What Is The Biggest Component Of LLC Tax Treatment?

LLC tax treatment is the same as the tax treatment of income earned by a W-2 employee. An LLC can be organized as a single-member LLC, which is treated as a sole proprietorship and income is reported on Schedule C to Form 1040. A multi-member LLC pass income to its members as owners who report the income on Form 1065 and K-1 for partnerships.

The Reporting of LLC Income

The biggest component of LLC tax treatment is the reporting of the income on an individual or partnership tax return. This impacts the earned income of an individual filer and may cause their tax rate to increase significantly as a result. The LLC tax treatment of earned income passed on to its members cause the members to manage their income in a way to ensure that they maximize individual deductions in order to offset any change in personal tax liability.

Changes in Personal Tax Rate

An earner making more than $325,000 is subject to the maximum individual tax rate of 35 percent. This can be significant for an individual filer who may not receive all of the benefits of the pass-through earned income of the LLC but now faces a larger tax bill as a result of their LLC membership.