LLC Tax Requirements: Everything You Need to Know
LLC tax requirements differ, depending on how the IRS classifies and taxes the business. LLCs may be taxed like corporations, partnerships, or sole proprietorships.3 min read
LLC tax requirements differ, depending on how the IRS classifies and taxes the business. LLCs may be taxed like corporations, partnerships, or sole proprietorships. Also, the state in which an LLC is located may have additional taxes the business is required to pay.
LLC Tax Filing Rules
An LLC, or limited liability company, isn't considered a taxable entity by the IRS. Tax rules differ based on whether an LLC is a single-member or multi-member entity. LLC business owners have some flexibility in choosing how they're taxed.
An LLC is a “pass-through” entity, similar to a sole proprietorship or partnership. The business itself isn't treated like a separate tax entity, such as a corporation. The LLC's profits and losses pass through it to the company's owners, or members, who then report the information on their own tax returns. LLCs don't pay income taxes on the federal level.
If your LLC has employees, you may be responsible for withholding taxes from their wages. Withholding amounts depend on several factors, such as how many exemptions were claimed by the employee and the amount of wages.
Employees and employers are both responsible for contributing to Medicare and Social Security, known as FICA taxes. The portion of FICA taxes employees must pay are withheld by the employer. LLCs that withhold FICA from their employees are required to file a return and deposit the withheld tax into an authorized bank.
In states that have an income tax, LLCs must withhold taxes from employee wages and pay the withheld amount to the state.
Franchise Tax, Property Tax, and Sales and Use Tax
Some states impose a franchise tax on businesses in exchange for letting them conduct business. The state may call the tax one of the following:
- Registration tax
- Registration fee
- Excise tax
- License tax
- Privilege tax
How an LLC is taxed differs from state to state, with some states setting a flat fee and others basing the fee on the number of members a company has. Other states consider the members' distributional share or the amount of the business's income. Failing to pay a franchise tax can result in severe penalties for a business, including dissolution.
LLCs that use or own property may be required to pay property taxes. Three types of property are taxable:
- Real property, such as land and structures, fixtures or buildings on that land
- Tangible personal property, which are physical objects that a person can own, such as office equipment, machinery, and vehicles
- Intangible personal property, which has no physical substance but still has value — the most common intangible asset a company will claim is its “good will”
All states tax real property, while many states tax tangible property. A smaller number of states tax intangible property.
Sales and Use Taxes
Many states impose sales and use taxes. The rate and types of products and services that are taxed differ from state to state.
Sales taxes involve the retail sale of different kinds of tangible property. The tax is imposed on gross amounts of the transactions.
Use taxes are imposed upon the consumption, storage, or use of tangible property that isn't subject to the sales tax. Issues surrounding use tax usually come up when someone buys a “big ticket” item in one state to use in another state.
Use tax rates and sales tax rates are the same. Many cities and counties also impose their own set of sales and use taxes. Consumers pay sales and use taxes, but retailers are responsible for collecting the taxes and paying them to the state.
Retailers are usually required to obtain a permit or license before being allowed to do business in a state, which makes it easier for the state to collect taxes from responsible parties. LLC owners should be aware that laws for sales tax collection may be different if they sell to out-of-state customers.
Tax requirements can be complicated, so it's always wise to consult with tax and financial professionals when running a business. If you fail to uphold any of your responsibilities, you could face hefty fines and penalties. Any expenses you pay to CPAs or other financial experts are often well worth the cost of running a business.
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