Overview of Tax Options for LLCs
An LLC pays taxes as either a sole proprietorship or partnership, depending on the number of owners. A single-owner LLC is taxed as a sole proprietorship while a multi-owner LLC is taxed as a partnership.
Electing Corporate Tax Status
LLCs can elect to be taxed as S-corporations or C-corporations by filing IRS form 2553 or form 8832 respectively. S-corp status can offer tax advantages, such as the ability for business profits and losses to pass through to owners’ personal tax returns, as well as lower employment taxes on salaries. On the other hand, a C-corp may be better for LLCs planning to retain earnings for future expansion, as retained earnings are usually taxed at lower rates.
Considerations for Choosing Tax Status
Choosing an LLC structure allows for significant tax planning flexibility, since LLCs can opt to be taxed as corporations. When considering converting to an S-corp, profits greater than a reasonable owner salary could indicate potential tax savings. An S corporation also provides owners with limited liability protection.
In contrast, C Corporations endure double taxation on dividends and higher legal and accounting costs due to their complexity.
Tax Filing for LLCs
The IRS considers multi-member LLCs as partnerships, which require TurboTax Business for Form 1065 filing. Single Member LLCs can use TurboTax Home & Business or TurboTax Online Self Employed. State requirements, such as Illinois’ annual report using Form LLC-50.1, must also be considered. LLC owners can choose their tax classification, either sticking with the default or electing a new status to optimize their tax situation.