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by Mike Vestil 

LLC Taxes – How Is An LLC Taxed, Tax Benefits And Tax Classification

Taxes - one of the few things you can’t say no to.

When learning how to start an LLC, taxes are an essential consideration. 

An LLC is a business that gives you limited liability just like a corporation does. This means that if the business goes bankrupt or gets sued, the owners won't have to pay as much as they would if the business was a sole proprietorship or partnership. 

LLCs are also very tax efficient, meaning that you'll pay less taxes than other types of businesses. And finally, they offer the same flexibility as partnerships do so you can make decisions quickly and easily.

In this article, I'll share how LLCs are taxed, giving you a complete picture of what’s involved when dealing with this business entity.

How Do LLC Taxes Work? LLC Tax Classification

As part of earning money online, the IRS has a category dedicated to LLCs (Limited Liability Companies). An LLC is like a partnership, but it can have an unlimited number of members, and all members are protected from personal liability for business decisions or actions of the LLC. The default tax classification for an LLC with one owner is “disregarded entity,” meaning that the LLC does not pay tax on its income; instead, it “passes through” the income and losses to the owner.

The shareholders' profit shares are subject to both federal and state income taxes. As the owner of an LLC, you will need to pay self-employment tax (Social Security and Medicare taxes) on the net earnings from your business.

LLC Tax Benefits

Fully knowing what is an LLC also means understanding the tax benefits of an LLC.

Here are the various LLC tax advantages to consider:

  • Pass-Through Taxation: One of the most attractive benefits of forming an LLC is that it’s considered a “pass-through entity.” This means that income from the LLC passes through to its members and is taxed at their tax rates. The LLC does not pay taxes; all profits and losses are reported on each member's personal tax return.
  • Flexible Profit Distribution: Unlike other business structures, an LLC allows for flexible profit distribution among its members, which can be adjusted according to individual preference or agreement between members. All distributions must be made in proportion to each member’s ownership percentage as stated in the operating agreement.
  • Limited Personal Liability: As an LLC, you will benefit from limited personal liability. This means that the members of an LLC are not held personally liable for debts and obligations incurred by the business. Members may be responsible only for the extent of their investment in the company.
  • Perpetual Existence: An LLC offers perpetual existence, meaning it will continue after one or more members die or leave. This is an excellent benefit because it ensures continuity and protects current members against unwanted changes due to new members joining or leaving.

Overall, an LLC offers many tax benefits and advantages for businesses looking for a simple yet effective way to manage their operations.

What Tax Form Does An LLC File?

If your LLC status is classified as a corporation, you must file Form 1120. 1120 is the C corporation income tax return.  

In simple terms, LLCs that elect to be treated as corporations, such as an S corporation, must file Form 1120. This includes any LLCs who have opted for a default corporate classification or requested special tax treatment as an S corporation.

What Can You Write Off On Taxes For LLC?

Another aspect of the tax benefits associated with LLCs is the ability to deduct certain expenses and fees. Generally, you can write off all business-related costs directly related to your LLC’s income or operations.

This includes the following items:

  • Advertising: Businesses need to spread the word about their services or products to draw customers. Advertising costs can be deducted from your taxes when filing with an LLC.
  • Home Office Expenses: If you are running a business from home, you may be able to deduct certain expenses related to that home office that aren’t deductible for other companies.
  • Professional Fees: This includes any fees paid for professional advice or services related to the operation of your LLC, such as legal and accounting fees.
  • Travel and Entertainment Expenses: These include travel-related expenses like hotel stays, meals, transportation costs, etc., and entertainment costs associated with conducting business. 
  • Interest and Bank Charges: Interest payments and bank charges incurred while running a business may be deductible.
  • Insurance Premiums: Any insurance premiums you pay related to your LLC are considered a tax-deductible expense.
  • Office Supplies and Equipment Rentals: The costs associated with purchasing office supplies or renting equipment for use in connection with business activities can typically be written off.
  • Legal Services: Those expenses can be deducted if you’ve incurred any legal fees to run an LLC.
  • Vehicle Expenses: You may be able to deduct certain vehicle expenses, such as mileage, gas, repairs, etc. if they are directly related to conducting business.
  • Salaries and Wages: You may be able to deduct salaries and wages paid to employees who are vital to the success of your LLC.
  • Retirement Plan Contributions: If you’ve established a retirement plan for yourself or your employees, any contributions made to that plan may be deductible from your taxes.
  • Business Meals and Entertainment: You can deduct business meals and entertainment expenses from taxes if they were used in conducting business.
  • Health Insurance Premiums: Health insurance premiums paid by an LLC owner or employee may be tax-deductible.
  • Rent or Lease Payments: Rent payments and equipment leases related to running an LLC can typically be deducted from taxes.
  • Depreciation of Assets: Any depreciation of assets used in connection with business activities can be written off on taxes.
  • Amortization of Intangible Assets: This includes intangible assets such as patents, copyrights, or trademarks acquired while doing business.

