Taxation on an LLC

Limited Liability Company taxation can be confusing to new owners, but understanding the selection type of the LLC will simplify tax questions. An LLC with one owner can be taxed like a sole proprietorship, C-Corporation, or even a S-Corporation. Ultimately, understanding how a LLC is treated for income tax determines how the entity is taxed. Community property states allow for a husband and wife to be treated as a single member LLC. When an LLC has multiple owners a partnership is the default classification, but still have the right to be a S or C corporation.

One of the major downsides of a Limited Liability Company is payroll and self employment taxes. Single member LLC pays self employment taxes on its profits, which goes on schedule C tax form. That is for active trade business, but a passive LLC (Real Estate Investing) does not pay self employment tax on its profits, but reports its passive income on schedule E.

Multiple member LLC as a partnership engaged in active business pay self employment taxes on their shares of the profit. LLC reports business income on a separate 1065 partnership form, and then the individual calculate their self-employment tax bills on their share of the profits which accompanies their 1040 return.

LLC as a C-corporation are not subject to self employment tax. Profits are subject to corporate income tax and are reported on the LLC's 1120 corporate return. If dividends are distributed they are subject to 15% qualifying dividend tax rate. C-Corporations are subject to payroll taxes on wages paid to members.

LLC as a S-corporation are not subject to neither self employment tax or corporate income tax. Form 1120 needs to be filed and through this return LLC owner's get taxed at their respective corporate profits. The S-corporation must pay reasonable salary which the S-corporations will owe payroll taxes.

Understanding how each entity is taxed will help with the right selection of what the LLC should be; in turn determining how it will be taxed.

This is not advice. Each individual should consult their CPA or Attorney.

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