What are my tax obligations?
There are 2 ways an owner can choose to be taxed as a multi member LLC:
Partnership
- By default, a multi member LLC is treated as a partnership i.e, members and the LLC are considered the same.
- Income taxes are paid by the members, not the LLC itself. Taxes are divided in proportion to the members' share of ownership.
LLC as a corporation
- By filing Form 8832, single member LLC can be treated as a corporation i.e, owner and the LLC are considered separate.
- LLC pays income taxes on its income, not the member. Just like a C-corp, taxes are paid at the corporate tax rate, which is lower than most personal income tax rates.
Pass-through income
When the LLC is treated as a partnership, income and losses are passed through to the members.
Meaning: Tax is paid only once at the member's level and not at the LLC's level.
You don't end up in a situation where the LLC pays tax on its income and after that money is transferred to the member, it is taxed again as personal income.
That's how multi member LLCs avoid double taxation.
Tax reporting
There are a couple of important returns to be filed when you have a multi-member LLC.
- Form 1065 — U.S. Return of Partnership Income: This is an informational return filed by the LLC, letting IRS know how much tax each member has to pay. Even though the LLC doesn't pay income tax, this form has to be filed.
- Schedule K-1 of Form 1065: LLC also completes Form 1065 for each member. This form contains the share of profits and losses for each member. Based on the info filed in Schedule K-1, each member can file their own personal tax returns.
- Schedule E of Form 1040 — US Individual Tax Return: Each member then has to report his or her earnings on their personal income tax return.
Employment taxes
Things are slightly different here.
So, IRS in general does NOT consider a multi member LLC separate from its members.
But, when it comes to certain employment taxes and excise taxes, the members and the LLC are considered separate.
That's why you use the EIN of the LLC, not owner's EIN or SSN, for certain employment taxes and excise taxes
Department of the Treasury(TREAS)
Section 301.7701-2(c)(2)(i) of the regulations states that, except as otherwise provided, a business entity that has a single owner and is not a corporation under 301.7701-2(b) is disregarded as an entity separate from its owner (a disregarded entity). However, the regulations also treat a disregarded entity as a corporation for purposes of taxes imposed under subtitle C (employment taxes).
Question: Do I have to pay employment taxes when I have no employees?
Answer: Some yes, some no.
- If you have employees — payroll taxes + self-employment taxes
- If you have no employees — self-employment taxes
Let's understand these taxes little more.
01
Payroll tax
If the multi member LLC has an employee, it will have to pay payroll taxes on the wages paid to the employee.
Social Security tax, Medicare taxes and unemployment insurance are the taxes that come under this 'payroll taxes'.
Who pays this tax, members or the LLC? LLC.
However, half of this tax amount is collected from the employee's paycheck. Only the other half is contributed by the LLC.
The employee's share of these taxes is withheld by the LLC when issuing the paycheck.
FICA tax(Social Security & Medicare) - Employer portion is 6.2% for Social security and 1.45% for Medicare. LLC withholds the same amount from the employee's paycheck as well
FUTA tax - It covers unemployment insurance. Of the total amount of 6%, states usually have a 5.4% credit. The other 0.6% is paid by the employer.
02
Self employment tax
For members who are active in the business operations, there is an additional tax: Self employment tax.
Self employment tax is like payroll tax, but paid by the members. It is levied in proportion to the member's share of profits.
Keep in mind that this tax is paid by the member, not the LLC. And it is not withheld from the member's draw (unlike how employment tax is withheld from employee's paycheck). Each member has to pay this tax separately.
A member who isn't active in the daily operations, doesn't have to pay self employment taxes.
For non-residents
US non-residents who own an LLC don't have to pay self employment taxes.
How to pay all these taxes?
Whether it is income tax, payroll tax or self-employment tax, all the taxes in a multi member LLC are paid as estimated taxes to the IRS.
What's this estimated tax, you ask?
Estimated tax payment is the method of splitting up your total annual tax amount into 4 quarterly payments.
You all have to estimate your income ahead of time and pay taxes on them at the end of a quarter — in April, June, September and January.
Can't I just pay all taxes in one shot at the end of the year? Nope. IRS won't buy it.
IRS charges a penalty if you fail to pay an instalment or pay it late. So, keep this in mind.
Also, if you're just starting up or if you haven't earned any income during a quarter, you can skip an instalment entirely
