By default, a single-member LLC is classified as an entity disregarded from its owner for federal income tax purposes. That is, unless the owner files a tax election with the Internal Revenue Service ("IRS") to have the entity classified differently. For example, as an S corporation or a C corporation.
Where it is treated as a disregarded entity, a single-member LLC would not file its own business tax return. Rather, its owner would report the LLC's activity on her or his tax return (Form 1040) on Schedules C, E and F. These Schedules reflect the LLC's profit or loss. Federal income tax may apply on the net profit. Working with a competent CPA on planning for and filing your annual Form 1040 is a good idea.
The LLC is subject to employment tax withholding if it has employees. The LLC's owner, however, is not considered a W-2 employee and does not receive a salary. Instead, the IRS considers the owner to be self-employed and compensated through draws from the profits of the entity, just like a sole proprietor would be paid. If the profits result from an actively operated business, the LLC's owner would be subject to self-employment tax.
Self-employment tax is separate from federal income tax and is reported on Schedule SE. Self-employment income up to an annual threshold amount is taxed at a rate of 15.3% (12.4% for Social Security and 2.9% for Medicare). The LLC's owner, just like a sole proprietor, can deduct half of the self-employment tax paid for the year on Form 1040.
One significant benefit of operating through an S corporation is saving on self-employment tax.
Allie Petrova is a Tax and Business Law attorney based in Greensboro, North Carolina. Petrova Law serves business owners and privately owned businesses. Call Petrova Law to arrange an appointment in our Greensboro office at 336.310.1210.
Petrova Law is a Greensboro-based boutique business law firm focused exclusively on tax and business law issues. Located in the Triad, the firm assists individual and business clients with tax matters, IRS representation, and business law matters from launch through day-to-day operations to exit and succession.