How to File LLC Business Taxes for the First Time

A limited liability company (LLC) is a popular business structure, but the IRS doesn't use a fixed tax classification for it. For income tax purposes, an LLC can be treated as a sole proprietor, partnership or corporation. This classification, often chosen when your LLC is first formed, will impact which tax forms you need to fill out.

Here’s a rundown of how to file LLC business taxes for the first time.

1. Weigh your need for professional help

Ideally, LLCs should always consult a tax professional well before tax season starts to get their records in order. This is especially true for LLCs filing business taxes for the first time. Certified accountants and tax professionals can also help you weigh the pros and cons of becoming a corporation, and many other nuances of the process.

But the following steps can help you understand how the process generally works, and exactly how much professional help you might need for your situation.

» MORE: How to find the right small-business tax advisor

2. Determine your LLC’s current tax classification

There are the four main ways LLCs can be classified for tax purposes:

• Sole proprietorship.  

• Partnership.

• S corporation. 

• C corporation. 

By default, the IRS treats single-member LLCs as sole proprietorships and multi-member LLCs as partnerships. Both of these are considered pass-through entities. That means members (also called LLC owners) report the LLC’s profits and losses on their own individual tax forms. In this case, the LLC isn’t treated as a separate business entity.

To have your LLC classified as a corporation, you have to fill out specific forms. Becoming a C corporation, for example, involves filing Form 8832. Becoming an S corporation involves filing Form 2553. If you didn’t file either of these, your LLC is probably classified as either a sole proprietorship or a partnership.

Don’t remember whether you opted to change your LLC’s tax status to a corporation? You can try calling the IRS and providing your employer identification number.

» MORE: How to look up your employer identification number (EIN)

3. Decide whether you’d like to change your tax classification

Note that your tax status won’t affect your LLC from a legal standpoint. Legally, your business will continue to operate as an LLC.

However, income in a corporation is taxed differently than an LLC. Typically, a corporation is eligible for more deductions and credits.

But choosing a corporation over an LLC also has its downsides if your business doesn’t make enough profit. It may also involve additional administrative work that requires your time and money.

If you decide to change your election prior to filing taxes, know that you can’t change it again for another 60 months, per IRS rules.

4. Prepare your federal income tax forms

LLC owners can be responsible for a wide range of business taxes — more on those below — but income taxes are usually the biggest burden. How you file and pay income taxes depends on your LLC’s tax classification. Here are the various tax classifications and forms that each requires.

Sole proprietorship

If your single-member LLC is classified as a sole proprietorship, report its profit and losses in Schedule C of your Form 1040 individual tax return.

If the LLC generates a profit for the year, you’ll owe taxes to the IRS in accordance with your personal income tax rate. If the LLC operates at a loss for the year, you can deduct the business’s losses from your personal income.

Partnership

If your multi-member LLC is classified as a partnership, you’ll need to file Form 1065, U.S. Return of Partnership Income. This is an informational return that must be filed annually with the IRS.

You’ll also need to distribute Schedule K-1s to each LLC member for their records. This tax form, which is part of Form 1065, summarizes their share of LLC income, losses, credits and deductions. Each member will pay taxes on the LLC’s income in proportion to their ownership stake.

If, for instance, two members in an LLC have a 50-50 ownership split, each owner will be responsible for paying taxes on half of the business’s profits. The LLC tax rate aligns with their individual income tax bracket. Each owner can also claim half of the small-business tax deductions and tax credits that the LLC is eligible for, and write off half of the losses.

S corporation

LLC members can choose to classify their business as an S corporation for tax purposes. Usually, you can find the voting procedure and consent required to make this change in the LLC operating agreement. To opt for S corporation tax status, file Form 2553 with the IRS.

An S-corporation is taxed like a pass-through entity, with some differences in how salary and distributions from the business are taxed. To file taxes for an S-corp, submit Form 1120-S, U.S. Income Tax Return to the IRS.

C corporation

Your LLC can opt to be taxed as a C corporation by filing Form 8832 with the IRS (your state might also require additional forms for a change in tax status). If you make this change, your LLC will be subject to the 21% federal corporate tax rate. You’ll need to file taxes using Form 1120, U.S. Corporation Income Tax Return.

