Hey guys in this video, I'm going to explain the eight different ways
LLC members are taxed on their income.
Some of these options could have you paying more than your fair share in taxes.
If you're not aware of them.
But hey, if you want to learn more about how to properly structure
all your real estate investments and reduce your taxes, you can join us
and register for a free tax and asset protection live event at the link below.
All right, let's discuss LLC and taxation.
Now when it comes to LLC and taxation, the first thing we need to determine is
how is your LLC set up?
Is a member manage or a manager manage limited
liability company because that is going to play in
to a lot of what we're doing here when we're figuring out the LLC
and what tax selections or how that income is going to hit you.
Now the first type of LLC option you have
is what we call a single member limited liability company.
That means you set up an LLC right here.
Guess what?
There's only one member. It's just you.
So when you set up a single member LLC, you will typically or you can elect
to treat this as a disregarded, disregarded entity for tax purposes.
And so what does that mean?
That means that any money you were in, let's
say, make 100 K inside of this limited liability company,
all that is going to flow down and be taxed to me at on my 1040
and I'm going to file what's called a schedule C for that income.
So it'll all be schedule C income.
That means you're going to be subject to employment taxes
on that entire amount, plus ordinary income taxes.
Now, that's on an active income.
So if your LLC was set up and it has passive income inside of it,
then the second way in which it can be taxed
is not on a schedule C, it can end up on your schedule E
or possibly D, depending on the type of passive income it's earned.
So in that case, you're typically looking at a limited liability company
that owns a piece of rental property.
So if I had a piece of rental property
inside of this LLC, and again, if it was a disregarded entity,
then that's going to show up on my schedule E on my 1040.
So when I say it's a single member LLC and disregarded, that means that it's
being ignored for federal tax purposes.
Now the other way, the third way in which LLC is can be
taxed is going to be partnership, tax status.
And so we look at a partnership of partnership passive or partnership active.
So in a limited liability company where there are two members
now you can elect to be treated as a partnership, which
means this,
that your limited liability company is going to file a 1065 tax return.
And so when we look at the LLC, if this LLC is engaged in activities
that are considered to be passive again, let's say rent or real estate,
then the income is going to flow down to each of these members
based upon their ownership interests.
So this one has a 40% membership interest.
They will be entitled to 40% of the income.
So if this limited liability company generated ten K in income,
this person gets $4,000 of that.
This person over here would receive $6,000 of that income.
Now, because the activity itself is considered passive rental real estate,
that income will show up on their schedule.
E Where you would put rental real estate, it's going to show up on page two.
Now, if the LLC was engaged in an active business, so let's say we set up
this limited liability company here and it was a nail salon.
And so you have two, two members in this nail salon, again, 6040.
So in this case, what you have when you have a partnership
now, the income is going to be based upon how that individual or what
that individual is doing with respect to this limited liability company.
So let's say this person near the 40% member,
they're actively working in this limited liability company.
They're out there clean the nails and things of that nature.
And you have this partner over here.
They don't actively work.
They're just an investor.
So the way taxes work in this particular structure
with the limited liability company, the chosen partnership tax status
is the person who is actively working in the business.
This income here is going to be what we call active income,
and it's going to show up on their 1040 schedule
s e, which is like a schedule C.
So this income that you generate from working for an LLC
is going to be subject to 15.4% employment taxes.
So you're have to pay that higher tax rate because it's considered active
income to you.
Now, on the other side, my 60% owner over here
because she's not actively working in the business, then she won't be subject
to the 15.4% employment taxes.
This is going to flow down to her.
It's going to be taxed to her as ordinary income from an active business activity.
So as you can see, when you're dealing with limited liability companies,
you really need to know how they're being taxed.
Number one from is it that how they set up for federal tax purposes,
but also what the engagement level is like
from the members or managers in that business to determine
how the IRS is going to treat the income that they're generating.
All right.
So the fifth method when it comes to Taxing LLC
is whether or not your LLC is going to be set up to be treated as an S corporation.
So if you set up an S corporation act
limited liability company, again, we've got this LLC set up.
It's treated as an escort for federal tax purposes like a partnership.
It's a flow through entity.
So whatever money is earned inside of the limited liability company,
it'll flow down to the members
based upon their ownership interests, and that'll come to them on a K-1.
Now when it's a passive activity.
