LLC Member Tax FAQs
If you are thinking of forming an LLC, or are already a member of an LLC and are doing some research, you've come to the right place. There are many benefits to forming an LLC, particularly for tax reasons. A key tax aspect of an LLC is that it shields your personal assets. If your business is failing, creditors can't seize your home, car, or other personal property. Keep in mind though, you'll lose that benefit if you've signed a personal guarantee to finance your business. Below you will find some commonly asked questions about LLC member tax liability.
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 percent. 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.
What if an 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.
Get an Initial Evaluation from a Tax Attorney
When it comes to LLC tax benefits and liabilities, these matters are usually best left to the experts. A legal professional can walk you through the process and help you decide which business structure is right for you and how it will impact your own tax situation. Reach out to an experienced tax attorney in your area today and you can receive a free initial evaluation of the facts of your case.