As Limited Liability Companies (LLCs) gained popularity, the IRS opted to classify them under existing tax categories rather than creating a new one. One of the key benefits of forming an LLC is that the owners can report the company’s profits or losses on their individual tax returns.
What is a Disregarded Entity?
A Disregarded Entity is a business type that is legally separate from its owner for certain purposes but fully integrated with the owner for tax purposes. Sole proprietorships and single-member LLCs are examples of disregarded entities because the owners report the business’s profits or losses on their personal tax returns. Businesses classified as disregarded entities are typically not “disregarded” when it comes to specific other regulatory obligations, such as federal excise taxes (with the exception of S Corporations and REITs).
LLC Classification for Taxes
According to the IRS, an LLC can either be classified as a sole proprietorship (if it has one owner) or a partnership (if it has multiple owners), which makes them disregarded entities for tax purposes. However, LLCs also have the option to elect corporate tax treatment by filing Form-8832 with the IRS.
LLCs responsible for specific federal taxes, such as those on alcohol, firearms, or tobacco, are required to obtain an Employer Identification Number (EIN) and maintain a separate bank account.
Self-Employment Taxes
If your LLC is classified as a disregarded entity, you will likely be required to pay self-employment tax. If you earn more than $400 from your disregarded LLC, you are obligated to file and pay self-employment tax using Form 1040.
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