File My LLC As A C Corp Or Sole Proprietor?
I am a single member LLC, no employees. I filled out my tax forms using the 1040 and sched C and sched SE, and discover that I must pay a hefty amount in taxes.
I am thinking that I should file as a C corporation to see if that would be beneficial to me. What line on my 1040 should I report the income from the corporation – or what sched should I use to report the income from the corporation?
In general, what corporate and personal forms and schedules should I use if I choose the C Corporation route?
– Barbara, D.C.
You’re going to have to convert your LLC to a c-corporation or elect to have your LLC taxed as a corporation. Changing your tax election after operating the business can result in large tax penalties. You’ll need an accountant on this one.
And you’re probably not going to save as much as you think.
As a c-corporation, your LLC will pay corporate income tax on the LLC’s income, which is currently at a rate of 35%. The LLC’s income would no longer be reported on your 1040, instead, it would file its own tax return and pay the 35% corporate tax rate. By comparison, your personal rate might be lower than 35%.
Second, if you want to pay yourself from your c-corporation, you’ll have to go through the whole withholding payroll exercise in addition to paying taxes on your salary (reported on your 1040 just like salary from any other employer would be reported). In terms of employment taxes, the LLC pays half your FICA and Medicare taxes, with the other half withheld from your paycheck. If you’re looking to avoid paying self-employment taxes, converting to a c-corporation will not help you. All you would be doing is chopping self-employment taxes into 2 pieces–one paid by your LLC and the other paid by you.
Finally, if your corporation has money left over after paying corporate taxes, and paying you a salary, it can then issue you a dividend.
And you’ll pay taxes (on your personal return) on that dividend. That’s the “double tax” for corporations.
But I would first consult with an accountant to see if you’d really save much by converting to a c-corporation before you spend time and money on conversions.
Can A Single Member LLC Elect To Expense Organizational Costs On Their Individual Tax Return?
When an individual incurs organizational costs while setting up their single member LLC, are they able to elect to amortize and/or expense organizational costs through the Schedule C (1040). My research seems to indicate this option is only available to corporations, partnerships, and trusts.
My research did not get a clear answer, however, the general principal is that business expense deduction are the ordinary and necessary expenses related to running a business.
Incorporating a business is necessary and ordinary–millions of businesses are incorporated–so I don’t see how the IRS could object to the business expensing organizational costs.
Particularly in a Schedule C situation, you can take all business deductions for unincorporated businesses (sole proprietorships), so either you can take it “individually” or through the LLC.
Because the LLC’s taxes are passed through regardless, the total tax you pay is the same provided you take the deduction once–either as an a business expense when your business was unincorporated, or as a business expense when the business was incorporated.
How To Deduct A Christmas Meal/Party For A Small LLC?
We have a two member LLC. The second member is my wife. She’s a legit member (professional, with some part-time work contribution), but since it is a spouse, the taxes are simple (LLC income and deductions treated as, well, a pass through entity I guess is the term).
I understand having the LLC buy us non-business meals might be viewed as commingling personal and business funds (not to mention not tax deductible if not business related). However, all that being understood: Any reason this LLC could not buy a Christmas meal/party for its members? Would your answer change if clients were invited? Thanks!
– C.J. Colorado
A business can deduct all ordinary and necessary business expenses.
This includes business meals and client entertainment, provided you meet the IRS regulations.
The IRS’ rules limiting the deductibility of certain business meals have become stricter due to past abuses by businesses, but generally, if the expense is business related, then it is deductible.
Here is a publication explaining the rules:
The most important factors in deducting more business expenses are:
1. Knowing what your business expenses are.
This means keeping accurate books on Quickbooks or similar small business accounting software.
2. Knowing what is deductible.
This requires having either a good paper-based tax guide or using tax preparation software such as TurboTax, whose interview-style format makes sure that you don’t miss any category of deductions.
3. Ensuring you qualify for the deductions
This means keeping copies of you receipts, written mileage and business purpose notes for deductions automobile expenses, and use of business credit cards and business checking accounts for business expenses.
4. 50% Limitation on Business Meals / Entertainment
The IRS places a special limit on the amount of business meals and entertainment expenses you can deduct. Instead of being able to deduct the full amount spent, you can only deduct 50% of the cost of a business meal & entertainment expense.
See IRS Publication 463 (linked to above) for more detail on exceptions and exceptions to the exceptions.
Is A Nevada Or Delaware LLC The Best?
The short answer is yes…if your business is located in Nevada (or Delaware).
Otherwise, your best bet is to form your business entity in the state where your business operates and you live.
There are many myths about forming Nevada LLCs and corporations. One such myth is that you can avoid paying income tax by incorporating in Nevada. Repeat after me: “there is no (legal) way to avoid income tax except by earning no income”.
Another myth is that you can hide your assets from your creditors (including ex-spouses and bankruptcy trustees) by forming a Nevada corporation and handing bearer shares in the corporation to an accomplice.
Needless to say, these techniques don’t work. Bad things happen when you try to cheat the IRS or a bankruptcy judge.
In many cases, it’s unnecessary. Most people, if they used the tax rules to their fullest, would save more money than they do already. It is not necessary to cheat to lower your tax bill.
Costs of Nevada and Delaware LLCs
Ok, so say you don’t want to cheat the taxman or creditors…are Nevada or Delaware LLCs nonetheless cheaper to form and operate compared to other states?
In addition, some states also require that each LLC file an annual report and pay an annual fee for the privilege of doing so.
The states with the highest formation fees do not necessarily charge the highest annual fees.
Therefore, to best compare the cost of forming an LLC, this site uses a “total cost of ownership” approach which adds up the entire cost of having an LLC in a specific state for 5 years.
Delaware and Nevada are both aware of their popularity as destinations for the formation of corporate entities–and they charge fees accordingly.
Delaware charges a $250 annual reporting fee while Nevada charges $325.
In contrast, there are 28 states that charge less than $100 annual reporting fees, and 8 states that charge no annual LLC reporting fee.
Filing An LLC Tax Return When Your Company Made Little Or No Money
We began a start up company in 2008 as an llc, we are just getting started and our production is not even running yet. We have made no income from our business yet, but we have put money into all the equipment and supplies etc. Do we need to file taxes?
