“Taxes” and “simple” never seem to be used in the same sentence, and as an LLC business owner, you’ve probably talked about taxes more than ever!
Let’s get into the details to outline exactly what taxes you need to pay as an LLC owner, including your required taxes, how you can treat your business, and how to keep track of the federal and state income taxes you need to pay in the spring.
The Basics of LLC Taxation
Before we get into the tax rate, let’s review what an LLC is.
An LLC, or a Limited Liability Company, is a formal business structure that separates an owner from their business. Should anything legal happen against an LLC, it’ll be the business assets that are at risk, not the business owner’s assets (like their house). You may have formed your own LLC because it’s a relatively simple business structure for the benefits: you fill out a few forms, receive your Employer Identification Number (EIN), and bam: limited liability to your personal assets.
What Are the Taxes for an LLC?
The most basic taxes that a member has to pay for their LLC are:
- Income tax
- Self-employment tax
Sometimes, depending on your business, you will also have to pay payroll taxes and sales taxes, but we’ll get to that.
Identifying Your LLC’s Tax Treatment
While an LLC and a sole proprietorship’s liability structures are vastly different, they’re taxed the same. From now on, look at your business from two angles: its business entity, and how it’s taxed.
Single-member LLCs Are Taxed With Sole Proprietorships
Single-member LLCs are taxed the same as sole proprietors. Why? Because even though the asset-liability is different, the taxes are the same: done through personal filing (not corporation). For a sole proprietorship, you’re filing as an individual, and thus your taxes are being directly taxed on your account. An LLC is what’s called a pass-through entity, which means the profits pass through to its owner’s income too, just like a Sole Prop.
Look up your state here for your LLC or Sole Proprietorship’s tax rate.
Multi-member LLCs Are Taxed With Partnerships
Both multi-member LLCs and Partnerships are taxed the same— once again, through pass-through taxation.
LLCs Can Opt to Be Taxed as an S Corporation
One of the unique parts of having an LLC is that you can file a few different ways. Some LLCs file as an S-corp because it saves money on paying self-employment taxes if you’re making enough to warrant it. (This is where a tax professional’s guidance comes in handy.)
Determining Your LLC’s Tax Rate
There’s no single “LLC federal tax rate.” Instead, you’ll determine your rate when you file. While all applicable businesses are required to pay both income tax and self-employment tax, your business might also require a few other taxes. Let’s go through them:
Your income tax is determined by your federal tax bracket, which is based on how much money you’ve made in the past year. In the 2022-2023 year, there are 7 tax brackets, one of which you’ll be placed in: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Each bracket determines what your tax rate will be.
Why are there tax brackets? So people making a million dollars a year don’t only have to pay $100 in taxes, and people making $30,000 a year don’t have to pay $5,000 in taxes.
Let’s say you make $55,000 from your Etsy small business (and though you’re living with your partner, you’re unmarried and filing as single). You’d fall into the 22% bracket category for singles who make between $41,776 and $89,075. That tax rate is 22%, which comes out to $4,807.50 plus 22% of your amount owed over $41,775. Nerd Wallet’s handy income tax chart quickly shows you where you fit.
After all of those numbers, this one should feel a bit more simple. The self-employment tax for self-employed business owners is a flat 15.3%, which covers Social Security and Medicare costs. (Whew, that was easy, right?)
State and Local Taxes
Franchise tax— The tax needed to own and operate your business in a state. Franchise tax rates vary widely from state to state; Alabama’s franchise tax is based on an LLC’s income from the previous year, while California requires every LLC to pay $800 in annual franchise tax, plus more if they make more than $250,000 a year.
Excise tax and sales tax— What you’ve already paid and shows up on your receipt, like for gas or supplies.
Payroll tax— If you have payroll, you’ll have to take out your employee’s cut of the 15.3% (remember your self-employment tax?) which is 7.65%.
Taxes Are Confusing. That’s Where doola Come’s In
Your business deserves to succeed, no matter how taxing the taxes are! That’s why we created our very own bookkeeping service for small business owners like you. Stay on track and never worry about taxes again. Stress-free bookkeeping, at your service— let’s begin.
How is an LLC taxed by the IRS?
An LLC can be taxed as a regular LLC/sole proprietorship (they’re both taxed the same), a multi-member LLC/partnership, or as an S-corp. You’ll determine this when you’re filling out your taxes.
Which state has the lowest LLC tax rate?
Wyoming doesn’t tax personal or corporate income, and Delaware has very low fees, doesn’t tax out-of-state income, and has the Chancery Court, which helps businesses resolve conflicts quicker compared to other states.
Why do LLC pay less taxes?
LLCs don’t necessarily pay fewer taxes, but compared to a C Corporation, they undergo what’s called “pass-through taxation,” which means they don’t have to pay corporate federal income tax, as the tax is passed through straight to its member(s).
How does LLC avoid double taxation?
By being what’s called a “pass-through entity,” which means that the members are filing as their individual tax return, as opposed to a corporation tax return.
What are the disadvantages of an LLC?
Compared to a sole proprietorship, it takes a bit of time and effort to get started (but it tends to pay back liability-wise). Compared to a corporation, LLC ownership is much harder to shift (if that’s important for your business).