What are my tax obligations?
Even though personal and business assets are considered separate due to the limited liability, the owner and the LLC are NOT considered separate, from a tax point of view
IRS treats the single member LLC as a part of the owner's tax returns and is 'disregarded' as a separate entity.
That's why single member LLCs are also called disregarded entity.
This is exactly like how the IRS treats sole proprietorship.
There are 2 ways an owner can choose to be taxed in a single member LLC:
Disregarded entity
- By default, single member LLC is treated as a disregarded entity i.e, owner and the LLC are considered the same.
- The member pays income taxes on the LLC's income, not the LLC.
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.
In this guide, we'll mostly be dealing with disregarded entities. Read our guide below for a detailed look at LLC treated as a corporation.
Pass-through income
Disregarded entity is a pass-through entity.
What does that mean? LLC's business income is passed on to its owner and is not taxed at the LLC's level. Tax is paid only once at the owner'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 a disregarded entity avoids double taxation.
Tax reporting
IRS does not treat a disregarded entity as separate from its owner.
So, for income tax purposes, IRS treats the LLC just like it treats its owner.
And the single owner can be a single individual, a corporation, a partnership or even another LLC.
When the disregarded entity's owner is a single individual*, IRS treats it like a sole proprietor.
- Income and losses of such an entity is reported on the the single owner's Form 1040 — US Individual Tax Return.
- Owner's Social Security Number (SSN) is used while paying taxes.
When the single owner is a partnership, corporation or another LLC, IRS treats the LLC as a branch or division of the owner
- Income and losses are reflected on the owner's federal tax return.
- Owner's EIN is used while paying taxes, not the LLC's EIN.
This way, a disregarded LLC doesn't have to file income tax returns. Only the owner does.
Employment taxes
There's a slight difference here in how the LLC is treated for employment tax purposes.
Before it gets confusing, let's recap a little.
For income tax purposes, IRS does NOT consider a disregarded entity separate from its owner.
However, when it comes to certain employment taxes and excise taxes, the owner 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 LLC has an employee, it will have to pay payroll taxes on the wages paid. These payroll taxes are social security tax, medicare taxes and unemployment insurance.
Who pays this tax, member 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.
Amount that the employee has to pay is withheld by the LLC when issuing paychecks.
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
This is kind of like payroll taxes, but paid by the members.
Member doesn't have a paycheck since he/she is considered 'self employed'. So, this tax cannot by withheld by the LLC when money is withdrawn. It'll have to be paid separately by the member.
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 single 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. Instead of paying all your tax in one shot, you break it into 4 instalments.
So, you 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.
IRS is pretty serious about this.
They charge 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.