Did your LLC have expenses? If so–and the LLC had no revenues–the your LLC by definition had a loss.
In that case, the LLC’s loss becomes your personal tax deduction.
By neglecting to file, you are going to overpay on your personal taxes.
New Business And Made No Money. Do I File Taxes?
Hello i got an EIn number in 2007 for an llc that I had opened, but things happened and I could not get my store up yet. i have not made any money from this business. Do I still have to file taxes? Do I have to fill out a form or something to claim that I did not make any money? Thanks for your help?
– Dawn, North Caroling
File a Form 1065 (partnership return, assuming your LLC is taxed as a partnership).
Fill in all zeroes for revenues and expenses.
If you had some business expenses (such as the cost of incorporation, maybe you opened a bank account and incurred some fees, etc.), then record those.
You’ll show a loss, which will then act as a deduction on your 1040, reducing your personal taxes.
If You Make No Money As An LLC Do You Still Have To File And Pay Out Taxes At Year End?
If your business operates as an llc and makes no money or looses money do you still have to file taxes and will you end up owing or you have to file regardless and you can file your business expenses for a return? What if there are not enough funds in LLC account?
If your LLC loses money, then the loss becomes a deduction on your personal 1040 tax return.
However, in order to take this deduction, you must file a return for your LLC–either a 1065 (for multi-member), or Schedule C for disregarded single member LLCs.
Failing to file a tax return for an LLC that loses money means you are leaving a tax deduction on the table, and thereby overpaying on your taxes (or getting a smaller refund).
If there isn’t enough money, you may want to consider loaning money to the LLC from your personal account and memorialize the loan with a promissory note.
If LLC Income Is Under $2k Do I Need To Pay Taxes On It?
We are a club, garden state ghost hunters LLC. We went LLC so as we can have small ghost tours to generate funds to help our club obtain equipment.
Neither the founders or members make any personal financial gain from these fund raisers.
But the GSGH LLC will get the profits after expenses which is usually only about 200 to 300 dollars, never exceeding over 2 K a year. We thought we should have an LLC so as we are legal to operate these fund raisers, but we have absolutely no idea how to file taxes and the like. Any and all help would be great.
– Robert, New Jersey
Assuming your LLC is taxed as a partnership, you would first file a Form 1065, partnership return.
This would report the total profit/loss for your LLC. However, the LLC does not, itself, pay these taxes.
Instead, the LLC then issues a K-1 (part of Form 1065) to each member of the LLC, showing their portion of the LLC’s profits. A copy of the K-1 is also sent to the IRS (similar to how a copy of your W-2 and 1099 are sent to the IRS).
Each member will then use the K-1 to report his percentage of the LLC’s profit on his own 1040 tax return.
Note: Be sure that you are running ALL your LLC ghost hunting expenses through the company. That means automobile mileage for driving to the tour areas, advertising, food during the tour, any recording equipment used, etc. etc.
You might find that at the end of the day you don’t have a profit, and might even show a small loss (which is deductible against your regular income).
For under $50 you can pickup an older version Quickbooks on Ebay, and track your LLC expenses to ensure that you’re not paying a penny more in taxes than you should.
Tax Question When Forming An LLC In Nevada W/ Husband & Wife As Members
If forming an LLC in Nevada w/ husband & wife as members if we elect sub s – can IRS decide to treat as a single member LLC because we are married?
– Jerry, Georgia
You can choose either method of taxation–partnership or disregarded entity.
If you don’t elect a specific taxation method, the IRS can/will choose one for you. That’s why it’s important to decide which you want at the beginning and make your election in writing, via the proper form.
Note: Because Nevada is a community property state, the IRS permits a husband and wife LLC to be treated as a QJV- Qualified Joint Venture. This is not so in non-community property states–husband and wife LLCs are taxed as partnerships (or corporations), but not as disregarded entities.
H1B Forming An LLC
I am in Maryland on H1B. I work full-time for a software company.
I am planning on starting my own LLC which conducts R&D and software development while of course, working full-time to maintain my H1 status.
Are there any things I should know off? Will I be able to operate the business? How about making a profit?
Also am I eligible to claim business expenses on my personal tax return (sole owner). Will the profits also be combined with my personal tax return?
There are no restrictions on who can own interests in an LLC, and this includes non-citizens on H1B visas.
By contrast, some other business entities (such as the s corporation) have limitations on foreign citizens/residents owning interests.
No such limitation exists with the LLC.
As far as operating your business at a profit…that’s up to your marketing, business savvy, etc.
There is no requirement that you work at your business full time, nor any prohibitions against working full time while also operating your LLC.
In terms of tax reporting, if you form a single member LLC, the IRS will treat it as a disregarded entity.
All your LLC’s revenues and expenses will be reported on Schedule C of your personal tax return (1040). If your LLC shows a profit, then your personal income tax return will show higher taxable income, whereas as loss will reduce your taxable income.
The key to minimizing your taxes with an LLC is to maximize your legitimate business deductions. A business owner has far more opportunities to take deductions than an employee.
Can A Single Member LLC Get A Health Insurance Deduction?
Can a single member LLC which has only part time employees deduct health insurance premiums for it sole member/owner?
Yes, thanks to a 2003 tax change.
You might find some older advice, written before the 2003 tax change, that will tell you only corporations can deduct health insurance premiums.
The deduction for health insurance premiums for the self-employed can be found on line 29 of your Form 1040.
Note a couple of caveats:
1. Your SMLLC must have been profitable: You can only deduct health insurance premiums paid up to the amount of the LLC’s profits.
2. You must not have been eligible for coverage under your own employer’s (assuming you have a job outside of your LLC’s business) or your spouse’s employer’s health insurance plan.
3. The insurance should be setup under your LLC, covering you + dependents.
4. If the SMLLC has no employees, the sole owner/member can still purchase an individual health insurance policy and deduct the premiums (to the extent of profits) as described above.
I Am An Actor. Should I Incorporate Myself And Will That Help With Writeoffs?
I am an actor and keep diligent records of all my expenses for tax purposes. I am being audited this year because of this. Would incorporating myself be beneficial? My agent said I should and for Social security reasons as well. My accountant is still in the process of trying to have the audit end in my favor!
