Forming an LLC does not, by itself, create a new federal tax return for a one-owner business. That surprises many owners who assume that a company needs its own return. Understanding the default rules, and the few places where the LLC is treated as separate, prevents most of the mistakes we see.
The default rule: disregarded entity
According to the IRS, a single-member LLC is generally a disregarded entity for income tax purposes. It is treated as an entity disregarded as separate from its owner unless it files Form 8832 to be taxed as a corporation. For an individual owner, the IRS says the LLC's activity typically goes on Schedule C, E, or F of Form 1040 or 1040-SR. A single-member LLC owned by a corporation or partnership is reported as a division of that owner.
What you file
- Form 1040 with Schedule C (Profit or Loss From Business) for most operating businesses.
- Schedule SE to compute self-employment tax. The IRS says an individual owner pays self-employment tax on net earnings in the same manner as a sole proprietorship.
- Schedule E instead of Schedule C if the LLC only holds rental real estate, and Schedule F for farming.
- Estimated tax payments during the year. See quarterly estimated taxes for LLC owners.
- State income tax returns, and in some states an LLC fee, franchise tax, or annual report.
Deadlines
Because the LLC reports on your personal return, the filing deadline is your personal return deadline, generally April 15 for calendar-year individuals, with an automatic extension to file available if you request it. An extension to file is not an extension to pay, so any tax owed is still due by the original deadline. Estimated payments follow their own schedule. See business tax extension filing. State deadlines and LLC annual reports have their own due dates, which vary by state.
Where the LLC is treated as a separate entity
The IRS says a single-member LLC is treated as a separate entity for employment tax and certain excise taxes. For wages paid after January 1, 2009, the LLC uses its own name and EIN to report and pay employment taxes. An EIN is required if the LLC has employees or owes certain excise taxes. Without those, the LLC can use the owner's name and taxpayer identification number for income tax, though many owners get an EIN to open a bank account or because state law requires one.
Owner pay: no salary, just draws
A disregarded single-member LLC owner is not an employee of the LLC. Money you take out is a draw, not wages, and does not reduce your taxable profit. Tax is based on net profit whether or not you withdraw it. That is why people are surprised by a tax bill in a year they left cash in the business.
Your elections
- Stay disregarded: simplest, with all profit subject to self-employment tax.
- Elect S corporation status: payroll for the owner, a separate Form 1120-S, and potential self-employment tax savings. See LLC taxed as S corp.
- Elect C corporation status with Form 8832: a separate corporate return and entity-level tax. Uncommon for small operating businesses.
Common mistakes
- 1Mixing personal and business money, which makes bookkeeping and audit defense harder.
- 2Skipping estimated tax payments and paying penalties.
- 3Forgetting self-employment tax when estimating what to set aside. See how much to set aside for business taxes.
- 4Treating owner draws as salary or as deductible expenses.
- 5Missing state annual reports or franchise taxes, which can lead to penalties or administrative dissolution.
- 6Misclassifying workers as contractors when they are employees.
- 7Not keeping the records that support deductions, such as mileage logs and receipts.
Spouses who own an LLC together
The IRS notes that a business wholly owned by spouses as community property may be treated as either disregarded or as a partnership, and the IRS accepts either position. An LLC owned by spouses in a state that is not a community property state should file as a partnership. If you are in this situation, it is worth confirming how your state treats the ownership. See multi-member LLC tax filing.
When to get help
- Your profit is growing and an election may save tax.
- You are adding employees or a second owner.
- You sell in multiple states.
- Your books are behind. See bookkeeping cleanup services.
For a deeper look at self-employed returns, see Schedule C tax preparation. Our tax preparation service handles single-member LLC returns and elections. To schedule a consultation, tell us your state and how your LLC is currently taxed.
