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How to File Business Taxes for an LLC

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Limited liability companies (LLCs) can have different taxation benefits, especially those that were set up in Nevada. However, this doesn’t exempt them from other forms of taxation. 

November 28, 2022
Author: NCH

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The Internal Revenue Service (IRS) will treat an LLC as part of the owner’s tax return, partnership, or corporation. This will depend on how many members the company has and the number of tax elections made by the company.

How Do You Determine Tax Classification?

Since the IRS does not automatically consider LLCs as corporations, the members need to elect their entity classification. The LLC must file Form 8832, Entity Classification Election as a corporation, or Form 2553, Election by Small Business Corporation as an S corporation, to inform the IRS how it wants the company to be classified for tax purposes. 

The company may choose among the following:

  • Part of owner’s tax return (disregarded entity)
  • Corporation
  • Partnership

The form contains updated mailing lists for each state. Bear in mind that the LLC should file Form 8832 or Form 2553 within 75 days of the company’s formation. The IRS allows filing within the first 75 days of each fiscal year if the company fails to comply with the original period. Alternatively, the IRS provides rules for late filing if the LLC exceeds 75 days.

The IRS will send a determination letter within 60 days to inform the LLC of its decision. Owners can call 1-800-829-0115 if they have not received the letter within the said time frame.

How to File Business Taxes for LLCs?

LLCs have a more flexible tax status compared to sole proprietorships. This is why the IRS can tax LLCs as pass-through entities or consider them as C or S corporations for tax purposes. Take note that setting up an LLC in Nevada, for example, doesn’t exempt business owners from paying taxes and other fees in other states. Even if they have an LLC established in Nevada, their corporations still need to comply with the taxation protocols of their home states.

Understanding Tax Filing Requirements

Single-Member LLC

As mentioned earlier, the IRS will consider the tax status of the LLC as a disregarded entity if the members do not elect another classification. As a result, the federal tax return will reflect the profits or losses of the LLC.

Single-member LLCs must file Schedule C with Form 1040, which contains information about an individual’s annual income tax return. Schedule C allows an individual to report income or loss from a business. This includes income, expenses, and costs of goods sold.

Businesses that own rental properties must file Schedule E instead of Schedule C. The form lets the entity inform the IRS of the income or loss from rental real estate and other ventures.

Multi-Member LLC

The IRS treats a multi-member LLC as a partnership. A partnership “passes through” profits or losses to the partners, much like how a single-member LLC is treated. Naturally, having several members makes it more complicated to file taxes.

The partnership needs to submit Form 1065 to the IRS. It includes income, deductions, tax, and payment. It also asks for other information, such as entity type and stock ownership.

Moreover, the IRS requires each member of the LLC to provide Schedule K-1. This is a report of the income, deductions, and credits of each share of every member in the partnership. Filing Form 1040 must include details from the K-1 in your Schedule E.

C Corporation

After submitting Form 8832 to be elected as a corporation, the LLC must file Form 1120 to report income, deductions, tax, refundable credits, and payments. 

It also contains Schedule C for dividends and special deductions. Schedule J deals with tax computation and payment, while Schedule K asks for other information, such as accounting methods and products or services.

S Corporation

S corporations elect to pass the income, losses, and deductions of the company to the members for federal tax purposes. This form of taxation works similarly to that of a single or multi-member LLC. However, members must file more documents.

How to file business taxes for an LLC to be considered an S corporation?

Filing business taxes for an LLC to be considered an S corporation requires the company to submit Form 2553 instead of Form 8832. This requires the following details:

  • Election information
  • Selection of fiscal tax year
  • Late corporate classification election representations

Once the IRS approves the classification, the members will then file Form 1120-S to report the income, losses, deductions, and credits of the LLC. 

Take note that the IRS considers an S corporation as a pass-through entity. Hence, each member will receive Schedule K-1. It contains information about the following:

  • Partnership and Partner
  • Partner’s share of income, deductions, credits, and other items

The IRS requires each member to report such information on Part II of Schedule E (Income or Loss From Partnerships and S Corporations). Schedule E then gets filed with Form 1040. 

What Other Taxes Do LLCs Pay?

Estimated Tax

The IRS requires sole proprietors, partners, and S corporation members to pay estimated taxes if they expect to owe a tax of $1,000 and above. The IRS set a lower range of $500 or more for corporations.

Individuals must pay estimated tax on income not subject to withholding. For instance, owners who receive interest, dividends, capital gains, and self-employment income must file Form 1040-ES or the Estimated Tax for Individuals. Keeping track of payments is essential for tax return reports.

Self-Employment Taxes

Individuals who earn income from business activities must submit Schedule SE and pay self-employment taxes. The IRS sets this at 15.3%, which covers 12.4% for social security and 2.9% for Medicare.

But if the LLC was elected as a C corporation or S corporation, it does not need to pay self-employment taxes but would have to pay payroll taxes instead.