Incorporating or forming an LLC now won’t help you with your past (or ongoing) tax audit.
Once they have flagged your for audit, the audit is going to carry through.
However, there is some evidence from looking at audit rates that LLCs and corporations are audited less frequently than people who run sole proprietorships and use only a Schedule C.
Therefore, in addition to the other advantages of an LLC such as pass-through taxation, limited liability, and more deductions, it is possible that you would also reduce your chance of an audit.
That said, there is nothing you can do to prevent an audit–only lessen the possibility of one.
I’m Forming A Real Estate LLC With Concerns About Taxation
My goal is to acquire 3 new properties a year and then rent each property to tenants. There are 7 other members of this LLC. What is the best way to arrange taxation on this LLC?
As a standard LLC? Or, arrange taxation as a Corporation? No dividends will be given to the members at least for 5 years.
– Anthony, Pennsylvania
You generally want taxation as a partnership, not a corporation, for the type of real estate venture described in your question.
A corporation is generally a bad idea for this type of real estate venture. The only time a c corporation would possibly be recommended is if you planned on forming a REIT (Real Estate Investment Trust) to be traded on public stock exchanges. Even then, not all REITs are c corporations–many are arranged as limited partnerships.
As a limited liability company taxed as a partnership, you and your partners would be able to tax the depreciation-caused losses as personal deductions on your personal tax returns. As a corporation, you would not, and would have to carry forward the losses against future gains.
Our firm does a lot of real estate work, and I don’t think we’ve formed a corporation for this purpose (owning real estate for lease) in years. Before LLCs, people used general or limited partnerships, in order to deduct depreciation losses on their personal returns during the early years of ownership.
In fact, this is a huge advantage of real estate investment–the ability to deduct non-cashflow losses (e.g. depreciation) — during the early years of the venture. Combined with borrowed money, the tax advantages to owning depreciable real estate in a pass through entity like and LLC or partnership are substantial.
A major consideration as well is whether to use a separate limited liability company for each piece of property. By doing so, you can put a legal “firewall” of liability protection between each property.
Most investors will form a separate entity for each property. Occasionally they will put several similar properties (such as multiple buildings that are part of a single apartment complex) in a single entity.
Can A Laptop Be Purchased As A Business Expense?
The business is in it’s first year and is a new partnership LLC (two members); should a laptop purchased be a deduction for start-up or amortized as a capital expense?
A laptop would qualify for expense treatment under the Section 179 deduction for small businesses. Any quality small business tax software will have a section where you can elect to take the 179 deduction for business equipment purchases such as a laptop.
Living In A Different State Than The Single Member LLC Business
If I have a single member LLC in one state and then move to another state, while leaving the single member LLC business behind, would I just owe taxes in the state in which I am living?
Income passes through the LLC and is paid by each member personally. Therefore, your personal state taxes would be determined by the state of your residence, not the state the LLC is formed in.
However, the state that you left might claim that you were actually earning a living in their state by virtue of your LLC being formed there–even if you were physically located in state #2. With the current economic crisis facing state budgets, I wouldn’t be surprised to see some states take this very aggressive (and unjustified, IMO) position.
This happens particularly often with California. If you owned a California LLC, I would highly advise that if you plan on moving to become a resident of another state, you look into selling the assets of the CA LLC to an LLC formed in your new state. There are might be tax implications of such a sale, so see a tax adviser, however, it is almost certain California will want to claim taxes on your California LLC (at the minimum, they will seek annual franchise taxes).
If your former state gives you trouble, you could always form a new LLC in your new state, and then transfer the assets from the old to the new LLC.
However, you would need to consult a tax adviser or accountant or attorney before doing any sales of assets or stock between the LLCs.
LLC EIN vs Single member EIN (or TIN)
I just called the IRS regarding EINs for SMLLCs. I was under the assumption that all income for SMLLCs should be reported under the single members EIN (or TIN) and that if the actual LLC had an EIN (for banking purposes, etc.) that it should only be used for that purpose – not for using to report income.
The person I spoke with at the IRS told me that only one EIN was necessary and that at year end, the LLC would file a 1065 (which I thought was only a partnership return) for informational purposes and then a K1 would be issued to the single member that would be used to file the single members 1040 schedule C.
I am trying to figure out what EIN (or TIN) should be given to customers on a W9 but seem to be reading and hearing contradictory information.
I have a single member LLC with its own EIN.
I receive 1099s under the LLC’s EIN from purchasers of my LLC’s services.
My 1040 is filed using my personal Social Security Number, and the revenue from my LLC is recorded on Schedule C (which has a place to reference your LLC’s EIN).
A single member LLC does not file a 1065, though I don’t think the IRS will mind if you do. I did the first year with my single member LLC, and they took my taxes 🙂 and then sent me a letter stating to use Schedule C in the future.
LLC Or S Corp For An Independent Contractor Therapist
I am going to be an independent contractor occupational therapist. I am not sure if I should start an LLC or S corp. If I start an LLC can I write the taxes off under a S-Corp to save on self employment taxes in the state of Arizona? It will be only me in the business for the first few years.
You can form and LLC and choose to have it taxed as an S-corporation through a simple election form filed with the IRS, called 8832.
Yes, an S-corp can save you some (but not all) self-employment taxes under limited circumstances. However, you will invite extra scrutiny from the IRS to ensure that you paid yourself a “reasonable” wage (which is subject to SE taxes), and cannot simply take all your profits as non-taxed dividends.
If you start a corporation, and request s-corporation taxation, you will still have the issues of double taxation on the corporation’s dividends. Under Obamacare, there is a Medicare surtax and tax on net investment income for all high income taxpayers, that somewhat negated the advantage of dividends vs. wages.
Also, s-corporation status does reduce your company’s flexibility when it comes to ownership structure, if you plan on taking on additional owners now or in the future.
How To Do Pass Through Taxes For A Husband And Wife LLC
I know single member LLC treated as pass through. But what about husband and wife filing jointly. How do we file to get the pass through?
– Kelly, Missouri
The answer is complicated, because the IRS has issued confusing guidance.
Here’s what the IRS says:
- A spouse is considered an employee if there is an employer/employee type of relationship, i.e., the first spouse substantially controls the business in terms of management decisions and the second spouse is under the direction and control of the first spouse.
