LLC Tax Rate by State and Federal Tax Overview

Key Takeaways

• LLCs are pass-through entities for federal taxes, but state taxation varies significantly.
• Some states impose a flat LLC fee, others have franchise taxes, and a few charge income taxes even on pass-through LLCs.
• LLC members must still pay taxes on profits whether or not they were distributed.
• Special allocations must follow IRS rules to avoid penalties.
• Some states have specific minimum taxes or thresholds regardless of income.
• California, New York, and Tennessee impose some of the highest additional state LLC taxes.
• Understanding your specific state’s requirements is essential to avoid penalties or surprises.

LLC taxes by state vary, so it's important to understand how an LLC will be taxed in your state. Unlike a corporation, which exists as a separate entity from its owners, a limited liability company (LLC) is considered to be a pass-through entity. This is similar to a sole proprietorship or a partnership. Pass-through taxation means all business losses and profits go through to the owners of the LLC, who are called the members. Each member then reports these amounts on his or her personal tax return. 

Although the LLC doesn't have to pay federal income taxes on a business level, some states do require the LLC to pay a tax or fee every year. Every business is responsible for paying any required federal income taxes, as well as any necessary state income tax.

Income Taxes

The IRS treats LLCs as partnerships or sole proprietorships, depending on how many members are in the LLC. An LLC owner that has already operated a business as a partnership or sole proprietorship will have an advantage because he or she already understands the rules and requirements.

State Income Taxes and LLC Fees

While LLCs do not pay federal income taxes as entities, many states impose taxes or fees on LLCs regardless of their federal pass-through status. These charges may include:

• Franchise taxes – Often based on income, gross receipts, or the number of members.
• Annual report fees – Required in many states to keep an LLC in good standing.
• Minimum taxes or fees – Charged regardless of income level in some states.

Examples of State-Level LLC Taxation:

• California: $800 annual franchise tax plus an additional fee for LLCs earning over $250,000.
• New York: Annual filing fee ranging from $25 to $4,500 depending on gross income.
• Texas: No personal income tax, but LLCs must file a franchise tax report.
• Tennessee: Requires both a franchise tax (0.25% of net worth or real/personal property) and an excise tax (6.5% of net earnings).

Other states like Nevada and Wyoming have no income tax and low or no LLC fees, making them popular for business formation.

Single-Owner LLCs

The IRS treats single-member LLCs as sole proprietorships in terms of taxation. This tax treatment means the business doesn't have to file a separate tax return or pay separate taxes to the IRS.

The owner of a single-owner LLC must:

• Report the losses and profits of the business on a Schedule C.
• Submit this form with his or her personal tax return.
• Report on the personal tax return any funds that are left in the business bank account at the end of the year, such as to grow the business or cover any future costs.
• Pay taxes on funds left in the business.

State Filing Requirements for Single-Member LLCs

Single-member LLCs (SMLLCs) are typically treated as disregarded entities for federal tax purposes, but some states treat them differently. For example:

• California: Requires SMLLCs to file Form 568 and pay an $800 minimum annual tax.
• New Hampshire: Although it doesn’t have a general income tax, it imposes a Business Enterprise Tax (BET) and Business Profits Tax (BPT) on SMLLCs.
• Illinois: Requires an annual report and imposes a filing fee.

Even when no state income tax is levied, administrative filings and flat-rate fees may still apply to SMLLCs.

Multi-owner LLCs 

The IRS treats LLCs that have more than one owner as partnerships for tax purposes. A multi-owner LLC doesn't have to pay separate taxes on the business income. The members are responsible for paying taxes on their shares of the business profits on their income tax returns each year. The shares are reported on Schedule E, which is filed with the personal tax return. A distributive share is the number of losses and profits each LLC member is responsible for. Distributive shares should be outlined in the LLC's operating agreement.

In many operating agreements, LLC members determine that each member's share should be based on the individual percentage interest in the business. For example, if John owns 45 percent of an LLC and Jessica owns the other 55 percent, they would receive 45 and 55 percent of the profits and losses, respectively. However, this distributive share setup is not a requirement of an LLC. If members choose to allocate profits and losses in a different way, this is called a special allocation. To avoid fines and penalties, the LLC members must follow all IRS rules around special allocations. 

Regardless of how the LLC chooses to divide distributive shares:

• The IRS will still treat every member of the LLC as if he or she had received the full distributive share at the end of the year.
• Each LLC member must pay the proper taxes on his or her full distributive share, even if they didn't receive that amount. 

This IRS rule exists to make sure all LLC members pay the required federal income tax on their rightful distributive share, even if the members choose to keep money within the business, such as to grow, expand, or purchase inventory.

Although a multi-owner LLC doesn't have to pay separate income taxes, the business does have to file IRS form 1065 each year. Partnerships are also required to file this form, which is an information document reviewed by the IRS to make sure business owners are reporting the income they receive properly.

An LLC must also distribute a Schedule K-1 to each member. This document includes a breakdown of every member's share of business losses and profits. The LLC members will then report the numbers provided on Schedule K-1 on their personal tax returns, IRS form 1040. Every member must also attach Schedule E to their personal tax return forms.

Comparing LLC Tax Rates Across States

Each state imposes different LLC tax rates or fees, and some have unique tax structures. Here’s a snapshot of how various states treat LLCs for tax purposes:

This variability underscores the importance of researching the “LLC tax rate by state” before forming your business.

Frequently Asked Questions

1. Do all states tax LLCs the same way?
   No. State tax structures for LLCs vary widely. Some states impose annual franchise taxes, others charge flat fees, and some have no additional LLC taxes at all.
2. Which states are most favorable for LLCs in terms of taxes?
   Wyoming, South Dakota, and Nevada are often considered tax-friendly due to no state income tax and low or no LLC fees.
3. What happens if my LLC earns income in multiple states?
   You may be required to pay taxes and file returns in each state where your LLC earns income or has a taxable presence.
4. Can I deduct my LLC’s state taxes on my federal return?
   State income taxes paid by pass-through LLCs are typically deductible on individual members’ federal returns, subject to limitations.
5. How do I know if my LLC qualifies for a special allocation of profits?
   Special allocations are allowed if they have "substantial economic effect" under IRS rules. They should be clearly outlined in the LLC operating agreement and follow IRS guidelines to avoid reallocation.

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