How to Add an LLC to a Tax Return

One of the most common questions new business owners ask is how to report their Limited Liability Company (LLC) on a tax return. The answer isn't as simple as finding a box labeled "LLC," because the IRS doesn't actually have a specific tax classification for LLCs. This guide will walk you through how your LLC is treated for tax purposes and which forms you’ll need to file, depending on your structure and choices.

First, Understand the Core Concept: Legal vs. Tax Structure

An LLC is a legal structure created by state law. Its primary purpose is to provide a layer of liability protection, separating your personal assets from your business debts. For federal tax purposes, however, the IRS treats an LLC in one of four ways, depending on how many owners (members) it has and which tax status it elects to use.

By default, the IRS classifies an LLC as either a "disregarded entity" or a partnership. You can also elect for your LLC to be taxed as an S Corporation or a C Corporation if it makes strategic sense for your business. Let's break down each of these four paths.

The Four Paths for Filing Your LLC's Taxes

How you add an LLC to a tax return depends entirely on its tax classification. The business activity is reported on a specific IRS form, and the net profit or loss then flows through to the owner’s personal tax return (with the exception of a C Corp).

1. Filing as a Disregarded Entity (The Default for Single-Member LLCs)

If you are the sole owner of an LLC, the IRS automatically treats it as a "disregarded entity" for tax purposes. This is the simplest way to file. The term "disregarded" simply means the IRS ignores the LLC for tax filing and sees the business's income and expenses as your own.

You don’t file a separate business tax return for the LLC itself. Instead, you report all business income and expenses on a schedule that you attach to your personal tax return, a Form 1040.

• Which form to use: A Schedule C (Form 1040), Profit or Loss from Business is the most common form for a single-member LLC actively engaged in a trade or business. If your LLC owns rental real estate, you would use Schedule E, and for farming activities, you would use Schedule F.

How it works:

1. Gather Financials: Throughout the year, track all business income and categorize your ordinary and necessary business expenses (e.g., supplies, advertising, office rent, contractor pay). A tool like QuickBooks or Wave is excellent for this.
2. Complete Schedule C: Report your total gross income. Then, you will list your expenses by category. The form will guide you to calculate your net profit or loss.
3. Report on Form 1040: The net profit or loss from Schedule C is carried over to your personal Form 1040 on Schedule 1. This income is subject to both ordinary income tax and self-employment taxes (Social Security and Medicare), which you calculate on Schedule SE.

Example: Sarah runs a graphic design business as a single-member LLC. At year-end, her LLC earned $90,000 and had $20,000 in expenses. She would report these figures on her Schedule C, showing a net profit of $70,000. That $70,000 flows to her Form 1040, where it gets added to any other household income, and she calculates her self-employment tax on this amount.

2. Filing as a Partnership (The Default for Multi-Member LLCs)

If your LLC has two or more members, the IRS automatically classifies it as a partnership for tax purposes. A partnership acts as a pass-through entity, meaning the business itself does not pay federal income tax. Instead, the profits and losses are "passed through" to the members to report on their personal tax returns.

However, the LLC must file its own informational tax return to report the business's financial activity to the IRS.

• Which forms to use: The LLC files a Form 1065, U.S. Return of Partnership Income. Each member then receives a Schedule K-1, which breaks down their individual share of the company's income, deductions, and credits.

How it works:

1. File Form 1065: The LLC compiles its total income and deductions for the year and reports them on Form 1065. This return is due by March 15th for calendar-year businesses.
2. Issue Schedule K-1s: Based on the LLC's operating agreement, each member's share of the profit or loss is calculated and reported on a Schedule K-1. The LLC sends a copy to each member and a copy to the IRS.
3. Members Report on Personal Returns: Each member takes the information from their Schedule K-1 and reports it on Schedule E (Part II) of their personal Form 1040. Like a single-member LLC, this income is generally subject to self-employment taxes.

Example: Alex and Ben own a coffee shop LLC, with a 50/50 profit-sharing arrangement. The business earned $100,000 in net profit. The LLC files Form 1065 showing this profit. It then issues a Schedule K-1 to both Alex and Ben, each showing $50,000 of ordinary business income. Alex and Ben each report this $50,000 on their respective personal tax returns.

