What taxes does an LLC pay?
A LLC or Limited Liability Company is a type of private business not subject to as many laws as standard businesses which makes the structure more flexible. An LLC cannot be double-taxed because the pass-through status allows them to report business income on their personal tax returns. LLCs can be classified as a single member or multi-member. Learn what taxes an LLC pays.
Self-Employment Taxes
Since LLC members are considered self-employed business owners, they don’t make payments to Medicare or Social Security. However, one member of a multi-member LLC gets classified by the IRS as sole owner and must pay social security taxes and Medicare taxes to the IRS. The amount an LLC pays for Social Security and Medicare are commonly higher than standard corporations because employers match employee contributions, but you can deduct half of this expense on tax returns. You file these self-employment taxes under Schedule SE with your personal income tax on the 1040 form.
State Fees and Taxes
The LLC does not pay state or federal taxes itself, but you still have to report state taxes on a personal income tax form. Each state varies on how it classifies the business for tax purposes and may charge excise fees or franchise fees. New Hampshire, Delaware, California, and Wyoming are some states that impose franchise fees. Not paying these fees or taxes could result in stiff fines. You can find if your state charges these fees and classification information on the secretary of state’s website for your state.
Profits and Losses
An LLC still has to recognize profits and losses. The profits should be included in the member’s income and divided based on member percentage interest. For example, if a member has a 30% interest, you would give them 30% of the profits. If you want to give members more profit, you must report this according to the rules. Multi-member LLCs must file form 1065 and the LLC must include profits and losses for each member on form K-1. The members attach this to their 1040 form with Schedule E.
LLCs can also elect for corporation status to retain more income. These are some of the taxes an LLC has to pay. If you are unsure of anything, seek the advice of a tax professional.