November 15, 2021
Being an owner of a limited liability company (LLC) allows for more flexibility with how the IRS taxes your earnings. LLCs don’t have a unique set of tax rules, so how you choose to tax your earnings will determine which rules you must adhere to. Your choices for tax rules include partnership, corporate, and sole proprietor. Each of these options come with their own filing requirements.
It’s important to choose how you want your earnings to be taxed because the IRS will automatically treat your business as a partnership. This designation doesn’t fit if you’re a sole proprietor or prefer to file as a corporation. Once you choose your tax rules, you cannot change the designation again for five years, which is why you must choose wisely.
Sole Proprietorship/Single Member LLC
As a sole proprietor, you are personally responsible for all tax returns and payments. When you prepare your income tax return, you must include a Schedule C attachment. The Schedule C reports the income and deductions from your business. Any profits calculated on Schedule C are included with the rest of your income on Form 1040.
Partnership LLC
As a partnership, your tax rules indicate that you are responsible for filing annual tax returns on IRS Form 1065, but the company is not responsible for paying the tax on business earnings. Instead, each individual owner (partner) files and reports their income via their own tax returns. Each owner’s earnings are reported by the LLC on a Schedule K-1.
Corporate LLC
With a corporate designation, your business is treated as a separate taxpayer from yourself. The responsibility of reporting income and deductions falls on the business itself. This can be achieved through filing Form 1120 annually and paying income tax on time.
Although you and the other owners are not responsible to file the returns and pay the income taxes, the business earnings are taxed twice. The second tax occurs when the owners receive a dividend. Each owner of the LLC must report on the dividend as taxable income via Form 1040, which is their individual responsibility to pay tax on.
Filing business taxes for an LLC can be confusing. Should you find yourself in tax debt, give Optima a call for a free consultation at 800-536-0734.