Do you plan business incorporation and want to know more about taxes?
The taxes and fees you have to pay to maintain a good company reputation directly depend on the chosen business structure. One of the most popular options today is a limited liability company, which is a unique business model combining the features of partnerships, corporations, and sole proprietorships. Every day, hundreds of entrepreneurs across the country choose it to launch their own businesses. Also you can have a professional service forming an LLC for you which will make this process fast and easy, check this article for additional information.
In this article, we’ll talk about whether LLCs are required to pay taxes at the state level, and also discuss a few examples of the most common ones. In addition, we are going to mention three states, which can be called the most favorable for the LLC incorporation in terms of the tax treatment.
The LLC Taxes at the State Level
Tax Requirements for the LLC Formation. Taxes are one of the biggest parts of the expenses to consider when budgeting for your company. They can be provided for at three levels:
- Federal
- State
- Local
Unless the owners have specified otherwise during the LLC incorporation, LLCs are treated by default as pass-through entities for federal income tax purposes. In this case, the business delegates tax obligations to the owners, who report all profits received from the business on their tax returns. Most states support such a tax classification.
At the same time, one should not forget that one of the advantages of the LLC formation is tax flexibility. The owners of a company have the right to switch to corporate taxation. It can be beneficial if a significant part of the profit regularly remains in the company’s account for business development. However, you need to consider all the pros and cons of this option carefully, since the second change of tax status is allowed only after 5 years.
If you need help with this process, you can consult with one of the LLC formation services, such as LegalZoom or IncFile.
The Most Common Types of State Taxes
Depending on the location and characteristics of your LLC company, it may be liable for certain state taxes. Let’s take a closer look at the most common ones.
Franchise Tax. In some states, after the business incorporation, LLCs have to pay an annual franchise tax, also called an “annual registration fee” or a “renewal fee”. It usually costs about $100. However, in California, you should pay as much as $800. The other states, where there is a franchise tax, are the following:
- Delaware
- Illinois
- Massachusetts
- New Hampshire
- Pennsylvania
- Wyoming, etc.
Sales Tax. If the purpose of your business formation is to sell goods or provide services, you will probably need to pay sales tax. It applies in almost every state in America, except the following:
- Alaska;
- Delaware;
- Hawaii;
- Montana;
- New Hampshire;
- Oregon
The list of taxable goods depends on the state. The rate is most often determined by the place of delivery. In some cases, it is based on the origin of the goods, which is also determined by the location of the producer.
Self-Employment Tax. According to the law, the active members of an LLC involved in its management are not considered to be employees, but self-employed. It leads to the obligation to pay the self-employment tax, consisting of Social Security and Medicare taxes. Its rate is 15.3%.
If you choose the C-corp or S-corp tax treatment during business incorporation, you will not have to pay the self-employment tax on your personal returns.
Gross Receipts Tax. Whereas the sales tax is paid by the consumer, an LLC company pays the Gross Receipts Tax on its own. It applies in the states like:
- Delaware
- Hawaii (General Excise Tax)
- Nevada (Commerce Tax)
- New Mexico
- Ohio (Business Tax)
- Washington (Business and occupation tax)
Unemployment Insurance Tax. The Unemployment Insurance (UI) program is one of the elements of the national social protection program. It provides temporary payments to those who became unemployed not of their making.
After the business formation, the Unemployment Insurance Tax is paid by the employer. It is charged on the first $7,000 paid annually to each employee. Meanwhile, the rate is updated annually. Today, the maximum amount of the Unemployment Insurance tax is $434.
In Which States is the LLC Formation More Profitable?
We have prepared the top three states, where the LLC incorporation is the most advantageous:
- Wyoming: In this state, the corporate tax rate, as well as individual income tax, is only 0%. Additionally, there is a very low sales tax of 4%. Because of such a favorable tax climate, Wyoming can be considered as one of the most attractive places for business formation and starting selling;
- South Dakota: This state has also set the corporate and individual income tax rate at 0%. However, at the same time, the sales tax rate is slightly higher here – 4.5%;
- Florida: The individual income tax rate in Florida is 0%. On the other hand, the corporate tax rate is 5.5%. As for the sales tax, it is set at 6%.
Can the Incorporation Services Help with the State Taxes?
To make business operations easier, you can hire one of the best LLC services providing business formation services and offering assistance with current state requirements. Professional LLC creation services, such as LegalZoom or MyCompanyWorks, will give you access to an extensive library of templates, which may come in handy for your company. Among other things, you’ll get the forms for switching to corporate tax treatment, which are relevant to companies investing most of their profits in business development.
In addition, most incorporation services offer convenient compliance tools. You will be reminded in advance of the tax reporting deadlines, so you will not have to worry about any penalties. It will allow you to concentrate on managing your business.
Wrapping Up
To effectively conduct your business, it is crucial not only to keep track of the latest industry trends but also to comply with the state requirements. Paying taxes on time is one of the key conditions for maintaining the good reputation of the LLC company as well as its stable development.
Each state sets its own tax requirements, so it’s essential to visit the official website before your business formation. You may also consult with an experienced accountant who is well-versed in state legislation. A professional will not only answer your questions but also help you choose the best business structure, which will meet your business needs and goals. Of course, a specialist’s services require a fee, but their knowledge and experience can help you save hundreds of dollars.
Another good way to optimize your taxes is to hire one of the LLC formation services, which provide comprehensive business support solutions. Such affordable company formation services as LegalZoom or Rocket Lawyer will not only consult you but also assist you with the official forms. Their compliance tools will save your nerves, allowing you to avoid keeping numerous details in your head. Furthermore, you’ll always know ahead of time when your tax deadline approaches.
Dmitriy Kondratiev is the Chief Editor of LLC.services, associate in Axon Partners. He is an experienced lawyer (Intellectual Property, Patenting, Contract law, Labor Law, International Private Law). He works with IT-companies Webxloo (Delaware), Autoxloo (Florida), SCC (Delaware).