- If such a relationship exists, then the second spouse is an employee subject to income tax and FICA (Social Security and Medicare) withholding.
- However, if the second spouse has an equal say in the affairs of the business, provides substantially equal services to the business, and contributes capital to the business, then a partnership type of relationship exists and the business’s income should be reported on Form 1065, U.S. Return of Partnership Income (PDF).
- In May 25, 2007 the Small Business and Work Opportunity Tax Act of 2007 was signed into law and affect changes to the treatment of qualified joint ventures of married couples not treated as partnerships. The provision is effective for taxable years beginning after December 31, 2006.
- The provision generally permits a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for Federal tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business, if (1) the only members of the joint venture are a husband and wife, (2) both spouses materially participate in the trade or business, and (3) both spouses elect to have the provision apply.
- Under the provision, a qualified joint venture conducted by a husband and wife who file a joint return is not treated as a partnership for Federal tax purposes. All items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as a sole proprietor. Thus, it is anticipated that each spouse would account for his or her respective share on the appropriate form, such as Schedule C.
The problem is, there is some dispute over what a “qualified joint venture” (QJV) is, and whether an LLC qualifies.
Some say that the distinction depends on whether you are in a community property state (in a community property state, a H-W LLC is a QJV).
Others think all LLCs owned by a H-W are QJVs and therefore qualify for schedule C treatment.
It is an unsettled area of law.
The default stance, it appears, is that an LLC with more than 1 member is partnership and files a 1065 return. Part of the 1065 return is your K-1. The information from the K-1 goes onto your joint 1040.
What Are The Tax Advantages And Disadvantages To Being An LLC?
I looking to start my own LLC and I was wondering what the tax advantages and tax disadvantages are to being an llc?
The main advantages of the LLC over the corporation are:
1. Pass-through taxation which lets you take a personal tax deduction for the (usual) early losses incurred by a startup.
2. Only a single level of taxation, instead of the corporation’s double tax of corporate income tax + tax on dividends.
Now that a new administration is taxing place, it is likely that the low dividend tax rate of 15% will expire (it was part of the Bush tax cuts), and dividends will be taxed at the highest income tax rates. That would mean a 35% corporate tax + up to a 39.6% dividend if Obama returns rates to pre-Bush (Clinton-era) tax rates.
Multi Member LLC And Self Employment Tax
I am an employee of a company and pay my appropriate taxes through my paycheck. I also own 50% of an LLC of which I trade securities through. Do I have to pay SE taxes through the LLC even though I already pay the maximum Social Security and Medicare?
Check with your accountant, but I believe the answer is no. When you fill out your Form SE for your LLC, there is a line where you list FICA taxes paid from other sources. When you list the FICA taxes withheld from your day job (lines 8a-8d on Schedule SE to your 1040), those will be subtracted out and you’ll owe no additional FICA taxes on your LLC’s income.
Remember that Medicare taxes (2.9%) don’t have the same wage cap (currently $97,000) as Social Security, so even if you cap out on Social Security taxes at your job, you’ll owe Medicare taxes on your income above $97,000. However, you won’t have to pay Medicare twice on the first $97,000 of your income, as lines 8a-8d on Schedule SE tax form take the withholdings from your job into account.
My K1 Shows A Net Loss Of $1000, But It Didn’t Appear To Affect My Total Taxes
I received a K1 for our new LLC. It showed a loss of $1000, but when I entered the information into TurboTax, it didn’t make a difference on my overall tax liability. I thought that I would pay taxes on a profit from the LLC but also have lower taxes if the LLC came out with a loss.
Well, it should have, unless your total tax liability was already 0.
Your thoughts are correct–profits from the LLC will increase your taxable income, while losses will reduce it.
Depending on your tax bracket, the difference in taxes will be some percentage of the change in taxable income.
Extension On LLC Annual Dues
Can u get a extension on the annual report dues? and if not what if i dissolve the LLC do i still have to pay the 200?
It depends on which state you’re in.
Some states do not require any annual reporting fees.
Others, such as California, have substantial franchise taxes or annual reporting fees.
Does A California LLC Have To File A Return?
Does a single member llc that is wholly owned by a pension or annuity plan have to file a return? Are they subject to CA’s LLC fee?
– Rebecca, California
I have never encountered an LLC wholly owned by an annuity, so I’m not sure how to answer your question.
As to your second question, about California’s LLC fee…..have you ever known California not to attempt to collect on a tax? Even one as constitutionally sketchy as their corporate franchise tax.
It’s terrible to say, but California is about the most anti-business state in the union. This isn’t a political website, but I am honestly baffled by the anti-business stance in that state. And then they wonder why jobs are fleeing and tax revenues cratering.
Move to Nevada 🙂
Taxes For A Single Member LLC
I own a tile business and is registered as single llc.
I’m not sure if the way I file my taxes is the correct or the best way. I pay myself every month base on hourly rate. I sent my taxes every three month base on those checks. At the end of the year I do my taxes using turbotax and basically I put my gross income, my expenses and my w-2. Is this the way to do it?
As the owner of an LLC taxed as a partnership, you are not a W-2 employee.
As the owner of the LLC, you are taxed on your share (if you are the sole owner, then 100%) of the LLC’s profit.
So, you need to first enter your LLC’s revenues, subtract expenses, and determine your profit.
This is all done on your Schedule C if you are a disregarded entity single member LLC, or on a separate Form 1065 if you are filing as a partnership.
Schedule C is part of your personal 1040, and the instructions for completing it are all there.
Turbo-Tax Home and Business (not Deluxe or Premier) is the one you want to use for your single member LLC.
As a single member LLC, you are not taxed on how much you withdraw from the LLC in “pay”, but on how much profit the LLC reports based on its revenues and expenses.
It is possible, for example, if your LLC has depreciable assets (such as real estate), that you could be cash-flow positive (putting cash into your pockets each month) and yet still have zero or even negative tax liability because of depreciation expenses.
Forming An LLC For A Jewelry Business
I have a full time job, but have started making/selling jewelry. I want to make this hobby legitimate, so that I can deduct my “loses” from my income tax…as well as purchase wholesale with a federal tax ID number (EIN). Right now my expenses are more then I’m making. It seems the SMLLC is the right way to go…any advice?
