A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in Nebraska, we know that it is a pass-through taxation structure. Typically, the profit LLC makes passes through the LLC to its members. Based on the profit share, members file their income tax returns. LLCs, unlike other corporations, do not have to pay income taxes based on profit or revenue.
IRS (Internal Revenue Service) allows LLCs to choose their preferable classification of tax at the beginning of the LLC formation. In general, a single-member LLC is taxed as a sole proprietor and a multi-member LLC is taxed as a partnership. As there is no fixed tax structure for LLCs, anyone certainly wants to opt for the most beneficial one. Keep reading till the end to know more about the tax structure of a Nebraska LLC and related aspects.
On this page, you’ll learn about the following:
- Classification of Nebraska LLC Taxes
- LLC Taxes to be Paid in Nebraska
- Default LLC Tax Classification Rules
- Options to Change Default Tax Classification
- Choosing a Classification for Your LLC
- Classification of LLC Taxes – At a Glance
Classification of Nebraska LLC Taxes
An LLC is considered a Pass-through Entity because it allows the income to pass through & become self-employment income. The members of the LLC have to pay Self-employment tax or Self-Employment Taxes on any income they earn through the LLC. The LLC has to pay Franchise Tax on its income. In addition to the Self-employment tax, there are some other requirements that an LLC has to consider, such as:
- Franchise Tax – Franchise tax applies to or levies upon LLCs, C-corporations, & S-corporations. Sole Proprietorship & Partnerships (directly owned by individuals) are exempted from the Franchise Tax. This tax is to be paid with the office of the Comptroller of Public Accounts.
- Federal Tax Identification Number – An LLC with employees must obtain a Federal Tax Identification Number. Nebraska does not have a separate State Tax Identification number.
- State Employer Taxes – If an LLC has employees on the payroll, it must pay state employer taxes in Nebraska. These taxes are handled through Nebraska Workforce Commission.
- Franchise Tax Report – In Nebraska, the LLCs do not file an annual report with the secretary of state; instead, it is submitted in the form of a Franchise Tax Report with the Nebraska Department of Revenue.
Federal Tax Classifications
When LLCs were recognized as one of the types of Business Corporations, IRS did not create a new tax classification just for the LLC. LLCs were allowed to choose from the current tax classifications.
LLC Taxes to be Paid in Nebraska
There are two main state taxes that an LLC has to pay to the Nebraska Department of Revenue:
State Income Tax
You yourself pay through the earnings while representing your LLC in Nebraska. These earnings get reflected in your personal Tax return & are further calculated at the time of paying the State Income Tax. All the employees you hire will also need to pay the Nebraska state income tax. The Standard Nebraska State Tax rate ranges from 2.46% to 6.48% depending on how much you earn.
State Sales & Use Tax
The State Sales & Use tax rate in Nebraska is 5.5%. Some particular goods are also tax-exempted like the goods that are considered basic necessities. Other local taxing jurisdictions, such as cities and counties may imply additional sales tax.
Nebraska levies a tax on certain businesses for the right to exist as a legal entity and do certain business in the state. LLCs in Nebraska are exempt from paying the franchise tax unless they file their taxes as corporations.
Federal Self-Employment Tax
Every individual in Nebraska who is earning profit out of the LLC has to pay the Federal Self-Employment Tax (also called the Social Security or Medicare Tax). The Federal Self-Employment Tax applies to all the earnings of an LLC member or manager. The Federal Self-Employment Tax rate in Nebraska is 15.3%. One is able to deduct your LLC’s expenses from the income earned, for that, you must calculate the Self-Employment Tax your LLC owes.
Federal Income Tax
This tax also applies to the earnings you make in your LLC. One is obliged to pay regular federal income tax on any earnings you take out from your LLC.
The Federal Income Tax Rate is built upon the earnings you make, the type of your LLC’s industry, the current income tax bracket that is applicable, deductions applicable, and filing status. One only has to pay Federal income tax on profits you take out of the business, allowances, and less certain deductions. This includes your tax-free amount, business expenses as well as other deductions for areas such as retirement plans and healthcare.
Employee & Employer Taxes
Any LLC that has employees on the payroll is bound to pay different kinds of taxes that are applicable to all the employees. The employee & employer tax implications are different from all the other types of taxes mentioned above. For instance, all employees of an LLC have to collect and retain the Payroll tax at the time of receiving the salary. Whether you withhold the federal tax and state tax or not, each employee has to file an individual tax return. The employer might also need to pay insurance for any employees if required.
