When you’re thinking about starting a business, cost can be a huge factor. Understanding LLC taxes by state can make it a little easier to anticipate what your annual costs will be.
Taxes can be pretty complicated, and they always vary from state to state. In this guide, we’ll cover the basics of how to file taxes for LLCs.
By default, a limited liability company (LLC) is subject to pass-through taxation for federal income tax purposes. The LLC’s income tax burden passes through to the members, who report their share of the profits on Schedule C of their personal tax returns. Single-member LLCs don’t file an informational return; multi-member LLCs file Form 1065, the Partnership Return of Income, as their informational return. In many states, this federal taxation structure repeats on the state level (albeit with different forms).
Basically, an LLC is taxed like a sole proprietorship or general partnership, depending on the number of members it has.
For many small business owners, pass-through taxation creates a lower tax burden than a corporate income tax would. That’s not always the case, though, so if you’re unsure about whether pass-through taxation is an advantage for you, consult with a qualified tax professional.
A big perk of LLC pass-through taxation is that it avoids the double taxation of a corporation. Double taxation occurs when a corporation pays corporate income taxes at the entity level, and then the shareholders pay personal income taxes on any dividends they receive. By default, limited liability companies avoid this corporate taxation structure.
That said, some LLCs opt to be taxed as a C corporation because they can often enjoy the widest range of possible tax deductions and tax breaks on self-employment taxes (Social Security and Medicare taxes). S corporation status also allows members to lower their self-employment tax burden, but it also offers pass-through taxation. If you’re unsure whether these tax structures are right for your business, we recommend consulting with an accountant.
The vast majority of states in the U.S. charge a personal income tax. And typically, your state will honor your business structure’s federal tax status, although some states have other taxes on top of the income taxes. At the time of this writing, only eight states do not charge any personal income taxes:
New Hampshire does not tax most income, with the exception of income from interest and dividends. Beginning on December 31, 2023, they’re phasing out the interest and dividend income tax. For the 2027 taxable year, this tax should be completely gone, meaning New Hampshire will join the list of states with no income taxes.
In states that do charge an income tax, you can expect to pay either a flat rate tax or a graduated one that rises in proportion with your income (much like federal taxes).
Note: Income tax rate changes happen often, so be sure to consult your state’s revenue department each year to stay up to date.
Another common tax type is the franchise tax, or a tax “for the privilege of doing business” in that state. Some states charge a franchise tax instead of an income tax, and others charge it on top of income taxes. For example, Texas has no income taxes, but they do charge a franchise tax. Meanwhile, California charges a personal income tax and a franchise tax — and LLCs are subject to both.
LLCs taxed as pass-through entities aren’t always subject to the franchise tax, but it varies depending on the state. Here are the states that currently charge a franchise tax:
Franchise tax rates and procedures look a little different in each state. For example, in some states, the franchise tax goes hand in hand with the state’s annual report. For example, the Texas franchise tax report does double duty as a tax and an annual report. Be sure to consult with a local business attorney or CPA to be sure you get these right.
Sales taxes are extra charges added to any qualifying purchases. As a business, you can charge these sales taxes from your customers or pay it yourself. In many states, you need to register for a sales tax permit to be able to compliantly collect it.
Typically, states charge sales taxes on all general goods designed for final consumption or use. This includes items like clothing, housewares, cars, electronics — virtually any good you can buy, plus many services. It’s not uncommon for a state to reduce or eliminate sales taxes on essential goods like groceries, but this varies from state to state.
Every state has slightly different sales tax rates, and some states let their cities and counties add local charges to the tax. Alaska, Delaware, Montana, Oregon, and New Hampshire all don’t charge state-level sales taxes. Meanwhile, regions of Tennessee have taxes as high as 9.75%, thanks to local rates of 2.75% added onto the state’s base 7%. Many states’ sales taxes fall somewhere between 5-7% rates.
Consult with your state’s tax authority to obtain your sales tax permit and check the latest tax rates.
There are currently eight states that charge a gross receipts tax. Gross receipts taxes are taxes charged on all revenue that a business receives. Unlike an income tax, a business can’t reduce its gross receipts tax with deductions for losses and expenses. Some states charge this instead of a sales tax, and others charge gross receipts taxes in addition to sales taxes.
As of this writing, the following states charge a gross receipts tax:
Some of these states have a threshold for the tax, meaning you won’t owe any tax unless you meet the state’s set dollar amount. Others charge the tax regardless of how much you make (or lose). If you’re unsure what your tax burden will be, we recommend consulting with a licensed tax professional to discuss your unique situation.
Every state has a tax burden of some kind. And it’s important to note that there isn’t any one tax (or lack thereof) that makes a state good or bad for taxes. A state’s tax burden adds up from all the different taxes it charges. For an LLC, the taxes we’ve listed above have the biggest potential impact (plus property taxes, which we didn’t discuss in detail).
Alaska tends to be a low-burden state for LLC taxes thanks to no sales taxes and no personal income taxes. Their property taxes are just a little higher than average, though. Likewise, Wyoming is generally favorable for no income taxes or other business taxes, but LLCs can still expect to owe property taxes.
California’s high LLC tax rates are often a challenge for small business owners. The minimum franchise tax of $800 is substantial. Depending on your personal income from other taxes, the personal income tax can be pretty hefty, too.
We highly recommend consulting with a tax professional to discuss what your overall tax burden will be in your state.
Taxes can be a burden no matter what state you’re in, but the good news is you can reduce some of your taxable income somewhat — legally.
There are also a good number of business expenses that qualify as tax deductions. For example, if you use your car or home for business purposes, you can probably deduct a portion of those expenses. If you’re taxed as a pass-through entity, you probably also qualify for the Qualified Business Income deduction, which could let you deduct up to 20% of profits from your business activities. Other deductions might include your self-employed health insurance, the cost of your supplies, and more. Check out our LLC deductions guide for more info.
And as always, consult with a licensed tax professional. CPAs and tax attorneys are quite familiar with the ins and outs of their local tax codes. If anyone can help you spot potential tax breaks, it’s them.
Running a business can feel overwhelming, but you don’t have to do it all alone. ZenBusiness can help. Whether you need a streamlined Money app to help you keep track of your business finances, ongoing compliance help, or something else, we’ve got your back.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
No matter what state you’re in, your LLC will probably be subject to some sort of tax, such as income tax, sales taxes, property taxes, franchise taxes, or gross receipts tax. With that in mind, taxes in Wyoming tend to be quite low, as do taxes in Alaska and Texas (provided you don’t meet the annual tax-due threshold for franchise taxes).
There’s no such thing as a completely tax-free state. Even the states with no income tax for pass-through entities (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) have other tax types like sales or property taxes.
On the federal level, LLCs pay personal income taxes at the members’ level or corporate income taxes depending on what the LLC’s taxation structure is. The LLC’s members may also be subject to self-employment taxes. If the LLC has any employees, it will pay employment taxes.
On the state level, there is more variance as each state has different tax codes. Some states don’t charge an income tax for individuals. Some charge a franchise tax instead.
Taxes for LLCs with no income can be tricky. Ultimately, it depends on your taxation structure. Generally, you’ll still need to report your LLC’s losses on Schedule C of your personal income tax return. But in many cases, you won’t pay income taxes for the LLC — just for your other personal income.
In many states, you’ll still owe franchise taxes or other annual taxes. For example, in California, an LLC owes franchise taxes regardless of whether they’re operating at a profit or loss.
Failing to pay your taxes can lead to serious consequences. You’ll likely encounter late fees or underpayment fees. You might even lose good standing in your state or other, more severe legal penalties.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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