LLC State Taxes: Everything You Need to Know
LLC state taxes vary by state and the amount paid will depend on what state your LLC is organized in. 3 min read
2. How a Single-member LLC Pays Income Taxes
3. How a Multiple-member LLC Pays Income Taxes
4. Income Tax for LLC's classified as Corporations or S Corporations
5. What About State Income Tax for LLCs?
6. Estimating and Paying Income Taxes
LLC state taxes vary by state and the amount paid will depend on what state your LLC is organized in. An LLC is a business that offers the limited liability of a corporation combined with the management methods of a partnership; therefore, it is sometimes referred to as a "hybrid" business model.
How LLCs Are Taxed: Introduction
Most businesses will end up paying some amount of state income tax. At the federal level, all businesses must pay federal income tax. Determining the amount of state tax due by a business can be a complicated process because each state has its own distinct tax rate, deductions, and exclusions.
Considering their unique tax position, LLCs are taxed quite differently than other types of businesses. The IRS does not recognize an LLC as a taxing entity. The IRS states that LLCs may be taxed as a:
- Corporation (multiple-owners/members)
- Disregarded entity (single-owner/member)
An LLC is known as a "pass-through entity." Net profits or losses from the business are passed to the owner level and listed on the members' personal tax returns. Pass-through tax status ensures that LLCs do not pay federal income taxes. They may however still be subject to state income taxes.
How a Single-member LLC Pays Income Taxes
LLCs with only one member will be taxed as a sole proprietorship using a Schedule C form. The Schedule C form should be submitted along with your 1040 form. The net profits of the LLC will be identified on a Schedule C form. This amount will then be carried over to your 1040 form. Profits of the business will be taxed in the year they are earned, even if the funds stand idle in a company's bank account.
How a Multiple-member LLC Pays Income Taxes
LLCs with more than one owner or member will typically pay their income tax in a format similar to a partnership. Each member pays their distributive share of taxes based on each owner's share of the net profit. On their personal income tax return, using the Schedule E Form, members pay taxes on their percent of the LLC's net profit.
Co-owned LLCs must submit Form 1065. The purpose of Form 1065 is to ensure that LLCs are reporting income correctly to the IRS. Schedule K-1 should be completed following the submission of Form 1065. The K-1 identifies the member's share of the net profits in the partnership and is filed when completing the member's individual tax form.
Income Tax for LLC's classified as Corporations or S Corporations
For tax purposes, LLCs have the option to elect themselves as either an S corporation or corporation, on Form 8832. It is usually beneficial for the business to make this election because it will allow high-income members to pay lower taxes. LLCs will pay both their state and federal taxes based on the elected tax status.
What About State Income Tax for LLCs?
Each state will have a distinctive way as to how they classify an LLC. Similar to the IRS, nearly all states require LLC members to pay taxes on their personal return and not on the LLC itself. However, a few states that require LLCs to pay taxes on their net profit.
Once you've figured out the tax status of your LLC, it's a good idea to visit your state's Department of Revenue to determine how your business will be taxed. It is important to research how the basis and classification are determined. For example, how is the basis determined in calculating the tax due? How does the classification of the business impact the total tax due? A few states may charge an annual fee on LLCs. They may refer to this fee as a:
- Franchise tax
- Annual registration fee
- Renewal fee
It's recommended that you contact your state's Department of Revenue/Tax to determine if your state charges an LLC-level tax.
Estimating and Paying Income Taxes
LLC members are business owners, not employees, and are therefore not subject to tax withholdings. Instead of having money withdrawn from a paycheck, each member is required to pay estimated taxes to the IRS on a quarterly basis. It's recommended that you contact your state's Department of Revenue/Tax to determine if your state charges an LLC-level tax.
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