LLCs are a United States business structure recognized worldwide for the great advantages they offer: limited liability, anonymity, ease of opening and management, but above all, for the great tax advantages they present.
You may have heard that LLCs in the United States do not pay taxes? Well, it is true, as long as a series of conditions are met.
In this article, we will teach you in 10 minutes everything you need to know about the taxation and taxation of LLCs in the United States. Let's get started!
How does LLC taxation work?
The taxation of LLCs will depend on a series of factors specific to your situation. Let's start then from the base: in the USA there are 2 types of taxes, federal taxes and state taxes.
Federal taxes
Federal taxes are taxes collected by the IRS (Internal Revenue Service) of the United States. There are several federal taxes:
Income taxes
TheLimited Liability Company (LLC)are considered by the IRS to be pass-through entities. This means that the LLCs themselves do not pay taxes on their business income. Rather, it is its members who pay taxes on their share of the LLC's profits on their personal tax return, according to the rules of their country of residence.
This way, if your LLC does not have a physical presence in the United States and you do not qualify as ETBUS, you will not be subject to paying federal income taxes in the United States. By not having a physical presence, we understand that:
- Your LLC does not have any members residing in the United States
- Your LLC does not have dependent agents in the USA, that is, someone who resides in the USA and whose main source of income comes from your LLC.
- Your LLC does not have a physical presence in the United States (a warehouse, an office, a premises, etc...)
What happens if I have to pay income taxes?
If you do not meet the conditions mentioned above, your business may have to pay taxes on profits in the United States. If this is the case, this table recapitulates the taxable amounts:
| Rate | Benefits | Total to pay |
|---|---|---|
| 10% | $0 to $9,950 | 10% |
| 12% | $9,951 to $40,525 | $995 plus 12% of the surplus above $9,950 |
| 22% | $40,526 to $86,375 | $4,664 plus 22% of the surplus above $40,525 |
| 24% | $86,376 to $164,925 | $14,751 plus 24% of the surplus above $86,375 |
| 32% | $164,926 to $209,425 | $33,603 plus 32% of the surplus above $164,925 |
| 35% | $209,426 to $523,600 | $47,843 plus 35% of the surplus above $209,425 |
| 37% | $523,601 or more | $157,804.25 plus 37% of the surplus above $523,600 |
Employer taxes
LLCs that have employees in the United States must collect and pay payroll taxes. These taxes include unemployment, social security, and Medicare taxes.
If you do not have employees, this tax does not concern you.
| Tax | Tax Rate | Who Pays |
|---|---|---|
| Unemployment Taxes | 0.6% on the first $7,000 in wages | Employer |
| Social Security Taxes | 12.4% on wages up to $132,900 | Employer and employee split the taxed equally |
| Medicare taxes | 2.9% on all salaries, plus an additional 0.9% tax on salaries over $200,000 | Employers and employees split the tax equally. Only employees pay the additional tax. |
Self-employment taxes
Individuals who are not citizens or residents of the United States are not subject to the self-employment tax.
If you are a US citizen or resident and the owner of an LLC, you must pay self-employment taxes on your % of shares of the LLC. The self-employment tax consists of a 12.4% Social Security tax and a 2.9% Medicare tax. Half of this tax can be deducted as a business expense.
State taxes
Each American state has its own rules. How could it be otherwise, in addition to federal taxes, an LLC may be subject to paying state taxes.
Franchise Tax
One of the most common state taxes is the franchise tax, which LLCs in certain states must pay each year. In states like Delaware, they rise to $300/month. New Mexico LLCs do not have these taxes.
Sales Taxes
If your LLC sells taxable goods or services, then you may have to collect sales taxes from your customers and remit it to the state tax agency. Having to pay this tax will depend on the connection you have with the state in question. Having a physical store in the area, employing people in the area or simply shipping merchandise to the area may be sufficient nexus to be redeemable for collecting Sales Taxes.
This tax is usually collected only when sales exceed a certain volume of quantity or turnover. In addition, there are 5 states that do not collect Salt Taxes: Oregon, New Hampshire, Delaware, Montana and Alaska.
Tax as an LLC or as a Corporation?
Si bien las LLC unipersonales o de varios miembros funcionan cómo entidades de paso por defecto, las LLC también tienen la opción de tributar como:
- A C-corporation: C-corps pay corporate taxes on their income (21%) and then distribute dividends to shareholders.
- An S-corporation: An S-corporation is also a pass-through entity, but there are a few differences in how salary and dividend distributions for members are taxed.
