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How Does an LLC Pay State Income Taxes?

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Question: How Does an LLC Pay State Income Taxes?
Most states follow federal tax laws in determining net income (profit or loss), but each state adds its own exclusions and special deductions, just to make things more complicated. The federal forms are used as a basis for state taxes, so you need to know about the ways an LLC pays federal income tax:
Answer:

How does an LLC pay federal income tax?
An LLC pays income taxes in one of two ways:

  • If the LLC is a multiple-member entity, it pays federal income taxes as a partnership, unless the LLC has elected to be taxed as a corporation
  • If the LLC is a single-member entity, it pays federal income taxes as a sole proprietorship.
So, unless the LLC is taxed as a corporation, the LLC is considered a pass-through entity, meaning its income/loss is passed through to the business owner.

How Does LLC Income "Pass through" to the Owner?

  • For a single-member LLC, the owner completes Schedule C and the total income from the business goes into the owner's personal tax return (Form 1040), on line 12.
  • For a multiple-member LLC taxed as a partnership, the partners receive a Schedule K-1 for their share of the partnership profits or losses, and this amount also goes onto each partner's personal tax return.
In each case, the income or loss is recorded on the owner's personal tax return.

What About State Income Tax for LLCs?
Since the income/loss is on the owner's personal tax return, most states do not tax the LLC owner separately for the income from the LLC; this income is subject to state income tax in the same way as other owner income or salary/wages.

Some states do tax LLC income in addition to the tax imposed on the owners. In California, for example, an LLC which has a profit of more than $250,000 a year must pay an additional tax.

What About Franchise Taxes?
Some states impose an additional tax on the profits of corporations and other business entities, based on the net worth of the business. This tax might be called a "franchise tax" or an "annual registration fee."

Back to All About LLCs and Taxes

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