How are Single Member LLCs Taxed?

If you own a single-member LLC, you may wonder how single-member LLC taxes work, the reporting requirements, and how to file. Thankfully, this article is here to help and will break all that down so you know what to do and how to do it so you can stay compliant.

If you’re looking for additional assistance when it comes time to file and pay, remember that you don’t have to tackle it alone. ZenBusiness has the solutions you need to help you organize your finances to make tax time easier.

Single-Member LLC Tax Filing Requirements

A limited liability company (LLC) with a single owner is known as a single-member limited liability company (owners are known as “members” in an LLC). By default, if a single-member LLC doesn’t elect to be treated like a C corporation, the IRS treats the LLC as a “disregarded entity.”

Basically, the IRS doesn’t have a classification for LLCs, so they’re treated as a corporation, a partnership (if it has multiple members), or a sole proprietorship (if there’s only one member), which the IRS refers to as a disregarded entity (as in the business entity isn’t acknowledged for tax purposes, just the individual owner). In this scenario, the LLC’s activities would be reported on the owner’s federal tax return.

Unlike corporations, LLCs must report all of their income regardless of whether it’s distributed to the owners. So, even if you keep your LLC’s earnings in the business by keeping it in your business bank account, the IRS still expects you to pay taxes on them.

How to File Taxes for a Single-Member LLC

Filing single-member LLC taxes can vary depending on how the LLC has elected to be taxed. For example, in some cases, a single-member LLC may file Form 8832 to be treated as a C corporation. In this case, it’s a separate taxable entity and must file an annual federal business tax return and pay taxes at the federal corporate rate. 

By default, the single-member LLC is treated like a sole proprietorship by the IRS. In this case, the IRS will disregard it as a separate entity, and the owner will report profits and losses on Form 1040 or 1040-SR, Schedule C, Profit or Loss from Business (Sole Proprietorship).

Tax Deductions

If you operate as a single-member LLC, your standard deduction when you file your 2022 taxes will be $12,950. For many business owners, filing itemized deductions can yield substantial savings. 

Here are just a few of the common items you may be able to write off as a business expense. For more, see our page on tax write-offs for your LLC.

• Mileage: If you use your vehicle for business purposes, you can reimburse yourself for gas and other auto expenses for the times you use your vehicle for business. You’ll have to keep track of when you’re using your vehicle for business use versus personal use.
• Home office: If you operate the LLC from your home, you may be able to deduct $1,500. Learn more about home office tax deductions.
• Business phone: If you have a cell phone line exclusively for business, you can deduct the cost of the line from your taxes.
• Licensing fees: Professional licenses may also qualify as a business expense. An important tax write-off for LLCs providing licensed professional services can include the cost of obtaining and maintaining your license.

What are the tax benefits of a single-member LLC?

If you’re launching a new business or have already started one and are looking to organize it properly, you may be looking into things like incorporating or forming an LLC. What’s best for you will ultimately depend on your business, who owns it, the amount of personal liability you’re willing to risk, how it operates, and what tax situation makes the most sense. A single-member LLC can offer several advantages and benefits.

The primary tax benefit of a single-member LLC is that they’re typically treated as disregarded entities by the IRS, meaning there’s no separation between the LLC and the owner for tax purposes. They’re taxed similarly to a sole proprietorship by the IRS, meaning that owners will simply report income and expenses related to the LLC on their federal tax returns rather than needing to file a separate one for the LLC or pay additional taxes for the LLC. 

In some cases, an LLC can elect to be taxed as a C corporation or an S corporation. Filing as an S corporation can be helpful for reducing your self-employment tax burden because only your salary is subject to self-employment taxes (the taxes earmarked for Social Security and Medicare), but not the remaining profits. You avoid double taxation as an S corporation because businesses taxed as an S corp have pass-through taxation like a sole proprietorship or partnership. However, you’ll still have to submit a separate tax form, Form 1120-S.

Having your LLC taxed as a C corporation means facing double taxation because the LLC is taxed on its profits, and then the dividends are taxed again on individual returns of the members. However, certain more profitable LLCs sometimes elect C corporation taxation for a variety of reasons, such as the wider range of tax deductions.

We can help!

If you’re worried about single-member LLC taxes, fear not; you don’t have to go it alone. Not only can we help you form an LLC, but services like our Money app can help you get organized for filing your small business taxes.

Reach out today by either visiting us online or calling 1-844-493-6249 to how ZenBusiness services can help you launch, run, and grow your business. 

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.