LLCs, like other types of businesses, do need to pay taxes each year based on earnings or losses. Once a business becomes an LLC, it’s important to understand how to file taxes and what the impact might be, and there are a few different ways an LLC can be taxed. The main considerations are the number of business owners, whether there are other employees, and whether the business owner elects to file as a corporation. So how are LLCs taxed?
When There’s One Owner
If there is one owner, the business owner will include the income or losses on their personal tax return. An LLC is a pass-through business according to the IRS, so the LLC does not need to file its own tax return. The business owner will simply include the earnings or losses with their personal taxes and make any payments that may be needed to the IRS.
When There are Two or More Owners
When there are two or more owners, an LLC is still considered a pass-through business, but it works a little differently. Each owner will claim their percentage of the earnings or losses on their personal taxes, as well as their percentage of any deductions or credits. If there are two owners, for instance, each business owner will claim half of the earnings or losses for the year. They’ll also each be able to claim half of the deductions or credits.
When There are Employees
If the business has employees, it will need to collect and pay the payroll taxes, which include unemployment, social security, and Medicare. The employee’s share of these taxes should be withheld from checks throughout the year, along with income taxes and filed using special forms at the end of the year. The business owner will pay their share as well as the employee’s share throughout the year, so there shouldn’t be a large amount due at the end of the year.
Other Options
Instead of filing taxes as an LLC, business owners can opt to file as a c-corporation or s-corporation. Certain forms will need to be filled out so the taxes are applied appropriately, but this does not change the business type. It only changes how the business is taxed.
LLC taxes can get complicated, so it’s a good idea to have an accountant run through the options as well as their pros and cons before the end of the first year. This way, you know how to file your taxes and include the LLC taxes, no matter how you decide to file.