How should taxes be paid in an LLC?


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Hi, I am one of the members of a 3 member LLC. Our taxes were filed as an S-corp because we were informed it would be beneficial to us. We each had an equal amount of profit that was then counted on our personal taxes. Since my husband makes a decent amount of money we ended up having to pay $829 in business taxes. The other 2 LLC members did not have to pay anything. My question is, should that amount that had to be paid by my husband and I be reimbursed to us out of the company bank account? I may be wrong, but to me it seems that because of my husband's earnings, we ended up paying all of the taxes charged to the business and I would think that we should be reimbursed. My tax preparer said it was up to the 3 of us to decide, but I would like to know if anyone else has encountered this situation, and am I correct? Thank you for your help.
 
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Generally, in any type of pass-through entity, the owners pay their own taxes. The fact that the other members of the LLC had little or no other income and therefore had no tax due on their share doesn't change the fact that they picked up and reported their full share of the earnings on their returns. You and your husband only paid on your share of the earnings. The income of the other members had no effect on the amount of taxes you paid.

If the 3 members do agree to somehow even things out, be careful how you do it. One of the required features of an S corp is that it must have a single class of stock. What they means is that every shareholder must get EXACTLY a proportionate share of income and distributions. If the company pays an extra distribution to your husband, that is treating his shares differently than the other shares and could terminate the company's S election.
 
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Agreeing with Marshall. The $829 was not a tax on the company, with you paying all of this "company" tax, and your partners paying none of it.

Instead, each partner has the responsibility to report his or her 1/3 share of the company's profits on his/her personal return, as was done.

Then, how much each member owes in personal tax on his/her 1/3, whether it's zero, or $829, or any other amount, is solely a function of that member's own tax bracket, as determined by his/her other items of personal income and deductions.

Analogously, suppose you and I both had the same amount of money in interest-bearing savings accounts at the same bank. At the end of the year you and I each receive $100 of interest income from the bank. But because you're in a much higher tax bracket than me, you owe $25 tax on your interest income, whereas I only owe $10. Would the bank reimburse you $15 to make up the difference?
 
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Thank you both for replying. That makes a lot more sense to me now. I'm guessing it wouldn't make a difference if instead of filing jointly my husband and I filed separately? I asked my tax preparer to try it that way also so I'm hoping he chose the right option for me. Thanks again for helping me to understand because this is all so new to me. :)
 
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I'm glad it helped a bit, Laurie. The confusion is understandable as there are quite a few partnership / partner issues and transactions for which the fair and equitable answer isn't immediately obvious, and sometimes they're just downright counterintuitive. Such is the nature of LLCs and partnerships.

On the filing status matter, filing jointly more often than not trumps separate filing for serving up a lower overall tax liability. But even though it's the exception rather than the rule, under certain specialized scenarios and the just-right alignment of the stars, you get a lower combined tax bite with separate filing.

It's completely a case-specific question, and only your tax preparer can tell you for sure, based on all the types and amounts of income and deductions you and your husband have. But for conscientious tax preparers, comparing the bottom line under the two alternatives is just standard modus operandi in preparing a return, and tax software makes such comparisons very easy and efficient. So surely your preparer ran the comparison numbers and selected the better filing status. Or at the very least, he was able to tell from looking at the numbers, based on his experience, that filing jointly was the way to go.
 

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