So for example, again, if you had a rental property inside of that s corporation,
which I don't recommend you do, but if you did, then it's going to follow.
The partnership is going to flow down to b b tax on your 1040 as passive income.
Now, if you ran it as an active business, so, so the sixth way
in which you could be taxed with an LLC is if you have it
set up as an S corp here.
But now we have an active business in here
inside of.
So let's say it's a logistics business
and you're running trucks out to move stuff around.
Well, if I have a logistics business and it's an S corporation and I am a
an owner in this LLC, I'm a member
and I'm also a manager.
I'm working for the business.
So now I'm in two different roles.
I'm in the role of being an owner and I'm in the role
of actually working in the business.
So in this case, you're going to get taxed two different ways.
So as your active side, for your management side,
when you're working in the business, you're going to receive a W-2 income.
That's going to be a deduction. Dear Company.
This is active income to you.
This is where a lot of people like LLC is and they like for active businesses.
They like to treat them as escorts because they're able
to utilize this strategy of going about to show you, let's
assume that my income from my business this year is $200,000.
Well, I don't want all of that 200,000 to be considered
active income and paid out as W-2 because it'll be subject to 15.4%
on the vast majority of it.
So instead, I want to be able to take some of it as active
because you're required to do that if you're working for your company.
And I want to take some of it as a distribution,
as non-active income, ordinary income from an active trade or business,
because that ordinary income that comes down to me from this LLC
treat as an escort will not be subject to 15.4%.
So at some business owners might do here is they'll pay themselves
there to be a reasonable salary they'll pay themselves 80 K
that 80,000 it's going to be subject to this 15.4%.
But then they'll take $120,000 as a distribution
of which they will not have to pay employment taxes on.
So in that particular tax strategy
here, what you're able to do is save on the employment taxes.
And again, like I said, that's why it's attractive to a lot of small business
owners is as corporation tax treatment for their limited liability company.
Now, the seventh way in which you can treat a limited liability
companies to set it up as a C corporation.
All right.
So I can set this LLC up to be taxed as a C Corp.
Now with the C Corporation.
When I have this this company set up, the C Corp
plays a flat tax at 21%.
So if the company earns $100,000 and it doesn't expense that money out,
then the company is going to pay tax at a flat 21%.
But if you're a member here and you're the manager
and you're working for the company
and you want to draw a salary, then you're going to take out a salary.
Let's say you decide to set your salary at 80 K than the 80
K that you come out is just like with an S corporation salary.
It's active income here to you because it's W-2 and it's subject
to that 15 4% taxes on that money you're paying yourself.
And again, like the S corp, this is a deduction to the business.
All right.
So you're actually going to get a deduction against the income
from the corporation when you pay out a salary, whatever
remains inside of there, the 20 K profit that will be taxed at 21%.
All right.
Now, the eighth way in which C Corp LLC is are taxed,
are you going to be taxed with that is when you have your company set up?
And let's see, in that example again, they made 100 K and I'm
the member down here and I paid myself a salary.
But then I decide to take out what we call a dividend.
So when you take a dividend out of your company,
you're going to pay tax at a flat, typically 20%.
Actually, it's going to be about 23 a little over 23%
on the money you pull out of there as a dividend.
So this money that comes out to you is considered to be a dividend.
It's essentially passive in nature when it's distributed down to you.
So unlike the partnership or the disregarded entity,
where when you look at the business, you say, hey,
is it an active business or is it a passive business?
If it's active, you get taxed.
It is active income
with a limited liability company that's set up as a C corporation.
It's going to be paid out to you as a dividend and it doesn't matter
how the income was earned inside of the business itself.
So those are the eight different ways in which corporations are LLC are taxed.
And if you want to learn more about business entities and as they relate
to running your business or investing in real estate from a tax
standpoint, I'd like to invite you to our Tax and Asset Protection Workshop.
You can click on the link below to register for this live event
where if you're a real estate investor or your small business owner,
you want to know
if the LLC is a right entity for you and how it's going to how it's
going to treat you.
From a tax standpoint, this is the event you want to be on.
Not only will I be there teaching this class with my partner, Toby
Mathis, we're also going to bring in a team of attorneys
and tax professionals that will be available to you
to answer your tax related questions about your limited liability company,
as well as your structuring and questions when it comes to running your business.