LLC or S Corporation: How the Tax Difference Works
From Tax Guide.
Tax Guide · Arab, Alabama
How Are LLCs Taxed in Alabama?
An LLC is not a tax class of its own. See how single-member and multi-member LLCs are taxed federally, and how Alabama business privilege tax fits in.
The short answer
How is an LLC taxed?
An LLC is a legal structure, not a tax classification, so the IRS taxes it as a sole proprietorship, a partnership, or a corporation depending on how many owners it has and what it elects.
When you form a limited liability company under state law, the federal tax system looks at the LLC and asks two questions: how many owners are there, and did the LLC choose to be taxed as a corporation? The answers decide which tax return is filed and how the profit reaches the owners.
That is why two businesses that are both "an LLC" can have very different tax filings. If you are just getting started, our starting a business tax checklist covers the rest of the setup.
Default rules
How is a single-member LLC taxed?
A single-member LLC is normally treated as a "disregarded entity", which means the business income is reported on the owner's own tax return.
For an individual owner, that usually means the profit and loss go on Schedule C of Form 1040. There is no separate federal income tax return for the LLC. The owner pays income tax on the net profit and, in most cases, self-employment tax as well. Our guide on self-employment tax explains that part.
A multi-member LLC is, by default, taxed as a partnership. It files an informational return, Form 1065, and gives each member a Schedule K-1 showing that member's share of income and deductions. The members report those amounts on their own returns.
| LLC type | Default federal treatment | Where the income is reported |
|---|---|---|
| One owner | Disregarded entity | Schedule C of the owner's Form 1040 |
| Two or more owners | Partnership | Form 1065, then K-1s to each member |
| Elects corporate tax | Corporation or S corporation | Form 1120 or Form 1120-S |
Elections have deadlines and eligibility rules. Talk to a preparer before you file one.
Alabama
What is the Alabama business privilege tax?
Alabama charges a business privilege tax on many LLCs and other entities that do business in the state, and it is separate from income tax.
The business privilege tax is filed with the Alabama Department of Revenue and generally involves a return each year, including for entities that owe little income tax. Whether a particular LLC owes it, how it is computed and when it is due depend on the entity and its type. Alabama has its own rules, and we check how they apply.
Alabama also has an income tax return for you as an owner. Residents file Form 40. Pass-through income from your LLC generally shows up on your personal Alabama return as well as your federal one. Nonresident owners with Alabama income file Form 40NR.
Self-employment
Do LLC owners pay self-employment tax?
Most LLC owners who work in the business do pay self-employment tax on their share of the profit, which is the Social Security and Medicare tax for people who work for themselves.
That applies to a single-member LLC taxed as a sole proprietor and generally to active members of a partnership-taxed LLC. Because nobody withholds tax for you, owners often make estimated payments through the year. See our guide to estimated quarterly taxes for how those work.
An LLC that elects to be taxed as an S corporation works differently. The owner who works in the business is paid wages through payroll, and the rest is treated another way. Our article on LLC or S corporation compares the two.
Common questions
What do LLC owners often get wrong at tax time?
The most common mistakes come from assuming an LLC changes the tax rules automatically, when in fact it usually does not.
An LLC can help separate business and personal liability under state law, but it does not, by itself, lower income tax. Owners also sometimes mix personal and business money, which makes the books hard to trust. Keeping a separate business account and clean records is one of the simplest habits to build.
- Skipping the state annual filings because there was no profit
- Mixing personal and business spending in one account
- Taking money out and not tracking whether it is a draw, wages or a loan
- Missing estimated tax payments because nothing was withheld
- Not sending the right tax forms, such as a 1099-NEC to contractors
Returns
Which tax return does my LLC file?
It depends on the LLC's tax classification, so start by finding out how the IRS treats yours.
A disregarded LLC files nothing separate with the IRS for income tax, while a partnership LLC files Form 1065 and an S corporation LLC files Form 1120-S. A corporation-taxed LLC files Form 1120. The full breakdown is in our guide to business tax return types.
If you are not sure how your LLC is classified, look at the letter from the IRS that came with your EIN or any election you filed. We can help you read it. An LLC is created by filing with the state, and that is something we do not handle, but we can talk through how it fits the tax side.
How we can help
How Melton Tax Services can help with your LLC
We prepare federal and Alabama income tax returns for LLC owners and for the businesses themselves as part of our income tax preparation service.
Our income tax preparation covers businesses and the self-employed. We help you figure out how your LLC is classified, report its income correctly and stay on top of estimated payments.
We serve Arab and the surrounding area. Call 256-586-4635 or use our contact page. Bring your paperwork to the office, and please do not send Social Security numbers or documents through the website.
Answers
Questions about llc taxes
Does a single-member LLC file a separate tax return?
For federal income tax, usually not. The income goes on the owner's own return, typically on Schedule C. Alabama and other agencies may still require separate filings, so we check the state side.
Is an LLC a corporation for tax purposes?
Not by default. An LLC can choose to be taxed as a corporation or an S corporation by making an election with the IRS, but many LLCs never do.
Do I owe Alabama business privilege tax if my LLC lost money?
It can still apply, because the tax is not simply based on profit. Alabama has its own rules, and we check how they apply to your LLC.
Can I pay myself a salary from a single-member LLC?
If the LLC is taxed as a sole proprietorship, an owner generally takes draws rather than wages. If the LLC has elected S corporation status, the owner working in the business is paid through payroll.
Do LLC owners get a W-2?
Not unless the LLC is taxed as a corporation and the owner is an employee of it. Sole proprietor and partner-type owners do not receive W-2s.
Do I need an EIN for my LLC?
Many LLCs get one, and it is required if the LLC has employees or files certain returns. You apply for it directly with the IRS. Banks also often ask for one.
Read next
Related reading
Which Business Tax Return Do I File?
From Tax Guide.
Self-Employment Tax Explained: What You Owe and Why
From Tax Guide.
Starting a Business: Tax Checklist for New Owners
From Tax Guide.
Income Tax Services
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