LLC Taxes by State
Depending on the location of your business, state tax rates can vary. It’s important to stay updated on your state's LLC franchise tax, sales tax, and employment taxes in order to avoid misinformation and late filings.
In this guide, we will define the different types of state LLC taxation, which states include which taxes, and more.
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Pass-Through Taxation
Businesses that are considered “pass-through” entities are individually taxed rather than taxed as a business. In other words, the members pay taxes, not the LLC itself.
An LLC is taxed as a pass-through entity by default, with single-member LLCs taxed as disregarded entities and multi-member LLCs taxed as partnerships.
With pass-through taxation, LLC owners are not at risk of double taxation, which refers to paying both income and employment taxes for your business and on your personal tax return. Unlike corporations and LLCs that elect to be taxed as C corps, owners of a business with pass-through taxation are only taxed on total profits once, at each member’s individual income tax rate.
LLC owners that choose default LLC taxation can choose to pay themselves with a distribution from their share of the LLC profits. The distribution will then undergo self-employment tax. C corp and S corp owners pay themselves a salary and therefore do not have to pay self-employment tax on their individual returns.
Franchise Tax
A franchise tax is typically an annual tax that allows businesses to continue activity in a state. Some states may refer to this tax by a different name. The amount of business tax and how it’s calculated varies by state, but in many cases, it is a flat rate. Failure to comply may result in the termination of your business.
States With an LLC Franchise Tax
- Alabama: Also known as the Business Privilege Tax, this tax is based on an LLC’s income from the previous tax year.
- Arkansas: All LLCs pay a flat annual franchise tax of $150.
- California: All LLCs pay at least $800 in annual franchise tax. LLCs that generate more than $250,000 may have to pay additional fees.
- Delaware: All LLCs pay a flat annual tax of $300.
- Minnesota: Multi-Member LLCs that have over $970,000 in combined property, payroll, and annual sales must pay a Partnership Tax. LLCs are also required to file an additional form with the state to determine their minimum fees.
- Nevada: Nevada has the Modified Business Tax, which applies to businesses paying at least $50,000 in wages per quarter.
- New Hampshire: New Hampshire has two business taxes—the Business Profits Tax is a flat tax rate on LLCs with gross receipts over $50,000, and the Business Enterprise Tax is based on specifically the earnings of each individual business.
- Tennessee: The Franchise & Excise Taxes are based on an LLC’s net worth and taxable income, respectively.
- Texas: LLCs that have an annual revenue of more than $1.13 million must pay a franchise tax along with their annual report.
- Vermont: A minimum Business Entity Income Tax of $250 is required from all Vermont LLCs.
- Washington D.C.: This is imposed on all unincorporated businesses with gross receipts of $12,000 and over and filed under Form D-30.
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Sales Tax
Sales tax is a tax on physical products that the state collects and the consumers pay for. The tax rate is multiplied by the price of the product and added to the final sale. Some states will relegate the taxing power to local governments.
States That Do Not Have Sales Tax
- Alaska
- Delaware
- Hawaii
- Montana
- New Hampshire
- Oregon
See our sales tax guide so you can learn everything you need to know about collecting sales and use tax.
Gross Receipts Tax
Sales Tax and Gross Receipts Tax are two different methods of paying taxes on products. Sales tax is paid for by the consumer, while the gross receipts tax is paid for by the business. Depending on your type of business, you may need to pay a form of gross receipts tax.
Example: Your LLC does business in a state with 5% sales tax and a state with 5% gross receipts tax. You sell a $20 product in each state. With sales tax, the final sale comes to $21. With gross receipts tax, the final sale is $20, but your business must pay $1 to the state.
States with Gross Receipts Tax
- Delaware
- Hawaii (General Excise Tax)
- Nevada (Commerce Tax)
- New Mexico
- Ohio (Commercial Activity Tax)
- Washington: (Business and Occupation Tax)
Employment Taxes
There are multiple kinds of taxes that your business will pay on behalf of your employees. Some of these taxes will be deducted from employee paychecks, while others are paid by you, the employer.
While there are separate federal employment taxes, there are additional taxes that are set forth by state governments.
Withholding Tax
Employees fill out a Form W-4, which allows the employer to calculate the amount of money to deduct from employee paychecks. The employer then sends these funds to the relevant state department.
States With No State Withholding Tax:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
NOTE: States without their own withholding tax MUST still pay federal withholding tax.
Unemployment Insurance (UI) Tax
This is a tax that is not funded by employees, but by the employer. This is paid to state agencies to fund unemployment benefits for eligible workers.
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LLC State Tax FAQ
The kind of taxes an LLC pays depends on its tax structure.
- An owner whose LLC is taxed by default pays personal income tax on their share of the business profits as well as self-employment tax on their distribution.
- An owner whose LLC is taxed as an S corp pays personal income tax on their share of the business profits but does not have to pay self-employment tax on their salary.
- An owner whose LLC is taxed as a C corp pays personal income tax on their share of the business but does not have to pay self-employment tax on their salary. However, the LLC will have to pay corporate income tax on the total LLC profits.
Depending on the state, an LLC with employees may have to pay withholding taxes as well as Unemployment Insurance (UI) tax. Franchise or business privilege taxes will also be levied on a state-by-state basis.
Yes. If an LLC has employees, they must pay state withholding tax (where applicable) as well as Unemployment Insurance (UI) taxes.
If your LLC sells products, they will have to pay sales tax (where applicable) or a gross receipts tax (where applicable).
Some states also levy a form of franchise tax, either as a calculated percentage of total revenue or as a flat rate.
If your business works out of a local physical store or only hires local employees, it is best to form your LLC within that state.
Businesses tend to look for states that have no income tax or other forms of tax breaks, but keep in mind that these states can also come with Annual Report fees and can require LLCs to report income based on where profits are earned, not where the business is formed.
If your business does not need to be focused in any one state, there are three popular states in which companies like to form:
- Delaware: This state offers low filing fees and does not tax out-of-state income.
- Nevada: A good choice for businesses that want to save on taxes that pertain to business income and capital gains. Additionally, Nevada does not require meetings or operating agreements.
- Wyoming: Wyoming has multiple tax benefits, including a lack of business and franchise taxes. There are also added privacy bonuses, as officers can elect to remain anonymous and owners can appoint a “proxy” to vote on their behalf.