– Tracy, Tennessee
The single member LLC setup will let you deduct your losses from your personal income taxes.
This is one of the big benefits to an LLC over a corporation (personal tax deduction of losses during startup, which you cannot do with a corporation).
One thing I need to clarify you on, though. When it comes to wholesale purchasing, you are likely going to need a sales tax ID from your state in addition to an EIN.
The sales tax ID allows your wholesalers to sell to you without charging sales tax.
Do I Need To File A Return For An LLC That Did No Business?
Do I need to file a return for an LLC that did no business at all in 2008? LLC is between me and my three brothers. No revenue, no expenses, no activity at all.
You probably ought to file a return showing zero income, zero expenses, particularly if the LLC has filed returns in the past.
It’s very easy for the IRS to have their computers run a check to see if every business that filed in 2007 filed in 2008. For the ones that did not, they are going to ask you “why not”?
Simply file a Form 1065 return with all zeroes (if that is accurate), issue the K-1s to each member, and be done with it.
Paying A Spouse Who Works For Your LLC
In a single member llc can the llc pay wages to the member spouse? and if so what taxes are they subject to?
Your LLC can pay W-2 wages to any non-member that does work for it.
This includes your spouse and children.
As an employer, the LLC will be responsible for the whole gamut of taxes required of any employers. That means the employer share of Social Security and Medicare taxes, withholding of state and federal income taxes, and so on. I strongly recommend you use a payroll service from a company such as Quickbooks Payroll to handle this for you if you go this route.
The other alternative, if the spouse qualifies, is to pay the spouse as an independent contractor. In that case, the spouse would receive a 1099 at the end of the year and would pay the same taxes any 1099 person must–state, federal, and self-employment.
Do I Need A W-2 As A Single-Member LLC With No Employees?
Do I need a W-2 as a Single-member LLC with no employees? how do I pay myself and file my taxes?
You pay yourself by writing a check from the LLC to yourself. Profit distribution.
You file your taxes by reporting your LLC’s revenues and expenses on Schedule C of your 1040 tax return.
Because the LLC is a pass-through taxed entity, you don’t have to withhold taxes on each distribution from the LLC to its member.
Do not setup a W-2 for yourself as sole member of the SMLLC. It’s incorrect, confusing, and costly.
Payroll Tax Responsibilities Of An LLC
Can a single member LLC elect to be treated as a Sub S by electing under Form 2553 and pay himself/herself a “reasonable compensation” salary and receive the balance as K-1 profit. Or is all of the income from a single member LLC, electing Sub S status subject to FICA/MED .Is this where I’ll see your response? http://www.llc-made-easy.com/single-member-llc.html
If you select sub-S classification, then your “reasonable” compensation will be subject to FICA/MED, also known as self-employment taxes.
The remainder of the LLC’s profits can be distributed as dividends, which are still subject to income tax, but not self-employment tax.
The problem with electing sub-S classification is that there are more rules for sub-S than for an LLC taxed as a partnership or sole proprietor.
For example, every owner of an S corporation must be a natural person (not another LLC, corporation or partnership). If you add partners to your SMLLC, and you wish to allocate profits unevenly between yourselves, then you will lose your S-corp status.
Payroll Taxes For PLLC vs PC
I formed a pc and now realize i have to pay myself via payroll and deduct taxes and send to irs etc…if I convert to a pllc can I take draws as I please and just pay taxes at the end of the year like it did b4 ? w/out dealing w eftps and sending taxes ….
Just to clarify for other readers:
“pc” means Professional Corporation. A Professional Corporation is essentially a corporation whose owners are all members of a particular profession, usually licensed by the state (such as lawyers, accountants, doctors, etc.), and where the purpose of the corporation is to provide such professional services.
A “PLLC” is similar in that it is an LLC whose members are licensed professionals and the purpose of the PLLC is to provide such professional services.
Each state has its own list of what occupations are considered “professions”.
As an LLC owner, you can take draws instead of a salary.
Like all taxpayers, LLC (or PLLC) members must pay quarterly estimated taxes, which can be calculated using Form 1040 ES.
Your self-employment taxes (which is the self-employed business owner’s version of the Social Security and Medicare taxes taken out of an employee’s paycheck) are calculated using Form 1040 SE.
Depending on your income level and amount of taxes owed the previous year, you might be required to pay estimated quarterly taxes.
Questions About Personally Funding Your New LLC
You have to use your money to start your business. Is it wise to put your money in your business bank account when you first open it and then proceed to purchase things for your business out of that account to be able to track everything accurately for taxes and other breaks?
You do NOT want to put your startup business expenses on a personal credit card. That would technically be commingling of funds (though, in reality, it takes a lot to pierce the corporate veil, so don’t lose too much sleep over it).
The above does NOT apply to the expenses you incur in forming your LLC. Obviously you won’t have a business credit card or business account before your form your LLC. So, formation costs and state filing fees you can pay personally. Buying equipment for your business after it is formed…use a business check or credit card.
It’s bad business practice to mix your personal and business funds. Even if a judge wouldn’t pierce your veil for mere sloppy business practice (though you’re rolling the dice, because you never know what kind of judge you’ll get), why be sloppy?
You can pay for the initial LLC formation with personal funds, as the company does not yet exist. Those expenses can be considered a capital contribution to the LLC.
After formation, and you have an EIN, go directly to the bank and open up a business checking account. You’ll need the EIN because banks won’t open an account without one.
All of your business expenses must be written out of your business checking account.
If you need a credit card for your business, then apply for a business credit card. Trust me, you’ll start getting offers in the mail very quickly after forming your LLC–particularly if you use your home address as your registered agent.
Will your business need a Paypal account? Then get one in your business’ name, using your business EIN.
Finally, buy a copy of Quickbooks and use it to track your business expenses.
If you have employees, you absolutely need to use a payroll service. Do not attempt payroll on your own…trying to do your own payroll is like trying to do your own laser eye surgery.
As owner, you are personally liable for all payroll taxes that you fail to pay. These debts are difficult to discharge in bankruptcy and the IRS can follow you around for a long time, racking up penalties and interest.
