LLC Taxation Overview
The IRS treats one-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the IRS. You must report all profits (or losses) of the LLC on Schedule C and submit it with your 1040 tax return.
LLCs can choose corporate tax status by making a tax election. This allows the LLC to file taxes as a C-corporation or S-corporation rather than a pass-through entity. To do so, the LLC must file paperwork with the IRS. The LLC will continue operating legally as an LLC even if it chooses corporate tax status for tax purposes.
In general, if your income is below a certain level, you may not need to file a personal tax return. However, there are other reasons you may need or want to file, like claiming tax credits. Use IRS tools to determine if you should file a return.
Failure to File Taxes
If you fail to file your taxes on time, you’ll likely encounter what’s called a Failure to File Penalty. The penalty for failing to file represents 5% of your unpaid tax liability for each month your return is late, up to 25% of your total unpaid taxes.
LLC Taxation Scenarios
- LLCs Taxed Once: LLCs are taxed only once – at the individual level. The profits and losses of the LLC are reported on the owners’ personal tax returns, and they are responsible for paying any applicable taxes on that income.
Tax Status Elections
- Tax Election Choice: LLCs give the flexibility of choosing how they are taxed – default as a sole proprietorship or partnership, or electing to be taxed as an S Corp or C Corp.
State Taxation Variations
- State Taxes: Most states tax LLC profits the same way – owners pay taxes on their personal returns, while the LLC itself does not pay state taxes.
Penalties and Refunds
If you fail to file your taxes on time, you’ll likely encounter what’s called a Failure to File Penalty. The penalty for failing to file represents 5% of your unpaid tax liability for each month your return is late, up to 25% of your total unpaid taxes. If you’re due a refund, there’s no penalty for failure to file.
How to File Taxes as an LLC Entity
- Tax Elections and Filings: LLCs can elect different tax statuses and have various ways of filing taxes based on their chosen tax elections.