxes.
Pass-Through Taxation
If an LLC does earn income, that income will be “passed through” to the LLC’s owners for federal income tax purposes. A pass-through entity simply means that the LLC’s owners will only report the business’s income once, on their personal tax return. The LLC itself does not pay income taxes.
State Residency and Taxes
In order to be considered a resident of Wyoming, you must live in the state for at least six months. The Wyoming state sales tax rate is 4%. The total tax rate can be as high as 6 percent. Drugs and groceries are not subject to sales tax.
Is Being an Author Considered a Business?
Is being an author considered a business? It depends on a number of factors. For example, if an author is self-employed and earns a living through writing books, then this could be considered a business.
Single-Member LLCs and Sole Proprietorships
For tax purposes, single-member LLCs function similarly to sole proprietorships. Both are pass-through businesses wherein the income of the business “passes through” to be taxed under the owner’s individual income tax.
Multi-Member LLCs
Multi-member LLCs are also considered pass-through entities. Partners are taxed on the business’s income commensurate with each partner’s ownership percentage. Guaranteed payments can be set up to ensure a minimum amount paid out to partners regardless of profit.
Self-Employment and Corporate Taxes
Unless a corporate tax structure is elected, business income from an LLC is subject to self-employment tax. Owners of LLCs who elect to be taxed as corporations are not self-employed. They pay income tax on dividends, but not self-employment taxes. This includes shareholders of S corporations.
LLC Income as Personal Income
For federal income tax purposes, LLCs are treated as pass-through entities, which means that LLCs themselves do not pay taxes on their business income; it is the members who pay the taxes on their shares of LLC profits. The net income shown on Schedule C is added to the person’s other income on their tax return (Form 1040 or 1040-SR).
Tax Filing for LLCs
A single LLC member must file a Form 1040 income tax return and report business income and losses on Schedule C. Multi-member LLCs must file an informational return on Form 1065, U.S. Partnership Return of Income, and each member files their share of the income on their own personal tax return.
LLC Tax Rates
LLC tax rates are determined based on the type of LLC you have and your personal income tax rate. If you own an LLC by yourself, you are taxed by default as a sole proprietorship. If you own an LLC with other individuals, you are taxed by default as a partnership. Either way, LLC’s are considered a pass-through entity by default.