A limited liability company (LLC) is a “pass through entity,” like a sole proprietorship or partnership. All of its profits and losses first pass through its owners, who must voluntarily report the figures on their personal tax returns.
Individual LLC owners must report all figures of the LLC on Schedule C and submit it together with their 1040 form. For instance, if you incorporate figures in the company’s bank account at the end of the year, either to save up for future expenses such as expansion, then you must pay income tax on that money.
Meanwhile, multi-owned LLCs are treated as partnerships by the IRS. These co-owned LLCs do not pay taxes based on income, but based on their share of profits on their personal income tax returns. This is why each member’s distributive share should be clearly stated in the LLC operating agreement.
Paying Income Taxes
LLC members are not subject to tax withholding, as they are self-employed business owners of the LLC, rather than employees. Hence, each LLC member must set aside enough money to pay taxes for his share of the profits. They must also estimate the amount of tax they’ll owe per annum and make payments to the IRS on a quarterly basis, which is in April, June, September, and January.
As LLC members are not employees, hence no Social Security or Medicare system contributions are withheld from their paychecks. More appropriately, most LLC owners pay these self-employment taxes as paid by a legitimate business owner, and that is directly to the IRS.
Any owner who works in the LLC, either in staffing or management must pay this tax on his or her rightful distributive shares. However, inactive yet lawful co-owners may be exempt from paying self-employment taxes on their share of profits.