» MORE: S corporation vs. C corporation and how to choose

5. Prepare your state and local income tax forms

The LLC tax filing process generally works the same way at the state and local level. For example, most states have their own equivalent of Form 1065 and Schedule K-1 for pass-through entities.

However, some may charge additional LLC taxes. California, for example, charges an $800 annual LLC tax, plus an annual fee that varies based on your LLC’s income.

What if your LLC hasn’t made a profit yet?

If your business is filing LLC taxes for the first time, it’s probably a startup. And lots of startups don’t generate income right off the bat, especially if they haven’t opened their doors to the public.

But even if you don’t have any profits to report, filing your LLC taxes is still necessary and often required. Plus, reporting your business expenses and losses could result in tax savings.

Find out what other taxes your LLC needs to file

Income taxes aren’t the only taxes your LLC has to handle.

LLC payroll taxes

LLCs with employees have to collect and pay payroll taxes. These include unemployment, Social Security and Medicare taxes. Employers pay unemployment taxes to fund unemployment benefit programs.

Employers and employees share in the payment of Social Security and Medicare taxes (collectively called FICA taxes under the Federal Insurance Contributions Act). Employers have to withhold the employee share of these taxes, along with income taxes, from their employees’ paychecks.

Payroll taxes are filed using IRS Form 940 and Form 941. Form 940 is filed annually and is used to report an employer’s unemployment tax obligations. Form 941 is filed on a quarterly basis. Businesses use Form 941 to report withheld income taxes and the employer and employee’s portion of Social Security and Medicare taxes.

One thing to note is that these taxes aren’t paid when you file the tax forms. The IRS utilizes a pay-as-you-go system for payroll taxes, so you’ll need to deposit your payroll taxes throughout the year according to the schedule set by the IRS. Deposits can be made on the Electronic Federal Tax Payment System (EFTPS).

Unemployment taxes are deposited quarterly, whereas Social Security and Medicare taxes are deposited either monthly or semiweekly depending on your tax liability. The IRS instructions for Form 940 and Form 941 can help you determine your deposit schedule.

For reference, here are the current federal tax rates for unemployment taxes, Social Security taxes, and Medicare taxes:

Along with federal payroll taxes, states and local governments often charge additional payroll taxes. For payroll taxes that are the employee’s responsibility, you’ll have to make the necessary withholdings and remit payment to the state or locality.

LLC self-employment taxes

Members of an LLC are not considered employees. However, under the Self Employment Contributions Act (SECA), you still owe Social Security and Medicare taxes to the IRS.

You’ll pay these taxes directly to the IRS in the form of self-employment taxes. The total self-employment tax is 15.3%, and it’s broken down into three parts:

• 12.4% Social Security tax on earnings up to $168,600.

• 2.9% Medicare tax on all earnings.

• 0.9% Medicare surtax if your wages surpass your filing status threshold amount.

Schedule SE will help you calculate your tax liability and should be attached to your tax return.

LLC sales taxes

If your LLC sells taxable goods or services, you’ll need to collect sales tax from your customers. Then, you’ll remit the tax to the state or local tax agency.

Which goods and services are taxable depends on the state and locality where you do business. Forty-five states impose sales tax. Alaska does not levy a state sales tax, but several cities in Alaska charge local sales tax.

Most states follow destination-based tax rules. This means that the sales tax rate is tied to the final delivery location of the product or service.

A small number of states follow origin-based tax rules, where the sales tax rate is tied to the sellers’ location. Contact the departments of revenue in the areas where you sell to check the rules that apply to your business.

» MORE: How sales tax deductions work

LLC tax forms and deadlines overview

The exact tax forms your LLC needs to complete depends on three things:

1. Whether your LLC is single-member or multi-member.

2. Whether you choose default (pass-through) tax status or corporate tax status for your LLC.

3. Whether your LLC has employees.

Here are the commonly used LLC tax forms and corresponding deadlines:

Note that if a tax deadline falls on a Saturday, Sunday or federal holiday, you can file the document on the next business day. Also, if you request an extension for tax filing, you’ll get an additional six months to file.

Use Form 4868 to request an extension if you’re a single-member LLC taxed as a disregarded entity. In all other cases, use Form 7004 to request an extension on business tax filing.

» MORE: A comprehensive list of IRS business forms