Any LLC can elect to be treated as a corporation for tax purposes by filing IRS Form 8832, Entity Classification Election, and checking the corporation tax treatment box on the form. In this way, LLC owners can save money on their overall taxes by electing to be taxed as a C corporation. This is different from standard C corporations, which are subject to double taxation. More specifically, the corporation must pay tax on its income.
Then, any distributions to its owners are also taxed as individual income. Clearly, avoiding double taxation can save a lot of money in the long run. That is one of the main tax advantages of an LLC. Because the LLC is fairly new, the IRS does not have a specific tax bracket for this type of business, so it uses the tax brackets of other types of businesses.
One of the advantages of the LLC over corporations is that LLC owners are not subject to double taxation. A corporation pays corporate income tax, and the owners of the corporation are shareholders who are taxed on the dividends they receive. Corporations are subject to double taxation, i.e. the corporation is taxed on its income and the shareholders are taxed on the dividends.
This is called the qualified business income (QBI) deduction and allows LLC owners to take a 20 per cent deduction on their net business income, in addition to normal deductions for business expenses. An LLC is generally treated as a pass-through entity for federal income tax purposes. This means that the LLC itself does not pay tax on business income. The members of the LLC are taxed on their share of the LLC's profits.
State or local governments may impose additional taxes on the LLC. Members may elect to have the LLC taxed as a corporation rather than as a pass-through entity. Since the owner has a choice of tax filing, the question is not which saves more in taxes, but which entity is the better choice for your LLC. The pros and cons of each of the four available options are discussed below.
In the meantime, because LLC owners can deduct up to 20 percent of their business income before their taxes are calculated, it can be very beneficial to file as an LLC based on an individual's personal income tax rate. Talk to your CPA or tax professional about the potential benefits of electing corporation status for your LLC. You should make sure that workers' compensation insurance covers all individuals who are employed by the Corporation or LLC. A multi-member LLC begins to be taxed as a partnership which needs to apply for an EIN on Form SS-4.An LLC is considered a pass-through entity also called a flow-through entity which means it pays taxes through an individual income tax code rather than through a corporate tax code.
An S-corp is taxed as a pass-through entity, similar to an LLC, with some differences in how the company's salary and distributions are taxed. After deducting reasonable compensation and other business expenses, the LLC's taxable income is reported by the member(s) as passive income, rather than as earned income subject to Social Security and Medicare contributions. LLCs also have the option to be taxed as a corporation or an S corporation, making an election with the IRS, to obtain the best tax advantage. This prevents the money from being locked up in the Corporation or LLC as a capital contribution until the Corporation or LLC is liquidated.
Consider these LLC taxes when selecting your business structure and making budgeting decisions. This describes how LLC profits can pass directly to the owner(s) without first having to pay federal corporate income taxes. Suppose an LLC wants to be taxed as an S-Corp to save money on payroll taxes and avoid the double taxation of a C-Corp. Your LLC can elect to be taxed as a C-corporation by filing Form 8832 with the IRS (your state may also require additional forms for a change in tax status).
For most small business owners, structuring a business as an LLC offers the most versatility in determining how the business is taxed, while offering the limited liability of a corporation but with less formality. The income of a corporation is taxed differently than that of an LLC, and a corporation is entitled to more deductions and credits. Although Social Security contributions must be made while children are employed by a corporation or LLC, a W4E withholding exemption form can be filed.