State Income Taxes

State income taxes apply to the LLC’s net income, and the rates vary widely. Some states have a flat tax rate, while others have a progressive tax system with rates that increase as income levels rise. 

Compliance with state income tax requirements involves filing annual tax returns with the state’s revenue or taxation department. In states with no income tax, such as Texas and Nevada, LLCs may still be subject to other taxes, such as franchise taxes or business entity taxes. 

Tax Return Due Dates

Knowing how to file taxes for LLCs entails taking note of the different due dates of each form:

Tax Status

Forms

Due Dates

Single-Member LLC

Schedule C and Schedule SE

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April 15

Multi-Member LLC

Form 1065 and Schedule K-1

March 15

Schedule E and Schedule SE

April 15

S Corporation

Form 1120 S and K-1

March 15

C Corporation

Form 1120

April 15

Business owners can file for an extension if they cannot meet the deadlines of the different tax filing dates. Owners who ignore these deadlines can receive penalties imposed by the IRS.

Common Mistakes to Avoid When Filing LLC Taxes

Mistake #1: Misclassifying Business Entity 

An LLC can choose how it wants to be taxed, either as a sole proprietorship, partnership, S corporation, or C corporation. Choosing the wrong classification can result in unnecessary taxes or missed opportunities for deductions.

Mistake #2: Incomplete or Inaccurate Record-Keeping

Failing to maintain comprehensive and organized financial records can result in errors, oversights, and potential audit triggers. Keep meticulous records of income, expenses, and any deductions claimed to substantiate the information provided in the tax return.

Mistake #3: Overlooking Deductions

Business owners may miss out on valuable deductions by not understanding the available tax breaks for LLCs. Deductions include business-related expenses like office supplies, travel, and certain startup costs. Staying informed about potential deductions can help minimize tax liability.

Mistake #4: Ignoring State Tax Obligations 

LLCs are subject to state tax laws, and requirements can vary widely from one state to another. Business owners must understand and comply with state tax obligations, including filing deadlines and any specific state-level tax deductions or credits.

Changing Your Tax Classification

Step 1: Understand Your Options

There are several classifications, such as sole proprietorship, partnership, S corporation, and C corporation. For example, if you are a business owner, you might be eligible to change from a sole proprietorship to an S corporation. Each status has its own tax implications, so choose the one that best fits your current situation.

Step 2: Gather Information

Collect all necessary documentation to support your request. This may include financial statements, business plans, or any other relevant records demonstrating the need for a change in tax classification. Ensure that your documents are accurate and up-to-date, as the tax authorities will rely on this information to assess your request.

Step 3: Complete the Necessary Forms

The form you need to file depends on your current classification and the one you are transitioning to. For instance, if you are changing from a sole proprietorship to an S corporation, you may need to file Form 2553.

Step 4: Notify State Authorities

In addition to the IRS, inform the relevant state authorities about the change in your tax classification. Each state may have its own requirements and forms for updating business information. Failure to notify state authorities could result in compliance issues and penalties.

Step 5: Implement Changes

Once your request is approved, implement the necessary changes in your business operations to align with the new tax classification. This may involve updating your financial systems, notifying relevant stakeholders, or adjusting your tax filing process. 

Best Practices for Filing LLC Taxes

Tip #1: Keep Accurate Records 

Track income, expenses, receipts, and other relevant documents. Utilize accounting software or hire a professional to ensure accuracy. This not only simplifies the tax filing process but also provides a clear overview of your business’s financial health.

Tip #2: Separate Personal and Business Finances

It’s best to have a dedicated business bank account and use it exclusively for business transactions. Having separate bank accounts simplifies the tracking of income and expenses for tax purposes and reinforces the limited liability protection that an LLC provides.

Tip #3: Understand Eligible Deductions and Credits

Common deductions include business-related expenses such as office supplies, travel, and marketing costs. Take advantage of tax credits for activities like research and development or hiring certain types of employees.

Tip #4: Comply with Filing Deadlines

Missing tax deadlines can lead to penalties and interest charges. Be aware of federal, state, and local tax deadlines, including estimated quarterly tax payments. Create a system to stay organized and ensure that all necessary forms are filed on time. 

Tip #5: Consider Professional Assistance

Professionals can help identify potential deductions, understand complex tax regulations, and optimize your LLC’s tax strategy. Investing in expert advice can ultimately save you time and money while reducing the risk of errors in your tax filings.

Let Experts Prepare Your Taxes

Filing taxes and taking note of due dates can be stressful for business owners. NCH and our business partner, Campbell Jones Cohen CPA, offer insights from CPAs and senior tax accountants. Our business startup specialists offer tax consultation, preparation, resolution, and bookkeeping services.

You can save yourself thousands of dollars by making informed tax decisions and handling them the best way possible. Our tax consulting service can help you better understand your tax write-offs and how to keep track of those expenses properly.

Be sure to use our tax service to get help from CPAs and senior tax accountants. Focus on growing your LLC without worrying about complicated taxes.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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