3. Electing to File as an S Corporation

An LLC (either single-member or multi-member) can formally elect to be taxed as an S Corporation by filing Form 2553. The primary motivation for this election is potential savings on self-employment taxes.

Like a partnership, an S Corp is a pass-through entity. The key difference is how the owners are compensated. Members who work in the business must be paid a "reasonable salary" as employees. This salary is subject to FICA taxes (Social Security and Medicare), which are split between the employee and the business. Any remaining business profits can then be distributed to the members as dividends, which are not subject to self-employment taxes.

• Which forms to use: The LLC files a Form 1120-S, U.S. Income Tax Return for an S Corporation. Just like a partnership, it issues a Schedule K-1 to each member detailing their share of the profits/losses. The owner-employee also receives a Form W-2 for their salary.

How it works:

1. Determine Reasonable Compensation: Research comparable salaries for your role, location, and industry to establish a defensible "reasonable salary." Your LLC must run payroll and withhold income and FICA taxes on this salary.
2. File Form 1120-S: The business reports all income and expenses, including the owner's W-2 salary as a business expense.
3. Issue W-2s and K-1s: The owner-employee receives a W-2 for their salary. A Schedule K-1 is issued to each member showing their share of the remaining business profit.
4. Report on Personal Returns: The owner reports their W-2 wages and their K-1 profit distribution on their personal Form 1040. Only the W-2 salary is subject to FICA/self-employment tax.

Example: Maria's consulting LLC elects S Corp status. The business has a net profit of $150,000 before her salary. She pays herself a reasonable salary of $70,000. The business has a remaining profit of $80,000. She pays FICA taxes only on the $70,000 salary. The $80,000 profit is passed through on her K-1 and is only subject to regular income tax, not self-employment tax.

4. Electing to File as a C Corporation

This is the least common tax election for small LLCs, but it's an option. An LLC can elect to be taxed as a C Corporation by filing Form 8832. Unlike pass-through entities, a C Corp is a separate taxable entity. It files its own tax return and pays corporate income tax on its profits at the corporate level.

If the corporation then distributes profits to owners in the form of dividends, the owners must pay personal income tax on that money. This is often called "double taxation" and is a key reason this structure is less popular for smaller businesses.

• Which form to use: The business files a Form 1120, U.S. Corporation Income Tax Return. Owners who receive dividends would receive a Form 1099-DIV to report on their personal return.

How it works:

1. File Form 1120: The corporation reports all income and expenses and calculates its taxable income.
2. Pay Corporate Tax: The corporation pays tax on its net profit at the current corporate tax rate.
3. Report Dividends: If the corporation distributes profits to shareholders, it issues Form 1099-DIV. The shareholders then report this dividend income on their Form 1040. Member-employees are still required to take a reasonable salary for their work.

While often tax-disadvantaged for smaller businesses, this structure can be useful for companies that need to retain significant earnings for growth or attract venture capital.

Changing Your LLC's Tax Classification

What if you started as a single-member LLC taxed as a disregarded entity but want to switch to an S Corp status? The IRS provides forms for this.

• To be treated as a corporation (S Corp or C Corp): You file Form 8832, Entity Classification Election, to tell the IRS you want to be treated as an association taxable as a corporation. If you want S Corp status specifically, you will also file Form 2553. There are specific deadlines for filing these forms, so it’s important to plan ahead.

The decision of which tax structure to choose involves analyzing revenue, profit margins, your need to take money out of the business, and your future growth plans. It's often one of the most high-value conversations you can have with a tax professional.

Final Thoughts

Adding an LLC to a tax return is a process of identifying the correct tax classification—whether it's the IRS default or a conscious election—and filing the right forms. The four paths of disregarded entity, partnership, S Corp, and C Corp each come with distinct requirements and strategic implications for the business and its owners.

Choosing the right tax classification is about advising your client on the best operational and financial path, a process that requires nuanced judgment. Instead of spending time digging for the specific rules around reasonable S Corp compensation or state-specific partnership filing requirements, you can get instant, citation-backed answers with Feather AI. This frees up your expertise to focus on strategic guidance for your client's business, which is where your real value lies.