You may be liable to pay certain other taxes and duties, depending on your type of industry. For example, if you are a gasoline seller then you may need to pay a tax on any fuel you sell. Similarly, if you import or export goods, you may need to pay certain kinds of duties.
Default LLC Tax Classification Rules
By default, the LLCs are categorized as below (In both the categories, separate filing of income is not required):
Disregarded Entity (Single-Member LLC)
A single-member LLC is usually disregarded from the taxes. Hence a single-member LLC is also called a disregarded entity. Under the U.S. tax law, it is assumed that a single-member LLC is owned by an individual (& not by another LLC), so the U.S. tax law levies rules on it as a Sole Proprietor. Single-member LLC’s owner (Sole Proprietor) has to report all the income of the LLC via his own income tax return.
Sole Proprietorship Taxes
As mentioned earlier, the single owner of the LLC is treated as the Sole proprietor of the LLC & has to file the Self-Employment Tax on all of the LLC’s earnings. Nebraska does not levy State Income Tax, so a single-member LLC must file only the Federal Income Tax.
Partnership (Multi-Member LLC)
Any LLC with more than one owner is referred to as Multi- Member LLC & it is taxed as a partnership by default. Similar to the Single Owner or Single Member LLC, this LLC is also a pass-through entity. This means that the income of the LLC passes through the income of the members & they have to file taxes through their own earnings.
Partnership or Multi-Member LLC has to pay taxes similar to the Single Member LLC. If the Partnership LLC is directly owned by individuals, it is exempted from the Franchise Tax. All the members of the Multi-Member LLC are liable to pay Self-Employment Tax & Federal Income Tax.
Options to Change Default Tax Classification
The LLCs are categorized either as sole proprietorships or as partnerships, depending on the number of members the LLC has. This is the default tax classification applicable to LLCs. However, the LLCs have an option of changing the default classification & opting to register under the following categories for taxation purposes:
An LLC can prefer to be treated as a C-corporation by filing form 8832 (the Entity Classification Election Form) with the IRS. The C-corporation is a regular corporation that is subject to corporate taxes & it is not a pass-through entity.
An LLC taxed as a C-Corporation is not a pass-through entity. In a C-corporation, the members/shareholders/ owners are taxed separately. The shareholders of the C-corporation are taxed twice on the dividends that they earn. The dividends of the shareholders are taxed at the corporate level – with a Corporate Tax filed with Form 1120 & at a Shareholder level – an Income Tax filed with Form 1040. Shareholders are subjected to Federal Income Tax.
The S-Corporation is the most common type of corporate structure used by small businesses. It was created to provide corporations with limited liability protection while maintaining the benefits of being a separate legal entity. An LLC can prefer to be treated as S-Corporation by filing Form 2553. S-corporations are small business corporations, that choose to pass through the corporate income, losses, deductions, & credits to the shareholders for the purposes of Federal Taxes.
An S-Corporation is similar to an LLC except that it is treated by the IRS as a corporation for tax purposes. S-Corps do pay corporate income taxes; however, they are still considered disregarded entities for federal tax purposes.
Like an LLC, an S-Corp reports its annual earnings on a separate Schedule E on the member’s personal account. An S-Corp is treated by the IRS much like a partnership for tax purposes. Unlike Partnership, in S Corporation, the shareholders are required to pay Federal Self Income tax on their share of the company’s profits.
Choosing a Classification for Your LLC
In terms of owners’ protection against liability, perpetual existence, & savings in Taxation, Both LLCs (Limited Liability Companies) & Corporations are very much alike. However, with regard to formalities, Taxation, & capital, LLCs & Corporations differ in Nebraska.
Both LLCs and Corporations provide liability protection to their owners. The LLC provides protection against inside liability (towards the employee) & outside liability (towards the creditor). The Corporation usually provides only the inside liability.
Tax Classification Flexibility
For taxation purposes, an LLC has a choice of being treated as a sole proprietorship, Partnership or C-corporation or S-corporation. A corporation can choose to be treated only as C or S Corporation.
As mentioned earlier, the LLC can choose to be treated as a corporation; the Corporation does not have the option of being treated as the LLC. A Nebraska LLC is subjected to Franchise tax, Federal Income Tax, Sales & Use Taxes & State Employment Taxes (for LLCs that have employees)
A regular corporation or a C- Corporation is subjected to corporate tax, which can be filed through Form 1120 every year. The shareholders have to pay the Income-tax, only when they receive dividends from the Corporation. These dividends are taxed twice at the corporate level (on a corporate form)& at the shareholder level (on shareholder form).
