99.9% of American businesses are small ones, and they’re responsible for 32.6% of exports. The country is reliant on these small businesses, which makes entrepreneurship an attractive and potentially lucrative route.
But as with any type of business, you have to worry about taxes eating away at your profits. If you don’t account for them, then you may be in for a nasty surprise.
Considering that many Americans opt to form a limited liability company (LLC), it’s important to know about LLC taxes if you want to be a small business owner. So how is an LLC taxed? Read on to find out the answer to this question and more.
How Is an LLC Taxed?
First, if you’d like to form an LLC, you can utilize our business registration service. You’ll only have to send in relevant information, and we’ll take care of the paperwork, making it quick and easy.
Now, there are several ways an LLC is taxed, but the default way is pass-through taxation. However, you can also change your tax election to a C corporation or S corporation, which will change your LLC tax rate. We’ll discuss each option more in detail below.
Pass-Through Taxation
By default, the LLC is considered a pass-through entity, which means that the company itself doesn’t pay taxes on the profits. Instead, they go to the individual LLC members, who then report their share on their personal tax returns. The same goes for the LLC’s losses.
The above only rings true for multi-member LLCs. If you have a single-member LLC, then your company’s taxed as a disregarded entity. You’ll report the LLC’s income and expenses on your personal tax return using Schedule C of Form 1040, as you’re basically a sole proprietorship.
C Corporation Taxation
If you don’t want your LLC to be considered a pass-through entity, then you can file IRS Form 8832 to elect your LLC to be taxed as a C corporation.
In this case, the LLC is treated as a separate entity for tax purposes. The corporation itself pays taxes on its income at the corporate tax rate. Shareholders are then subject to taxes on any dividends received.
It may be beneficial to learn more about what a C corporation is and how it’s different from an LLC before proceeding with a change in taxation. If you then decide to change your LLC into a C corp, then the good news is, it’s doable. Just follow our short LLC to C corporation conversion guide.
S Corporation Taxation
You can also change your LLC tax election to an S corporation; to do this, file IRS Form 2553.
When your LLC is taxed as an S corp, it’ll still be treated as a pass-through entity for tax purposes, and works similarly to a partnership. Do note that your LLC must meet certain eligibility requirements to qualify for this tax status.
To make a better-informed decision on whether you should have an S corp tax election for your LLC, take a look at our article on the tax benefits of each.
Federal LLC Tax Rate
You may be wondering about the federal LLC tax rate, but there’s no such thing. As we’ve mentioned previously, LLC taxation rates depend on the LLC members’ personal financial situations. This means that the taxes paid on its profits will depend on the individual income tax rates.
For 2024, the bracket rates are as follows for those filing as single or married filing jointly:
- 10%: $0 to $11,600 / $0 to $23,200
- 12%: $116,01 to $47,150 / $23,201 to $94,300
- 22%: $47,151 to $100,525 / $94,301 to $201,050
- 24%: $100,526 to $191,950 / $201,051 to $383,900
- 32%: $191,951 to $243,725 / $383,901 to $487,450
- 35%: $243,726 to $609,350 / $487,451 to $731,200
- 37%: Over $609,350 / over $731,200
In addition, you should be aware that individual taxpayers may be subject to other taxes, such as the Net Investment Income Tax (NIIT) or the Additional Medicare Tax, depending on your income level and filing status.
Can an LLC Be Tax-Exempt?
Yes; basically, all LLCs are tax-exempt since profits pass through to you. So if you’re asking, “Does an LLC pay taxes?”, then technically, the answer is “no,” except if you elect it to be a C corporation.
With that said, there are other circumstances where you’d have a tax-exempt LLC.
Nonprofit LLCs
If the LLC is organized and operated exclusively for any of the following purposes, then it may qualify for tax-exempt status under section 501(c)(3) of the Internal Revenue Code:
- Charitable
- Religious
- Educational
- Scientific
- Literary
You’ll have to fill out a tax-exempt form, Form 1023 or Form 1023-EZ. You need to also meet the requirements outlined by the IRS.
Governmental LLCs
Is your LLC owned and operated by governmental entities, such as state governments, municipalities, or tribal governments? Then it may be exempt from certain taxes, depending on applicable laws and regulations.
Holding Companies
In some cases, an LLC that primarily serves as a holding company for investments or assets might be structured in a way that allows it to be tax-exempt. Or it may enjoy favorable tax treatment on certain types of income, depending on the relevant tax laws and regulations.
State and Local Taxes
Some states or local jurisdictions have exemptions or special tax treatments available for LLCs that are engaged in specific activities. For example, if you’re involved with agriculture, certain types of manufacturing, or renewable energy production, then your company may be eligible for these tax benefits.
Know Your LLC Taxation Rates
After reading this article, you should have a solid answer to the question, “How is an LLC taxed?”
Essentially, you can either keep your LLC as the default pass-through entity, or you can change it to a C or S corporation. Taxation will vary on your LLC’s tax election, so it’s best if you speak to a professional to fully understand your specific tax obligations.
Sign up with Business Anywhere today to start your own LLC.
