If you’re self-employed or own a small business, chances are high that your business is an LLC or could benefit from becoming one. It’s not always straightforward how an LLC works and what it means for you, however. Here we’ll cover the different ways you can be taxed with an LLC and what the LLC tax rate can mean for you. By knowing how taxes are handled with LLCs, you can better understand their tax benefits. You can also work directly with a financial advisor to help you choose the best tax route for your business that will have a positive impact on your personal taxes.
What Is an LLC?
A limited liability company (LLC) is an organizational structure used to protect company owners from the liability of their company. You have some protection if the LLC owes debts or is sued. How an LLC is regulated and taxed varies from state to state. Essentially, an LLC can be considered a partnership, sole proprietorship or corporation. While every LLC is considered a limited liability company, the type of company that it is considered to be will be how the tax treatment is determined.
LLC Terms and Rules Around Membership
Managing a limited liability company isn’t as complicated as running a corporation, and it doesn’t have as many administrative requirements, but there is still plenty to know. You should be aware of how the LLC works before deciding to move forward. Here are some of the rules that an LLC comes with:
- Members: LLC “members” are the same as owners.
- Who Can Be a Member: Most states don’t put a lot of restrictions on who can be a member of the LLC. It can be individuals, corporations, foreign entities and other LLCs.
- Who Can’t Be a Member: Generally, insurance companies and banks cannot be members of an LLC. Though, this can vary by state.
- The number of members: In most states, LLCs can have as little as one member up to an unlimited amount of members.
How Are LLCs Taxed?
LLC taxes may sound complicated to you, but they’re not. The truth is that, for most LLCs, the LLC tax rate is the same as the personal federal income tax rate. Since LLCs are business structures established by state statute, the way they’re taxed on a state level varies.
The 4 Ways an LLC Can be Taxed
Before setting up an LLC or filing taxes, you should know the different types of LLCs and how they function. Remember that LLCs are regulated by states, so these types may vary. However, they serve as a general rule of how LLCs can act.
- Single-Member: This is an LLC at its most essential. If you own a single-member LLC and don’t elect a tax status then this is the one that you will get. With an LLC with just one member, the LLC works as a disregarded entity for tax purposes. This means that you will file the income from the LLC as your income for your federal income taxes.
- Multi-Member: When there are two or more members that own a stake in the LLC, then the automatic tax filing is that of a partnership. This is the same as the single-member LLC but each member is responsible for an equal portion of the tax. That means that each partner will file separately based on their share of income, deductions, credits, etc. So, if you own 30% of the company, you would file taxes based on 30% of the company’s income. From there, you can make deductions and apply credits based on your stake.
- S Corporation: If you choose to have your LLC taxed as an S Corp, there are benefits and drawbacks. With an S Corp, earnings can be treated as dividends, which helps you avoid paying higher self-employment taxes. There are requirements to be aware of but you’ll need to make sure that the numbers make sense for your situation. If the numbers work out then you could save a substantial amount on taxes. However, there are more administrative requirements and costs.
- C Corporation: You can also form your LLC as a C Corp. This allows you some advantages. If your goal is to raise funding through investors, a C Corp makes this a viable option. That’s because you can issue multiple classes of stock. You’ll also be able to make more deductions than you would with an S Corp. The downside with a C Corp is your LLC will no longer be treated as a pass-through entity. That means your LLC tax rate will be the corporate tax rate, and you’ll also have to pay income taxes on earnings.
LLC Tax Rate
Since most LLCs (besides those filing as C Corps) are regarded as pass-through organizations, they don’t hold tax liability themselves. This means an LLC doesn’t have a formal tax rate. Instead, the members of the LLC claim the income directly on their personal income tax forms per the federal income tax brackets.
The federal income tax brackets for the 2022 tax year (filed in 2023) are as follows:
FEDERAL INCOME TAX BRACKET FOR 2022 (FILING DEADLINE: APRIL 17, 2023)
|Single||Married Filing Jointly||Married Filing Separately||Head of Household|
|10%||$0 – $10,275||$0 – $20,550||$0 – $10,275||$0 – $14,650|
|12%||$10,276 – $41,775||$20,551 – $83,550||$10,276 – $41,775||$14,651 – $55,900|
|22%||$41,776 – $89,075||$83,551 – $178,150||$41,776 – $89,075||$55,901 – $89,050|
|24%||$89,076 – $170,050||$178,151 – $340,100||$89,076 – $170,050||$89,051 – $170,050|
|32%||$170,051 – $215,950||$340,101 – $431,900||$170,051 – $215,950||$170,051 – $215,950|
|35%||$215,951 – $539,900||$431,901 – $647,850||$215,951 – $539,900||$215,951 – $539,900|
If an LLC is listed as a C Corporation, the LLC must file corporate income taxes. In 2022, the federal corporate income tax rate is 21%, with many states adding their own taxes on top of that. Along with the corporate income tax, any profits or dividends distributed to members are subject to capital gains tax.
For reference, here are the long-term capital gains tax rates for 2022:
|Rate||Single||Married Filing Jointly||Married Filing Separately||Head of Household|
|0%||$0 – $41,675||$0 – $83,350||$0 – $41,675||$0 – $55,800|
|15%||$41,675 – $459,750||$83,350 – $517,200||$41,675 – $258,600||$55,800 – $488,500|
The Bottom Line
In most cases, the LLC tax rate is the same as your individual federal income tax. Still, there’s some nuance in how you’re taxed depending on how your LLC files. For instance, if you file as a partnership, you’ll see an LLC tax rate that equates to the percentage of your share. Regardless of whether your LLC is just you or a corporation seeking an IPO, it pays to know how you’ll be taxed.
Tax Tips for Small Business Owners
- If you’re unsure of the best route for filing your taxes, consider working with a financial advisor well-versed in small business taxes. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You need to know how you’ll be taxed as a small business owner. SmartAsset’s small business tax guide can explain the basics and help you figure out your small business’s taxes.
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