A followup question on the same topic:
Funding Your New LLC
Question: Can you continuously put money into your business account from your personal account to fund your business like to purchase equipment and pay for utilities until you start receiving a profit from it? Would that be perceived as commingling?
Yes, you can fund your business with personal funds (in fact, every business has to even if just to pay for incorporation, legal, accounting and state filing fees).
The key here is to understand that “you” and the LLC are legally separate individuals.
Which means that if you are giving money to your LLC, you need to be getting something in return — either you are making a capital contribution to the LLC or you are loaning it money.
You wouldn’t give money to some random corporation unless you got either stock or a bond in return–the same principle applies here.
The key is to create the proper paper trail, in particular, through the use of promissory notes if you are treating the deposit as a loan.
There are many forms of promissory notes you can download for free on the internet, and some you can pay for.
More followup questions
Using personal account to buy equipment for business
Question: Ex boss is selling equipment from his business at great price.He is giving us first pick before he auctions it off. Problem is LLC paperwork will not be processed in time to be able to open a business account to pay for it. Can we use personal account to purchase equipment as start up or would that be commingling of funds. He won’t hold the equipment.
You can buy the equipment with personal funds and then sell them to the LLC. Just make sure to writeup a receipt and have the LLC pay you for the equipment.
Salary, Banking And Expenses – Self-Employed Vs LLC
I am a self employed consultant but currently do all my work for one company and the pay is deposited directly to my personal checking account.
When I change to a single member LLC would the process be to open an account with the llc name, have the company make out the check to the llc name, deposit it to the llc account and then transfer my “salary” (basically all of the pay) into my personal account?
What document should my “salary” and these banking withdraw rights be stated on to maintain the integrity of the llc benefits?
Do I pay estimated tax or perhaps a life insurance premium out of the llc account or my personal account if married filing jointly?
– Janet, Maryland
You essentially have the process down:
2. Open a business checking account in your LLC’s name.
3. Have checks from your clients made out to your LLC.
4. Deposit those checks into your LLC bank account.
In addition to these steps, you also want to pay all your business-related expenses from your LLC checking account.
That means everything from web hosting to postage, to parking, to rent for an office space.
Assuming that your LLC makes money after all expenses, you can distribute those profits to yourself at any time.
The process for distributing profits from your LLC to yourself personally is simple — write a check from the LLC’s bank account to yourself personally.
This is not technically a “salary”, in the sense that the LLC must withhold taxes.
Remember than an LLC is a pass-through tax entity. Any profits or losses from the LLC flow through directly to your personal income tax forms through the Schedule C (assuming a single member LLC).
Write “profit distribution” or something similar in your LLC’s check to yourself.
In terms of risks to your corporate veil, this would only be an issue if your LLC was operating at a loss, and yet you kept writing checks to yourself, thus defrauding your LLC’s creditors.
But, if your LLC is turning a profit, you clearly have the right to withdraw that profit personally.
The key is to keep good accounts for your LLC.
Because your LLC doesn’t withhold taxes for you like an employer would, you must pay estimated taxes on your own.
An explanation of quarterly estimated taxes, and the forms, are found at www.irs.gov , search for “Form 1040 ES”.
First, as for benefits, an LLC, unlike a corporation, cannot pay benefits such as life or health insurance premiums. The LLC can of course pay all business-related expenses, but life insurance, for example, is a personal benefit that should not be paid from the LLC account, it is not a deductible LLC expense. (Imagine this taken to the extreme: you could decide your LLC provides you housing, a car, meals, etc.)
On the subject of operating and payment documentation, I understand that none is required, especially for a single-member LLC. However, an Operating Agreement can’t hurt, and this is were profit distributions could be spelled out, if desired. And, certainly keep a record of the “profit distribution” payments.
You cannot deduct personal expenses from your LLC’s revenues to reduce its profits (or increase losses).
In other words, its not which entity that writes the check that determines deductibility, but rather the nature of the expense.
Business expenses are deductible, personal expenses are not.
When it comes to health insurance premiums,however, you CAN take a deduction for premiums paid if your were self-employed and show a profit on your Schedule C.
See line 29 of your Form 1040.
From the IRS:
“You may be able to deduct the amount you paid for health insurance for yourself, your spouse, and your dependents if any of the following applies.
1. You were self-employed and had a net profit for the year.
2. You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.
3. You received wages in 2005 from an S corporation in which you were a more-than-2% shareholder. Health insurance benefits paid for you may be shown in Form W-2, box 14.”
Self Employment Tax and S Corp Status
I have a few questions.
It is to my understanding that a LLC owner must pay self employment tax. If I file a form with the IRS to treat me as a S-corp, will this avoid the SE tax?
In order to treat my LLC as a S-Corp, do I need to file form 2553? or must I file both Form 8832 and 2553?
Also if I am elected as S-corp (but still organized under a LLC) can I still have disproportional distributions of income among the member-owners?
As an S-Corp, it is true that you do not have to pay self employment tax on dividends paid to the owners.
However, the IRS knows about this loophole and requires S-Corporation owners to pay themselves a “reasonable” salary–which IS subject to self-employment tax.
So you can’t entirely avoid self-employment tax with an S-corp, you could possibly reduce it if your LLC’s profits exceed what is a “reasonable” salary (as determined by the IRS) and you can therefore take some of your profits as a non-self-employment tax dividend.
In addition, Obamacare has enacted a 3.8% Medicare tax on dividends, so even S corps that distribute income as dividends do not avoid all self employer taxes.
File the 2553 timely and you do not have to file an 8832 (see the bottom left to top middle of page 4 of Form 8832).
You CANNOT make unequal distributions to S-corporation shareholders.
One of the qualifications for an S-corporation is that it has only one class of stock. If you make unequal (meaning, disproportionate–e.g. if someone owns 10% of the stock they get something other than 10% of the profits) distributions, you have created multiple classes of stock and now you are a double-taxed corporation.
To keep your S-corporation status, you must distribute the same number of dollars per share to every shareholder, otherwise you lose it.
This is part of the reason why many multi-member LLCs choose to be taxed as partnerships, rather than S-corporations, despite the ability to partially shelter some S-corporation profit (but not all) from self-employment tax.
