LLC Member Tax FAQs
Do members of a limited liability company (LLC) have to pay estimated taxes and self-employment taxes?
Because LLC members pay taxes directly to the IRS on their share of the profits, the LLC does not make withholdings or pay employment taxes like an employer. The IRS typically treats LLCs, for tax purposes only, as a sole proprietorship or a partnership (or as a corporate entity, if the LLC asks for treatment as such). Like sole proprietors and partners, LLC members must report profits on their individual 1040 tax returns and pay estimated and self-employment taxes.
Because profit distributions from a LLC are not wages, a LLC member must make estimated tax payments on a quarterly basis to the IRS. Taxpayers must make payments in April, June, September, and January.
An individual LLC member must also pay self-employment taxes. An active member of the LLC is responsible for paying the entire amount of the self-employment tax-- 15.3%. The IRS does allow the taxpayer to deduct half of the self-employment tax from their adjusted gross income as a business expense, however.
If the member is not active in the daily business of the LLC, the IRS may exempt the member from paying the tax.
Our LLC likes to keep a substantial amount of profits in the business instead of distributing it to the members. Will our LLC benefit from electing corporate tax treatment?
The IRS will automatically categorize a LLC as a sole proprietorship or a partnership for tax purposes. If a LLC prefers tax treatment as a corporation, it must make a formal election with the IRS. This option may help a company that needs or chooses to keep a significant amount of the profits in the business. Doing so, however, has consequences on the members.
Even if the LLC never distributes a member's entire share, the IRS requires the member to pay income taxes on the distributive share the member is entitled to receive. This can result in members having to pay taxes on money that they can't even use.
Corporate tax treatment may still save members money, however, since the applicable corporate tax rate is lower than the highest possible individual tax rate.