It is important to mention that changing the tax status of your LLC will not affect your legal situation. If you choose to be taxed as a corporation, your business will continue to operate as an LLC.
In summary
- If you open an LLC as a Non-Resident, you have no dependent agents or physical presence in the USA, you will pay 0 federal taxes, you will not pay sales taxes, but you may have to pay a franchise tax, depending on the state you choose for your LLC.
- If you open an LLC while being a resident in the USA, with employees or with a physical presence, you may have to pay income taxes in the USA, employer taxes, self-employment taxes, franchise tax and sales taxes.
Frequently Asked Questions
¿Cuanto paga de impuestos una LLC?
If you are an American resident and your LLC is taxed as “Partnership”, you will pay an income on income that varies between 10% and 37%. If you are not a resident, do not have a physical presence in the USA or dependent agents, you will pay 0% taxes in the USA.
An LLC can also choose to be taxed as a C-Corp and pay corporate (21%) or S-Corp taxes.
How does an LLC pay taxes?
The taxes of an LLC can be paid to the IRS either by check or through its web platform. If the LLC does not elect to be treated as a C Corporation using Form 8832, it will not face corporate taxes, and the profits will be subject to tax when included in the personal return of its members.
How to file taxes for an LLC?
- If it is a Sole Proprietorship LLC, the owner reports his business income and expenses on Schedule C of the income tax return.
- Multi-member LLC: Members will report respective income based on their % shares on their personal tax returns. They must file Form 1065 and issue a Schedule K-1 to each member of the LLC.
- An LLC is taxed as a C corpfiles a corporate tax return each year on Form 1120. Owners report their dividends on Form 1040 of their tax return.
- An LLC that is taxed as an S corpprovides members with a Schedule form. K-1 showing their share of profits (or losses).
Members report that income on Schedule E of their personal tax returns.
What happens if I forget to file my LLC taxes?
Failure to submit the tax return to the IRS on the scheduled date may result in a penalty of 5% of unpaid taxes for each month of delay. The total fine will not exceed 25% of your unpaid taxes.
After 60 days of delay, the minimum fine for not filing the return is $210. If the amount of taxes you owe is less than that amount, the penalty will be 100% of your total taxes.
What happens if I forget to pay my LLC taxes?
If you declare your LLC income, but do not pay the taxes on time, the IRS will charge you 0.5% of the unpaid taxes each month of delay, up to a maximum of 25%.
If you do not file the income tax return or pay taxes before the due date, the maximum charged per month for both penalties is 5%. In all cases, the sanctions will have a maximum limit of 25% of the tax debt for the year.
How much does an LLC pay in taxes for digital services?
Generally, if the LLC is resident, has a physical presence, or dependent agents, you may be required to pay income tax, sales tax, and other applicable state and local taxes. Additionally, if the LLC has employees in the USA, it may also be subject to paying employer taxes.
On the other hand, if your LLC is non-resident, and provides services from abroad to clients outside the USA, it is highly likely that you will not have to pay taxes. Many freelancers open llcs to sell digital services in this way.
How much does an LLC pay in taxes for Dropshipping or FBA?
Selling physical products on Amazon through FBA or dropshipping raises classification issues for companies like ETBUS due to the uncertainty of whether Amazon can be considered a Dependent Agent.
This situation has led to the need for a court ruling or clarification from the IRS.
Currently, the most favorable interpretation for taxpayers is used, where Amazon is not considered a Dependent Agent and the business activity of the LLC is not considered ETBUS. However, it has been stated that the physical location of the goods at the time they are sold is the most important criterion in determining whether an eCommerce company must pay taxes.
How much does a Trading LLC pay in taxes?
Profits and interest earned from trading stocks or securities are not considered to be of ETBUS origin under Section 864(b)(2)(A) of the Internal Revenue Code, and therefore, LLCs of non-resident owners are not subject to tax obligations in the USA for such income.
However, dividends are subject to a 30% Income Tax, although this withholding may be reduced if the country of tax residence of the owner of the LLC has a Tax Treaty with the USA
Find out more about LLC for trading and investments.
Written by
Ignacio Navarro
Ignacio Navarro is a Certified Public Accountant, graduated in 2020 from the National University of Tucumán. Founder of Start Companies since 2023, he advises clients worldwide on forming LLCs in the United States and on proper tax filing. His expertise combines legal, tax, and practical knowledge, offering a comprehensive service that spans from company formation to bank account setup and sales platform integration.