Single Member LLC – Texas – Franchise Tax
Do single member LLC’s in Texas avoid the payment of the Texas franchise tax (margin tax)?
– Joe, Texas
According to the the Texas Comptroller’s site, the Franchise Tax is imposed on the following:
- The franchise tax is imposed on each corporation that is chartered in Texas and each non-Texas corporation that does business in Texas. See Franchise Tax Rule 3.546 for a list of some activities considered to be “doing business in Texas.”
- For franchise tax purposes, the term “corporation” also includes a bank, state limited banking association, savings and loan association,
limited liability company
- , professional limited liability company, a corporation that elects to be an S corporation for federal income tax purposes, and a professional corporation. Professional associations and partnerships are not subject to the franchise tax.
There is some good news for small Texas businesses, however:
- Corporations will not owe any tax if the gross receipts from their entire business for both taxable capital and taxable earned surplus are each less than $150,000 during the period upon which the tax is based. These corporations must file an abbreviated information report.
See the Texas Comptroller’s page for more information about the Texas Franchise Tax.
Single Member LLC owned by an S corp
We were recently told by our accountants that we could contribute our single member llc to a newly formed s corp. They told us that my husband would still remain the single member. That does not make sense to me b/c he contributed the LLC to the S corp for 100% ownership in the s corp.
Wouldn’t the new member be the S corp?
And can we pay my husband wages through the LLC? (now that it’s owned by the s corp, can issue his wages through the LLC instead of the s corp)
I believe that the llc will will flow through all of it’s income/expenses onto the s corp return. correct?
It’s a little unclear what your accountant is suggesting.
Is the SMLLC to become a shareholder in the s-corporation?
Or did you mean to say “convert” your SMLLC to an s-corporation taxation?
The general rule is that only natural persons can be shareholders of s-corps (no LLCs or corporations).
Perhaps there is a new letter ruling that makes an exception for SMLLCs, and this is what the accountant is referring to.
Does the SMLLC have significant assets which would cause tax issues by changing form to another type of entity?
Single Member LLC Taxation
I am trying to figure out how I will be taxed as a single member LLC.
Which forms do I need to use? When I pay myself, how much to I need to withhold for income tax? I understand that an LLC can be taxed as a sole proprietor but does that change if I give myself a salary or commission? Will I be taxed on both the profit from the llc and the income that I pay myself? Does that make any sense?
Any insight would be greatly appreciated.
Let’s start from the top down.
As a single member LLC, you can choose to be taxed as a disregarded entity.
This means that you use a Schedule C to report all your income and expenses and arrive at a net profit or loss.
This net profit is what you pay taxes on. Hence, you want to maximize your legitimate business expenses on your Schedule C.
The LLC is not taxed separately as a company at the entity level–that is the purpose of using a pass-through entity like an LLC or partnership instead of a c corporation.
In terms of paying yourself out of LLC profits, the simplest way is to simply write yourself a check.
No payroll, no withholdings.
Now, understand that you will have to make quarterly estimated income tax payments. Everyone makes quarterly estimate income tax payments (it’s just as an employee, your employer does it for you, so you don’t know that it’s happening–except that your paycheck is smaller…)
To figure out the right amount to withhold, it’s helpful to use software like Turbotax.
In addition to income tax, you will also report Self-Employment tax. You are required to pay this at the end of the year.
It is calculated based on your Schedule C and a separate Schedule for calculating the exact amount of your SE taxes. Coincidentally, your self-employment tax is reported on Form SE.
So, the forms needed to do your taxes for a single member LLC taxed as a disregarded entity (i.e. as a sole proprietor), you’ll need:
* Schedule C
* Schedule SE
* Form 1040
* Your appropriate state tax forms
Other Reader Question:
1. My husband and I are co-owners of an LLC. Is this considered a multi-member LLC for tax purposes?
2. In order to take advantage of HRA 105 for health insurance premiums, we are interested in changing the LLC to a single member, with my husband as owner and me as employee. We live in PA. However, I have done some reading on the internet and am concerned that the single member LLC will not be considered a partnership LLC for tax purposes, and that the veil can be pierced. Can you advise on this?
1. It can be, or it can be considered a disregarded entity by the IRS, and taxed as a sole proprietorship.
2. There is some confusion about being taxed as a partnership for single member LLCs. In the sense that you get pass-through taxation, SMLLCs and multi-member LLCs are both taxed as partnerships.
The difference is how the tax is reported. If you are a multi-member LLC, the LLC files an informational partnership return, Form 1065. It then distributes K-1s to each partner, which is used by each partner to complete their 1040.
With a SMLLC, you don’t file a Form 1065 + K-1s, but instead list all your business expenses and revenues on Schedule C of your 1040. It cuts out on step of paperwork.
In the situation where both members of the LLC are husband and wife, filing a joint tax return, you can see that whether you do a 1065 + K-1, or report the figures directly on the Schedule C, the final number in terms of tax owed is the same.
So the IRS lets multi-member LLCs whose sole members are husband and wife filing jointly to file as a disregarded entity.
As far as veil piercing, being a single member LLC, in of itself, is not a factor in piercing the corporate veil.
If you follow the basic corporate rules (keep separate personal and business bank accounts; don’t commit fraud, etc.), there is little risk of veil piercing.
Veil piercing is unlikely to occur due to an innocent “mistake” by the company owners–it’s an extraordinary remedy, and usually employed by courts only when the owners are committing obvious fraud on their corporate creditors.
SMLLC – Treated With Corporate Taxation
I recently formed an SMLLC but I plan to elect corporate tax treatment on the Form 8832. What sort of disadvantages should I expect by electing to be taxed as a corporation? I already filed an SS-4 and received an EIN. I do not plan to have any employees but wanted the tax ID to conduct business with certain entities requiring it.
Second question, each year if I elect to be taxed like a corporation what forms will I have to file (formed in Delaware, doing business only in North Carolina).
Third question, if taxed as a corporate entity how do I distribute profits to my personal account? Do I execute payroll or simple transfer it and report the earning on my personal tax return? Finally, what are the tax rates of a corporation?
– Jay, North Carolina
I’m interested in why you chose to be taxed as a corporation rather than as a partnership. Did someone suggest this to you, or did you read about it somewhere?
