If you want to start a business that will have an international scope, the United States is a good place to start because of its business-friendly laws.

And in the United States, you should consider setting up an LLC because an LLC or limited liability company costs less to start than other business structures and offers more flexibility. 

And, the good news is, you don’t need to be a US citizen to form an LLC in the USA, so you have a great opportunity if you’re an entrepreneur outside the United States.

Now your question is: Which state offers businesses the best tax incentives?

Answer: Every state has its tax rates, advantages, and disadvantages. So it depends on your business which state works best for you.

I’ve written this guide to give you some helpful information about the LLC taxes so keep reading!

LLC Taxes by State

How is an LLC Taxed

When an LLC is taxed, it’s considered a pass-through entity for federal income tax purposes. This means the LLC doesn’t pay corporate income taxes on business earnings. Instead, the LLC’s owners pay taxes on their percentage of the LLC’s profits.

Local governments may add taxes to LLC owners as well. Members can also choose to be taxed as a corporation instead of a pass-through entity by filing specific paperwork with the IRS.

When you set up an LLC, you’ll most likely be responsible for paying various taxes. You’ll also be responsible for paying federal, state, and local income tax on any money that you earn from your business. And if you have employees, you’ll be responsible for additional taxes such as self-employment tax.

Must Read: Tax Advantages of LLCs for Small Businesses

Types of LLC Taxes

There are various taxes that you may be required to pay when organizing a Limited Liability Company are:

Franchise Tax

In some states, a business has to pay a certain amount of money to be operated or to manage within that state. This is also known as privilege tax.

Franchise Tax does not levy in all states, it has to be paid in a few states and the amount of franchise tax depends on the state laws but usually, it’s a flat rate.

States where Franchise Tax levied:

Alabama: In Alabama, an LLC must pay privilege tax, which is paid on the company’s income from the last year.

Arkansas: LLCs in the state of Arkansas pay a flat annual franchise tax of $150.

California: The State of California charges a minimum of $800 annual franchise fee for all LLCs to maintain their license, but LLCs making over $250,000 may also have to pay additional fees.

Delaware: LLCs in the state of Delaware pay a flat annual franchise tax of $300.

Minnesota: Minnesota has a basic franchise tax of 9.8% on all business income, but some smaller companies can qualify for lower rates.

Nevada: Nevada has a Modified Business Tax, which is paid by businesses that pay a minimum of fifty thousand dollars in wages per quarter.

New Hampshire: Businesses in New Hampshire must pay two taxes: Business profit tax and Business enterprise tax.

The first is a flat tax rate on LLCs with gross receipts of more than $50,000, while the second is determined by the earnings of each company.

Tennessee: In Tennessee, an LLC’s franchise tax and excise tax are determined by its net worth.

Texas: If your business has between $1.18 million and $10 million in gross annual receipts, you will pay a franchise tax of 0.375%. Businesses with less than $1.18 million in gross annual receipts do not owe the franchise tax. The highest franchise tax rate in Texas is 0.75%.

Vermont: LLCs in the state of Vermont pay a minimum franchise tax of $250.

Washington D.C: In Washington D.C., Franchise taxes are owed by unorganized businesses with more than $12,000 in gross receipts and filed under Form D-30.

Sales Tax

A sales tax is a small percentage of a purchase price paid when you buy certain goods and services. Sellers collect the tax on your behalf and pay it directly to the government.

States where Sales Tax not levied:

There are five states where sales not levied are:

  1. Alaska
  2. Delaware
  3. Montana
  4. New Hampshire
  5. Oregon

Income Tax

Income Tax is the name given to taxes charged on the earnings of businesses and individuals. Income from various sources is subject to income tax including wages, salaries, dividends, interest, etc.

States where Income Tax not levied:

  1. Alaska
  2. Florida
  3. Nevada
  4. New Hampshire
  5. South Dakota
  6. Tennessee
  7. Texas
  8. Washington
  9. Wyoming 

Related: 9 States With No Income Tax

Employment Taxes

Businesses have more than one type of tax to pay on behalf of their employees. Some of these taxes are taken out of employee paychecks, and others are paid by the business.

Withholding Tax

Withholding tax, or WHT, is a portion of an employee’s income that is withheld by the employer at the time of payment and that is subsequently paid to the government on behalf of the employee.

States where Withholding Tax not levied:

  1. Alaska
  2. Wyoming
  3. Florida
  4. Texas
  5. Nevada
  6. Washington
  7. New Hampshire
  8. South Dakota
  9. Tennessee

Gross Receipts Tax

As a business owner, you should know about two different types of taxes: Sales tax is paid by the customer, while gross receipts tax is paid by the company. 

Depending on your business structure and your state’s tax laws, you may be required to pay a form of gross receipts tax.

States where Gross Receipts Tax levied:

  1. Delaware
  2. Hawaii 
  3. Nevada 
  4. New Mexico
  5. Ohio 
  6. Washington

Conclusion

In this guide, I offer you comprehensive information on LLC taxes so that you can learn which tax is applicable where.

Hiring a business accountant is recommended because professionals can save you thousands of dollars with tax deductions. 1800accountants is a great choice if you need this service.

Hopefully, this guide will enhance, your knowledge and be beneficial for your business.