So what is your LLC tax rate? Well, there actually isn’t one specific LLC tax rate—it first depends how many “members” you have in the LLC, as well as your personal filing status and annual income, among other factors. Keep reading to learn more about how to find your LLC tax rate.
How do LLC taxes work?
LLC tax rates are determined based on the type of LLC you have and your personal income tax rate. While that may seem complex, it’s actually fairly straightforward for most business owners.
If you own an LLC by yourself, you are taxed by default as a sole proprietorship. If you own an LLC with other individuals, you are taxed by default as a partnership. Either way, LLC’s are considered a pass-through entity by default. This means your business tax rate is the same as your personal tax rate, as your business income and business expenses pass through to your individual income tax return.
When you own an LLC on your own, your earnings are most likely also subject to self-employment tax, which includes both the employee and employer contribution for Social Security and Medicare. You may be able to limit these taxes by opting to have your LLC taxed as an S corporation, which may require the help of a tax expert to set up and use correctly.
Because your LLC tax rate is the same as your personal tax rate, it’s essential to understand how those rates work for tax purposes.
LLC tax rates: an overview
Each business structure has a different set of rules for tax time, extending to different types of LLCs. For example, a single-member LLC is taxed as a sole proprietorship by default, while a multi-member LLC follows partnership tax rules. An LLC owner may also choose to be taxed as an S corporation, which activates an entirely different set of rules.
Here’s a breakdown of how taxes work for the most common types of LLC:
Each of these structures has unique costs and benefits, so it’s important to understand why you’re choosing an LLC and how you’re setting it up. For example, an LLC with S corp taxation can often save owners on taxes, but only if they’re making a full-time income from the business.
When you own a partnership or use S corp taxation, your business income is passed through to your personal tax return using form 1065 or Schedule K-1. With a sole proprietorship or a standard single-member LLC, your business taxes go on your personal tax return using Schedule C.
If you own a standalone S corporation or C corporation, the entity is required to file an annual tax return. An S corporation is a pass-through entity and works similarly to an LLC taxed as an S corp. A C corporation must pay its own corporate income tax bill subject to a separate corporate tax rate in addition to shareholders. An LLC can opt for C corporation taxation as well.
With a C corp, you’re subject to double taxation, so running a small business as a different structure will be beneficial for income tax purposes.
Income tax rates
Your LLC tax rate follows the same graduated tax bracket system as your personal taxes. Tax rates are marginal, which means you only pay the higher rate on additional money you earn.
For example, moving from the 22% tax bracket to the 24% bracket doesn’t mean all of your income is taxed at 24%. Only income you earn over the 24% rate is subject to the higher rate, and so on as your income grows.
2021 LLC tax rate
Here are the 2021 tax brackets according to the IRS. These brackets apply to your 2021 tax filing.
*See the full tax brackets here.
Small Business Owner Tax Tip: You may be able to save on your tax bill when contributing to a self-employed retirement account, such as a Solo 401(k) or SEP IRA. That’s in addition to savings you get from a traditional or Roth IRA.
Calculating your LLC tax rate
Do all of those brackets and percentages have your head spinning? Don’t worry. Bench created a free calculator to help you find your tax rate based on your business structure and income.
The significant factors in your tax rate are your business entity type, employee payroll (your paychecks), total household income, number of children, and other key tax details. As a small business owner, your personal and business tax returns are closely related—they may even use the same form.
Fortunately, you should never have to calculate your LLC tax rate by hand. When you use an accountant or professional tax service, that math is all handled for you. Even when you do taxes yourself using tax software, you input your business and personal tax information, and the computer takes care of figuring out your tax rate.
Federal income tax is not the only type of tax you’ll have to pay as a business owner. There are also self-employment taxes, payroll taxes, state taxes, and sales taxes. The taxes you owe depend on your location, business setup, and income. Here’s a closer look at some of the most common types of business taxes:
Self-employment tax, as mentioned above, is a combination of the employee and employer’s contribution for Social Security and Medicare. When you file taxes as a standard single-member LLC, your entire business profits are subject to self-employment taxes, currently 15.3% between Social Security and Medicare.
When you opt for S corp taxation, you only pay self-employment taxes on your paychecks. Additional income, known as distributions, is only subject to your regular income tax rate. This benefit becomes worthwhile around $40,000 to $80,000 in annual business income due to the savings on self-employment taxes. With this business structure and filing method, owners who earn six figures or more are likely to find thousands of dollars in yearly savings. Learn more about S corporation taxes here.
If you take the S corp path, you’ll need to pay yourself using a payroll system that helps calculate your payroll taxes. As a business owner, your payroll taxes are part of the self-employment tax explained above.
Standard payroll tax rates are 6.2% for Social Security and 1.45% for Medicare taxes. The employer matches these amounts. When you work for someone else, they cover the employer’s portion. When you’re self-employed, you have to pay the employer portion yourself.
Depending on the nature of your business, you may be required to collect sales taxes. Sales taxes are local or state taxes not paid to the Internal Revenue Service. Most companies that sell physical products must collect and remit sales taxes to the appropriate tax authority.
Also, note that some online and digital sales platforms help you with these calculations. Large online marketplaces like Amazon and Etsy may take care of this for you. When you sell to customers directly, never forget about sales tax.
Sales tax rates range from 0% to 9.55%, according to the Tax Foundation for the highest average combined state and local sales tax rates. Alaska, Delaware, Montana, New Hampshire, and Oregon charge no state sales taxes. California charges the highest at 7.25%, followed by Indiana, Mississippi, Rhode Island, and Tennessee at 7%. Local jurisdictions may add their own sales taxes too.
Just as Uncle Sam wants a cut of your income, your state may as well. Requirements vary widely by location, so we don’t have room to cover everything here. If your state taxes your business income, you’ll want to check with your state’s tax website or a trusted tax expert to ensure you’re handling things correctly.
Taxpayers in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax, making state taxes easier (and cheaper!) than the rest of the U.S.
This may not be an all-encompassing list. Depending on where you live, you or your business could be subject to franchise tax, use tax, and more. Make sure to pay taxes by the due date to avoid any penalties and interest.
How Bench can help
We know that there’s a lot to understand when dealing with accounting and taxes for your small business. Bench gives you access to tax experts to help you handle all angles of your business’s finances. That includes bookkeeping and tax filing, so you know your tax returns are accurate and use the correct LLC tax rate.
When you choose America’s largest professional bookkeeping service for small businesses, you’re in good hands. Your remote bookkeeper automatically imports your transaction information, updates your revenue and expenses, and generates monthly financial reports that help you know where you stand and make the best decisions going forward.
If you need help with quarterly estimated tax and annual tax filings, Bench has you covered. We can handle your personal and business tax returns at no extra cost or give you the information you need to file yourself with our comprehensive year end packages. Learn more about how Bench works.
While there are few guarantees in life, you can count on tax season coming around each year. You can legally achieve the lowest possible tax rate for your annual tax year filings when you follow the best bookkeeping and business tax practices.
Now you know how your LLC tax rate is calculated and where to get help if needed, but don’t let taxes get you down. After all, a hefty tax bill is often a sign of a successful business. Your tax burden shouldn’t be too tough to handle when you plan ahead.