Tax season can be a stressful time, especially if you are worried about filing personal taxes and business tax returns. If you formed a limited liability company (LLC) in 2020, you may be wondering how you will be taxed and what you need to do to file. Fortunately, at NewLLC, we understand how confusing it can all be, especially the first time. That is why we have set up this guide to LLC tax filings in 2020. Here is what you need to know to file your LLC taxes accurately and on time!
How are LLCs Taxed?
LLCs allow for some flexibility in tax filings but, unfortunately, it is not always easy to figure out exactly what steps you need to take. The Internal Revenue Service (IRS) does not have a designation for an LLC as an entity so there is not a specific tax form that is universal for an LLC structure. Your tax status with the IRS will depend on whether or not your LLC is run by a single person or multiple people. If you’re a single-member LLC, the IRS automatically views your LLC as a sole proprietorship. If you're a multi-member LLC, the IRS automatically views it as a general partnership. But those aren’t the only two options. Your LLC can be taxed like a corporation if you fill out a form with the IRS. Here’s a look at each filing and how to go about it.
How to File as a Single Member LLC
As a single-member LLC, you will be considered a sole proprietorship and your income and expenses will be recorded on Schedule C of your personal tax return. Net profits and losses will be included in the income section of Form 1040. However, if your LLC owns rental properties, you will record income and expenses on Schedule E instead of Schedule C. A single-member LLC taxed as a sole proprietorship is known as a “disregarded entity” unless you have chosen otherwise. All this means is that for tax purposes, the LLC is ignored and all profits and losses pass through you as the owner. The LLC will still otherwise retain its operating structure.
How to File as a Multi-Member LLC
If the LLC is owned by more than one person, the IRS will automatically treat it as a partnership. The LLC is required to fill out Form 1065, a partnership information return. The LLC is also required to issue and submit K-1 forms for each member of the LLC. These forms include the share of profits, losses, and deductions. The percentage of each members’ share can be found in the LLC’s operating agreement. Each member will include the information from the K-1 on Schedule E of Form 1040.
How to File as a Corporation
If you do not want to use the default options listed above, you can consider filing as a corporation. You might consider filing as a corporation if you are leaving a large amount of money in the business each year to finance things like expansion, or if profits are greater than the amount owners or employees should make in salary and you want to reduce self-employment taxes. Choosing to file as a C Corp or S Corp will not change the structure of your business, it will simply change the way the IRS expects you to file taxes. To file as a C Corp, complete and submit Form 8832. This form will establish your designation with the IRS. Then, you will be required to file Form 1120 each year for your business tax return. Shareholders will report any salary or dividends on their personal tax returns. To file as an S Corp, complete and submit Form 2553. You’ll then be required to file Form 1120-S each year as your S Corp tax return. An S Corp is a pass-through entity and as such does not pay taxes itself. Income and expenses flow through to your personal tax return. Each member of the LLC will be issued a Schedule K-1 and include that information on Schedule E of Form 1040 of their personal tax return.
Self Employment Taxes
Because single-member and multi-member LLCs are pass-through entities, income and losses are reported as self-employment income. Each business owner will file self-employment tax reports as well as the annual Schedule C of Form 1040. Each owner is subject to self-employment taxes as both the employee and the employer. Self-employment taxes are 15.3% and cover Medicare (2.9%) and Social Security (12.4%) taxes. When employed by someone else, this tax burden is shared with the employee and employer both paying 7.65% When self-employed, you are responsible for all of it. S and C corporations are not subject to self-employment taxes. They do, however, have payroll taxes which are deducted from each employee’s paycheck.
Estimated Quarterly Tax Payments
You will be expected to make tax payments throughout the year. If you filed using the default status of a single or multi-member LLC, you will make estimated income tax payments four different times throughout the year. The payments are due in April, June, September, and January. You can make these estimated payments using Form 1040-ES. Be sure to keep track of all payments you’ve made as you will be required to report them on your tax return.
Are LLCs Eligible for a Tax Refund?
As an LLC, it is possible to receive money from the IRS for overpayment. In most LLC filings, taxes pass through to the owner(s) meaning that these individuals will pay and receive the taxes. This means that excess tax payments will be received personally, rather than through the LLC. It is only a C Corp that is eligible for a tax refund.
Do Personal Taxes Need to be Filed Separately?
The answer to this question depends on the structure of your LLC. If you are a single member or multi-member LLC, you are a pass-through entity so your profits and losses will be recorded on your personal tax return. While an S Corp is a pass-through entity, you need to submit Form 2553 and Form 1120-S as well as recording the profits and losses on your individual return. A C Corp will complete separate returns as they are not flow-through entities.
When Are LLC Tax Returns Due?
Unfortunately, there is no one single deadline for LLC tax returns. Here are all the dates you should be aware of:
- Single Member LLC: Schedule C and Schedule SE are due April 15
- Multi Member LLC: Form 1065 and Schedule K-1 are due March 15. Schedule E and Schedule SE are due April 15
- S Corporation: The 1120-S and the K-1 are due March 15
- C Corporation: The 1120 is due April 15
It is important to note that the dates for S and C Corps are based on businesses that end their business year on December 31. If you are unable to meet these deadlines, you can file for an extension. This extension will apply to filing your taxes, not paying them. You will still be required to pay your taxes by the original due date to avoid penalties.
Prepare and Organize Your Paperwork Early
The best thing you can do for your LLC is to stay on top of your accounting and tax paperwork.Keep careful records make sure that you are always aware of your filing deadlines and quarterly payment dates. If you don’t have a head for numbers, are already overwhelmed and busy, or are filing as an LLC for the first time, consider reaching out to an expert for support and guidance. The tax experts at H&R Block can answer all of your questions and ensure that your returns are filled in properly and filed on time. If you’d like advice from a CPA for more than just taxes, consider hiring a freelance accountant that will be available whenever you need. Taxes are never fun but they are an unavoidable part of doing business. Get your accounting in order early and you will be prepared when the filing deadline finally arrives!