LLC taxation is no different from any other business entity taxation. In reality, llc definition does not have an individual tax classification at the Federal or State level. Limited Liability Company owners can elect to be classified in any of the other business entity tax classification convenient to them. A single owner LLC is by default classified and taxed as a sole proprietorship. Multiple owners LLC can elect to be taxed as a partnership or a corporation. If elected to be taxed as a partnership, the income from business should reflect in each partner’s tax returns. When taxed as a corporation, tax on the business income has to calculated and paid through 1120 form. In Federal and state taxation, the differences in LLC vs S Corp taxes are that LLC can elect to be taxed as convenient to the members and beneficial to the business, while the S Corp passes through it profits to its shareholders who in turn reflects that in their personal tax returns and pays taxes accordingly.
A single member Limited Liability company when elected to be taxed as a “disregarded entity” (which means the LLC has no separated existence from that of LLC owner for tax purposes) profit from active trade or business is subject to self employment tax. The single member should report the business income in a schedule C tax form and pay the self employment tax based on Schedule SE Tax form. Where the LLC is not engaged in active trade or business and only a passive source of income such as income from investments or deposits, no self employment tax is payable. When a multiple member LLC engaged in active trade or business elects to be taxed as a partnership, the partners pay self employment tax on their share of profits and report the business income through a 1065 form. In an LLC elected to be taxed as a corporation, no self employment taxes are applicable on amounts paid as wages to the members but such payments will be subject to payroll taxes.
Where the LLC is treated as a disregarded entity or a partnership for tax purposes, no payroll taxes are applicable to profits distributed to the members and where no employees are engaged in the business. In LLC’s treated a C Corporation for tax purposes, any amount paid to members other than profits are subject to payroll taxes. For finer details on LLC taxation, consulting a corporate law firm will be prudent. They will be able to guide you on the most beneficial way to be taxed based on your business activities and LLC operating agreement.
