How Does an LLC Pay State Income Taxes?
All businesses pay federal income taxes, and most states pay state income tax if that tax is imposed by the states.
Most states follow federal tax laws in determining net income (profit or loss), but each state adds its own exclusions and special deductions, just to make things more complicated. States also have different ways of taxing LLCs, because of their unique tax position.
LLCs as Business Entities - How LLCs Pay Taxes
An LLC is a strange type of business entity because an LLC is not recognized as a taxing entity by the IRS. Instead, LLCs pay federal income taxes in one of two ways, depending on whether they have one owner (called a member) or multiple owners:
- If the LLC is a multiple-member entity, it pays federal income taxes as a partnership.
- If the LLC is a single-member entity, it pays federal income taxes as a sole proprietorship. This means in most cases that the single-member LLC pays taxes by filing a Schedule C and including it in the owner's personal income tax return.
Just to increase the confusion, the IRS and some states call the single-member LLC a disregarded entity.
What About State Income Tax for LLCs?
After you have figured out your LLCs tax status, you can go to your state's department of revenue to find out how your state might be taxed.
You will need to look at two factors:
- What is the tax based on? Most states use the federal income tax liability as a basis, but states modify that basis for their state tax.
- How does the LLCs tax classification (sole proprietor, partnership, S corporation, or corporation) affect the state income tax?
Some states call their income tax a franchise tax. Other states may impose taxes on LLCs as a gross receipts tax rather than an income tax.
Examples of How States Tax LLCs
(These are brief examples, as of the date this article was updated, they are not intended to be complete or to represent all possible LLC tax situations.)
Florida says that LLCs classified as corporations pay corporate taxes, those classified as partnerships pay partnership taxes. LLCs classified as sole proprietors don't pay a separate business tax. The state of Florida uses the federal taxable income but modifies it. See this article from the Florida Dept. of Revenue for more details.
In California, an LLC that is treated as a partnership or disregarded entity (single-member LLC) files a specific type of return and pays $800 in tax. An LLC taxed as a corporation files a different type of return and pays the "appropriate tax." See this article from the California Franchise Tax Board for more information.
Delaware classifies LLCs the same way as the IRS does. For LLCs classified as corporations, the Delaware corporate income tax rate is "8.7% on its federal taxable income allocated and apportioned to Delaware."
New York also conforms to the IRS tax classifications for LLCs. There is an additional New York City tax.