Offering a more flexible structure with protection and fewer requirements, forming an LLC comes with a wide range of benefits.
When choosing a business entity, taxes are inevitably a main focus. The amount of taxes you’ll owe quarterly, or yearly, are directly tied to your business structure.
Is an LLC better for taxes? How do LLCs file taxes?
These are just a few questions circulating around taxes and forming an LLC. Take a look at the information below to see how you should classify your LLC for tax purposes.
What is an LLC?
If you were to combine some of the best benefits and characteristics from business structures like a corporation, sole proprietorship, and a partnership then you would have an LLC.
An LLC, also called limited liability company, is a hybrid, flexible, pass-through entity that allows members to file their profits and losses on their personal tax return. Additionally, members are protected through limited liability protection.
How are Arizona
Limited Liability Companies Taxed?
Unlike a corporation, LLCs are not a separate tax entity. Like a sole proprietorship or partnership, the IRS considers LLCs a pass-through entity – meaning the LLC doesn’t pay taxes on business income.
Members of the LLC can choose for the business entity to be taxed as a corporation or another structure. If they elect for the pass-through entity, then they will pay taxes on their share of the business profits.
Federal, state, and local governments all impose taxes on LLCs, and all members are responsible for paying income tax on any income they earn from the LLC as well as self-employment taxes.
Depending on the industry, number of employees, and products sold, members are also responsible for paying payroll taxes and sales taxes.
In the eyes of the IRS, your LLC is treated like a partnership or sole proprietorship. This classification will depend on the number of members included in your LLC.
Single Owner LLCs
If you only have one member in the LLC, the IRS classifies your business as a sole proprietorship. This is strictly for tax purposes, and it means that the business (LLC) does not have taxes or file a return with the IRS. Instead, the member files taxes on their return.
When an LLC has multiple members, the IS classifies the business as a partnership. Again, this is for tax purposes and means that all members pay taxes on their profits. The LLC does not file taxes or pay on the business income.
Flexibility is a luxury when it comes to forming an LLC. One of those luxuries is having the freedom to elect for the business to be classified as a C Corp or S Corp for tax purposes.
If this is a change you wish to make for your LLC, it should be made when your operating agreement is formed and filed.
This change does not affect your LLC structure, but it does affect income. Choosing to classify as a corporation means you’ll be taxed differently. Additionally, a corporation state allows eligibility for more deductions and credits.
Depending on your unique situation, choosing to be taxed as a corporation can save on taxes. This is generally true for LLCs that are very profitable and those that will benefit from not having to pay self-employment taxes.
Arizona LLC Taxes: What is Tax-Deductible?
LLCs are structured a certain way for many reasons – flexibility, personal liability protection, and tax savings. LLCs can take advantage of many tax deductions and credits that are not available to other business structures.
Most business expenses that are related to the ownership and operation of an LLC can be deducted on taxes. For example:
- Health benefits
- Employee salaries
- Property/location related expenses
- Capital expenses
- Advertising and marketing
- Travel expenses
- Transportation expenses
- Legal fees
- Bank fees
There are also several other deductions and credits LLCs can take advantage of. It’s best to consult with a business attorney to ensure you properly follow the guidelines.
Other LLC Taxes
Because LLC members are classified as self-employed, they must also pay self-employment tax on their income. This covers a tax called FICA tax, which is Social Security and Medicare.
If you choose to be taxed as a corporation, corporate tax rules apply and the corporation itself is taxed. This means the corporation pays income tax on its net earnings and the owners/members pay income tax on any dividends they receive. In Arizona, the corporate tax rate is 6.968% of net income.
In Arizona, there are also other types of taxes that you or your LLC may be responsible for. It’s best to work with an experienced professional who knows state laws and regulations for LLCs.
How LLCs Pay State income tax
LLCs are subject to a variety of federal, state, and local business taxes. The way in which you form an LLC and file taxes will determine which taxes you’re responsible for.
By default, LLCs do not pay income taxes – the members do. If a member’s individual income is above $75,000, the state of Arizona requires estimated tax payments to fulfill state income taxes. If this is the case for your LLC, you must pay at least 90% of the tax due for the current year or 100% of the tax due for the previous year.
If an LLC elects to be taxed as a corporation, the state of Arizona taxes corporation income. When an LLC chooses to be taxed as a corporation, it’s best to discuss your unique situation with a business attorney.