Did You Pay Self-Employment Tax on Your LLC?

One of the things that I love about using LLCs for business is the total flexibility they offer where taxes are concerned. An LLC can choose if it wants to be taxed as:

  • A Sole Proprietorship (i.e., reports income/expenses on a Schedule C to your personal return)
  • As a Partnership (reports income/expenses on an IRS Form 1065, and issues you a K-1 to file with your personal return)
  • As an S Corporation (reports income/expenses on IRS Form 1120S and issues you a K-1 to file with your personal return); or
  • As a C Corporation (reports income/expenses on IRS Form 1120)

Deciding how you want your LLC to be taxed is a conversation you will need to have with your tax advisor. But we can give you some tips:

  1. If your LLC will provide a service, or sell a product, then you probably will want it to be taxed as an S Corporation or a C Corporation.
  2. If your LLC will rent real estate, or hold a stock portfolio, or lease equipment to another business, then you probably will want it taxed as either a Sole Proprietorship or as a Partnership.

If you aren’t sure, and can’t get the answers you need right away, then don’t panic – you don’t have to make any special tax election up front. The IRS gives new businesses some leeway on making a tax election. What you don’t want to do is make a snap decision to be taxed as a C Corporation, for example, and then later change your mind. There is a limit on when and how often you can change your LLC’s tax classification with the IRS.

Making the right tax election is just one of the many decisions you need to look at when creating a business structure, or even planning your new business venture before you get to the business structure stage. It’s an important decision, too. Make the right election, and it can save your bottom line, by reducing your business (and maybe personal) taxes. Make the wrong election, and it can impact your bottom line, too – in a way you may not like!

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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