How To Do LLC Taxes Yourself

While I do not generally recommend filing your taxes yourself, there are some things you can do to make the process more manageable if you choose to do so.

Here are the main steps to consider.

Choose The Correct Filing Status

The type of tax filing status you choose will depend on the style of LLC you own. Single-member LLCs are usually treated as sole proprietorships for taxation purposes, while multi-member LLCs can be taxed as partnerships or S corporations. Depending on your business structure and income levels, choosing one of these options could save you money in taxes.

Calculate Your Business Income

The first step to filing your taxes is calculating your total business income. This includes revenue from sales and services, dividends and investments, and other income sources related to the LLC.

Determine Deductions And Credits

Next, you need to identify any deductions and credits that may apply to your business. This includes office supplies, travel expenses, business meals, entertainment costs, health insurance premiums, retirement plan contributions, etc. It's essential to keep track of all these expenses throughout the year to maximize the deductions when you file your taxes.

File Form 1065 (U.S. Return Of Partnership Income)

Once you have determined your total taxable income for the year, you must file Form 1065 with the IRS. This form is used by partnerships or multi-member LLCs who must report their earnings and deductions to the government.

File Personal Tax Returns For Each Llc Member

If you are operating as a multi-member LLC, each member must file their own tax return in addition to filing Form 1065. This is done to report any income or losses allocated to them through the LLC's financial statements.

Pay Estimated Taxes On Time

In addition to filing your taxes, it's essential to pay your estimated taxes throughout the year. Make sure you keep track of all payments so that you don't end up being surprised with a hefty bill at the end of the year.

Filing your LLC taxes can be a complicated and time-consuming process, but if you follow these steps, you should be able to get it done promptly. If you find the process too overwhelming or confusing, seek help from an accountant or tax professional who can assist with filing your taxes correctly and efficiently.

Business Taxes LLC - FAQ

What Is The Process For Closing An Llc?

Closing an LLC depends on the state where the company is registered. Generally, it involves filling out a form with the state and submitting any necessary paperwork, such as filing a final tax return or notifying creditors of the closure. 

It may also involve publishing a notice in local newspapers, dissolving corporate records, transferring assets to new owners or other entities, and paying taxes for closing debts. After completing all these steps, you must officially submit Articles of Dissolution to close your LLC. Once the Secretary of State's office has approved this, your LLC will be dissolved and no longer exist in that state.

What Is The Best Tax Classification For An Llc?

The best tax classification for an LLC will depend on the number of owners (members) and how they plan to be taxed. Generally, a single-member LLC can choose between being taxed as a sole proprietorship or disregarded entity, while a multiple-member LLC can elect to be taxed as either a general partnership, S-corporation, or a C-corporation. 

In most cases, the default tax classification for an LLC is that of a disregarded entity or partnership, depending on the number of owners. For example, if two members are in an LLC, it would be treated as a general partnership and taxed accordingly.

What Type Of LLC License Is Required For My Business?

The type of LLC license required for your business depends on the state where you plan to operate. Generally, you'll need to apply for a special permit or certificate from the state and federal governments. The paperwork involved may vary based on your industry and whether or not there are any local regulations governing it. 

Additionally, certain businesses may require professional licensing depending on where you are located. This may include businesses like attorneys, doctors, or contractors. You should contact the appropriate state and local authorities to determine what licenses or permits are necessary for your business.

Do I Need A Registered Agent For My LLC?

Yes, most states require LLCs to have a registered agent responsible for receiving legal documents and official notices on behalf of the company. The registered agent must have a physical address in the state where the LLC is registered, and they must be available during regular business hours to accept paperwork. 

You can designate yourself as your registered agent or hire a third-party service to perform that role. However, an experienced professional handling your LLC's legal documents and other related correspondence is often recommended.


Understanding LLC state taxes is crucial when making money without a job. With no one to file your tax returns, it is essential to understand the factors and deductions that can affect your taxes.

No matter what type of business structure you choose, you should speak with a professional accountant or tax advisor to ensure that all deductions are taken correctly and by IRS regulations. This will help you save by ensuring that your expenses are properly documented and accounted for when filing taxes.

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About the author 

Mike Vestil

Mike Vestil is an author, investor, and speaker known for building a business from zero to $1.5 million in 12 months while traveling the world.

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