By choosing corporate taxation, your LLC will be taxed first at the corporate level, based on the LLC’s profits and losses. This will be reported on a corporate tax return and the taxes paid by the LLC.
Corporate tax rates start at 15% and go up to as high as 38%. I’ll post a chart soon, because this is common question.
In addition to corporate tax, when you distribute your corporation’s profits to yourself in the form of dividends, you will be taxed on those dividends as well. These dividends will be reported on your personal income tax return.
The scenario I just described above is what is called “double taxation”, and why many people choose entities like LLCs and partnerships–which are pass-through entities–instead of corporations.
You were correct in obtaining an EIN–every LLC needs an EIN, even if you don’t plan on having employees.
How to pay yourself as owner of an LLC…
There are two ways to pay yourself as the owner/member of an LLC.
The first is to put yourself on the payroll, and pay yourself like you would an employee. That means withholding taxes and the rest. Your LLC would have to setup itself with quarterly deposits of payroll taxes to the government. This is complicated and a hassle, which is why there are specialized companies like ADP which do payroll processing for you. Quickbooks/Intuit also has a payroll processing service for small businesses.
The other way to pay yourself, if your LLC is taxed as a partnership or a disregarded entity, is to simply write yourself a check from your business account to your personal account.
In partnership language this is called a partner’s “draw”. The advantage is that there is no withholding taxes or any of the other payroll complications.
Don’t get too excited, though–you still have to pay self-employment tax at the end of the year, and are required to make quarterly estimated taxes on your federal income tax. However, you have a little more control over the timing of your payments.
With your SMLLC taxed as a disregarded entity, you don’t file a separate tax return for your LLC. Instead, all your LLC’s income and expenses are reported on your Schedule C. Your total profit on your Schedule C is then made part of your personal 1040 return, and total tax owed (including self-employment tax, if any) is calculated from there.
Some people are confused by the term “disregarded entity”, thinking that it means that their SMLLC doesn’t exist, or doesn’t give them limited liability protection.
That’s not true. Disregarded entity is a term of art only for federal income taxation purposes, and has nothing to do with the limited liability protection of your LLC.
So long as you are diligent about keeping separate business and personal accounts, don’t commingle funds, observe LLC corporate formalities (which are less rigorous than c corporation formalities), and don’t commit fraud, your SMLLC corporate veil should stay intact and is not weakened by being considered a disregarded entity by the IRS.
Taxes On An Inactive LLC
If an single member LLC is formed in Ohio, but does nothing within the first year besides set up bank accounts and other infrastructure activities, what tax forms, if any, are required to be filed by the single member? ie: No money is moved between the LLC any anyone besides the initial investment.
You’ll file a tax return showing what the LLC did.
I assume by “inactive” you mean the LLC did not earn any revenue.
However, it may have incurred expenses, which means the LLC showed a loss, which can be deducted on your personal tax return and reduce your tax liability.
If you don’t file a return for an LLC which lost money, then you are leaving deductions on the table and overpaying on your personal taxes.
For example, did the LLC pay any bank fees? Order checks? Those are expenses, which can be deducted.
If you are a single member LLC, use Schedule C on your 1040 to record your LLC’s income ($0) and expenses ($X). The LLC will show a loss, which will translate into a deduction on your 1040.
State Franchise Taxes and Annual Report Fees
Your question did not exclude state-imposed “franchise” taxes on your LLC or annual reporting fees.
Fortunately for you, Ohio is one of about a dozen states that do not impose any annual reporting requirements (and associated fees) or any annual LLC franchise taxes. These franchise taxes are in addition to your normal state and federal income tax, and are imposed based on the LLC’s income or assets.
Some states impose a minimum franchise tax even if assets and income are 0 (e.g. California’s $800 minimum annual franchise tax).
What Tax Forms For An LLC Are Used For Rental Investment Property?
We have a 10 member LLC used for Investments.
We file the 1065, with K-1’s sent out to each member.
This year, 2 members got a Loan, purchased a Rental House as an Investment.
1. What Tax forms do we need to use to figure their portion of the LLC?
2. What Tax Forms would they need to use in their own Personal Tax Returns?
I have really enjoyed your Posts… I hope this one isn’t over the Edge.
Be Blessed Investors,
– Randall, Iowa
Your multi-member LLC is taxed as a partnership.
Form 1065–which you have already been using–is the proper form for your partnership’s tax returns.
The individual LLC members will use the K-1 they receive to record their income (or loss) on their personal tax returns.
Is this new rental house the member’s purchased part of the LLC, or a side venture outside the 10 member LLC?
If it’s outside the LLC, and they own it in their own name, then it would be recorded on Schedule C. Schedule C is part of your personal 1040 return.
If the investment was inside the LLC, then the members need to decide among themselves how to allocate income, expenses, profits/losses, and distributions.
LLC law is very flexible when it comes to these decisions, which is both good and bad. It’s good because you can pretty much devise any profit sharing scheme you want. It’s bad because you have to make these decisions, and these decisions have tax and other consequences.
When it comes to multi-member LLCs with complicated tax issues involving loans to the LLC, uneven contributions of property from a subset of members, and so forth, there’s one piece of advise to give:
See an attorney.
I know you’d like to get your answer from “some guy on the internet”, but trust me, you don’t 🙂
Where Can I Get A List Of LLC Tax Deduction Items?
Where I can get a list of LLC tax deduction items?
– Henry, California
Henry, excellent question, that I’m going to have to get back to you on.
The general answer is that you can deduct all “ordinary” and “necessary” expenses related to your business.
However, I know what you’re looking for is a list of specific types of expenses (is advertising “ordinary” and “necessary” — yes, it is).
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Deducting-Business-Expenses Has a general list of the categories of business expenses that are deductible.
While http://www.irs.gov/publications/p535/index.html is much more comprehensive and in-depth.
With regards to ordinary and necessary business expenses, the next distinction to make is between currently deductible expenses and capital expenses. Deductible expenses are subtracted in their entirety from your company’s revenue to determine taxable income during the year the money was spent (if you’re using cash accounting). Capital expenses can only have part of the cost deducted each year in a process called “depreciation”. The number of years it takes to fully depreciate a capital expense depends on the type of capital purchased (equipment, real estate, etc.) and is determined by IRS rules.