An S- Corporation in LLC is not subjected to corporate taxes. But the shareholders are subjected to Taxation – even if they do not receive any dividends. A member of a Nebraska S-corporation has to pay Federal Self employment Tax only on his salary; any other profits that he makes through the LLC are not subject to the 15.3% Self Employment Tax.
Classification of LLC Taxes – At a Glance
|Points of Difference||LLC||S- Corporation||C-Corporation||Sole Proprietorship|
|Taxation||As an LLC, by default, there is no tax levied at the entity level. The members’ income or even the loss is passed through to members or owners.||Similar to LLC, no tax is levied on an S-Corporation at the entity level. The members’ income or even the loss is passed through to members or owners.||The C-Corporation is often taxed at the entity level. The Dividends are taxed at the shareholders’ level.||The Sole- proprietorship as an entity is not taxable. The Sole Proprietor pays taxes as an Individual.|
|Double Taxation||The LLC does not have Double Taxation||There is no Double Taxation in S-Corporation||There is Double Taxation in C-Corporation, only when the Shareholders earn in the form of dividends.||No Double Taxation in a sole proprietorship.|
|Self Employment Tax||The net income of the members or owners is subject to self-employment tax.||The salaries of the shareholder are subject to self-employment tax, but any other profits that the shareholder makes are not subject to the employment tax.||The C-Corporation is subject to self-employment tax.||The Sole-proprietorship is subject to self-employment tax|
|Pass-Through Income/Loss||An LLC is often referred to as a Pass-through entity because its income passes through/ passes to its members.||Yes, An S Corporation is a Pass-through Entity.||No, A C-Corporation is not a Pass-through Entity.||Yes, A Sole-proprietorship is a Pass-through Entity.|
How Do LLCs Pay Taxes in Nebraska
Any LLC operating in Nebraska is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.
In Nebraska, the tax responsibilities of Limited Liability Companies (LLCs) depend on how the LLC is taxed by the Internal Revenue Service (IRS). An LLC can be taxed as a sole proprietorship, a partnership, or a corporation. Each of these has different tax obligations.
For sole proprietorships, the LLC is disregarded for tax purposes and the owner reports their profits and losses on their personal income tax return. In this case, the LLC is not required to file a separate return. However, the owner must pay estimated taxes to the Nebraska Department of Revenue (DOR) throughout the year.
In the case of partnerships, the LLC is required to file an annual tax return with the Nebraska DOR. The partnership must report its income, deductions, and credits on its return. The LLC must also attach Schedules K-1 to the return, which report the income and deductions of each partner. The partners must then report their share of the LLC’s income, deductions, and credits on their personal income tax returns.
If the LLC is taxed as a corporation, then the LLC is required to file an annual return with the Nebraska DOR. The LLC must report its income, deductions, and credits on its return. The LLC must also pay income taxes on its profits. The LLC must also pay estimated taxes to the Nebraska DOR throughout the year.
In addition to the federal and state income taxes, an LLC may also be subject to self-employment taxes. Self-employment taxes are paid by the LLC’s owners, not by the LLC itself. The self-employment tax rate is 15.3% of the LLC’s net income.
In Nebraska, LLCs are also subject to sales and use taxes. The Nebraska DOR collects sales tax on the sale of goods and services in Nebraska. The rate of sales tax varies depending on the type of goods and services being sold. The LLC must file sales tax returns and pay the sales tax it owes to the Nebraska DOR.
Finally, LLCs must also file annual reports with the Nebraska Secretary of State. The LLC must file an annual report even if it does not have any business activity in the state. The annual report is due by the last day of the LLC’s fiscal year.
In summary, LLCs in Nebraska must pay income taxes, self-employment taxes, and sales taxes to the Nebraska DOR. They must also file annual reports with the Nebraska Secretary of State. By understanding the tax obligations of an LLC in Nebraska, LLCs can ensure that they are compliant with the state’s tax laws.
C-Corporation. It taxes the dividends of the shareholders at the corporate level as well as at an individual level.
An LLC is often referred to as the pass-through entity because the income or the assets pass through the members or owners of the LLC.
The LLCs have two default classifications. It can be termed as a single-member LLC or a multi-member LLC.
When choosing a different classification for taxation, it is essential to understand the liabilities & taxes applicable in that classification.
Every Tax classification has its own set of benefits & restrictions. Every state will have different taxation rules for each of the categories of business corporations. Depending on the objective of formation of the business entity (Eg. To avoid dual Taxation- one can choose S Corporation, for more flexibility, one can choose the LLC format). It is essential to understand the taxing structure of each country & each Classification; to decide how you wish to treat your LLC.