An LLC with only one owner will be taxed like a sole proprietorship (aka "disregarded entity") unless a tax election (see below) is filed with the IRS.

An LLC taxed like a Sole Proprietorship does not file a federal return, but rather passes the income through to the owner.

If the owner is an individual, the owner reports the income on his/her personal 1040 and the profits are taxed at the owner’s income tax bracket rate plus an additional 15.3%* for social security and medicare. Federal taxes are paid by (passed through to) the owner based on the LLC’s annual profits even if the owner did not receive a distribution of those profits.

*self-employment tax for 2018 is 15.3% on the first $128,400 of profit/net income and then 2.9% on the net income in excess of $128,400.

An LLC with 2 or more members/owners that does not file one of the tax elections described below will file a federal partnership tax return (IRS Form 1065).  The partnership tax return is an information only filing…no taxes are paid by the LLC.   Each individual owner will report his/her proportionate share of the profits on his/her personal tax return (Form 1040).

Income taxes and self employment taxes (social security and medicare) are paid by the owners based on their share of LLC’s annual profits even if the owners did not receive a distribution of these profits.

Exception: Husband and Wife Owned LLCs: Normally, an LLC with more than 1 owner is taxed like a partnership.  However, an LLC that is (a) owned by 2 people; (b) who are married to each other; (c) who live in a community property state like Texas; and (d) file taxes jointly will have the option to be tax like a single member LLC.

LLCs taxed as S-Corporations (S-Corp LLCs) are quite popular due to reduction in self-employment tax obligations.  An owner of an S-Corp LLC who is also an employee pays self-employment taxes (social security and medicare) on his/her salary, NOT the profits that are passed through to him/her. Self employment taxes are about 15.3% and are typically levied on the owner’s share of the profit. IRS Form 2553 (the “S Election”) is used to elect S-Corp taxation. The S Election must be filed with the IRS within 75 days of formation (or no later than March 15th of a future year).

You can hire us to prepare an S-Corp Election for an existing business ($75).  You can also select the S-Corp option when completing the Texas LLC order form (use button below).

LLCs can also be taxed like a C-Corporation (C-Corp LLCs).  IRS Form 8832 is used to elect C-Corp classification. This tax election must be filed with the IRS within 75 days of formation or in a future year no later than March 15th.