Clients will frequently tell me they have an LLC and expect that to explain everything. However, as an accountant, the LLC status does not tell me anything (except that I won’t be able to go after your personal assets in the event of bankruptcy). In other words, LLC status is more a legal term rather than a tax-related term. What you want to know about your business is: are you a:
- Single member LLC (otherwise known as a sole proprietorship, disregarded entity, sole prop, etc)
- S Corp
- C Corp
Being an LLC means you can actually be filing under any of the above. If you have not specifically indicated to the IRS or any state that you are a partnership or corporation, then you are a single-member LLC and can file on your schedule C. This is actually beneficial for several reasons:
- Schedule C tax returns are flow-through, so all losses incurred in the ordinary course of business will be deductible on your personal return
- Schedule C tax returns are easier to complete and accounting fees are typically much lower for this sort of business as opposed to running a partnership or corporation return and then separately booking the income into your individual return
The drawbacks to filing your business as self-employment income (a.k.a. sole proprietorship, single member LLC, or disregarded entity) include the following:
- You are the only partner, and bringing in other partners in for tax purposes will be difficult to achieve on a 1040 return. This is not a problem, however, for married couples that are filing joint and are the only two owners of the business. In these cases, schedule c returns work perfectly.
- A drawback frequently heralded by accountants and those who consider themselves “tax savvy” is that self employment taxes can be minimized by filing as an s corp and then treating half of your pay as distributions and the other half as W2 income. However, the administrative costs of setting up payroll, payroll compliance (quarterly and annual returns to both your state [if applicable] and the IRS), and the additional costs for accounting work in many cases nullify this benefit. I frequently recommend to smaller clients to remain as a schedule c business as the benefits of creating and administering an s corp and payroll system outweigh the costs, in many cases.
This schedule (the schedule c) then feeds directly into your personal return. This is the easiest type of return to produce, and will eventually end up on your NY state IT-201 return. If you are a partnership or corporation, your taxes will go on a form 1065 or 1120/1120s return.