A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in Nevada, 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 Nevada LLC and related aspects.
On this page, you’ll learn about the following:
- Classification of Nevada LLC Taxes
- LLC Taxes to be Paid in Nevada
- 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 Nevada 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. Nevada 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 Nevada. These taxes are handled through Nevada Workforce Commission.
- Franchise Tax Report – In Nevada, the LLCs do not file a Franchise Tax Report. Instead, they file an Annual Report. This report has all the information regarding the LLC and its business in a year.
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 Nevada
An LLC in the state of Nevada has to pay two types of taxes to the Nevada Department of Taxation:
- State Tax
- Commerce tax
State Income Tax
Nevada is one of those states that does not have a state income tax. This means the LLC members will owe no state tax on income they earn from a Nevada LLC.
State Sales Tax
The State Sales tax rate in Nevada is 4.6%. Tax-exempted goods are food, medications, clothing, and gas. Other local taxing jurisdictions, such as cities and counties may impose an additional sales tax. The sales tax needs to be paid monthly or quarterly.
If your LLC generates more than $4,000,000 in gross revenue in a tax year, then you’ll be required to file a Nevada Commerce Tax return. According to different business categories, its own gross receipts tax rate has been assigned. The rates range from 0.051% to 0.331%.
Federal Self-Employment Tax
The Federal Self-Employment tax is administered by the Federal Insurance Contributions Act (FICA). The Federal Self-Employment Tax applies to all the earnings of an LLC member or manager. The Federal Self-Employment Tax rate in Nevada is 15.3%. To deduct your LLC’s expenses from the income you earned, you must calculate the Self-Employment Tax your LLC owes.
Federal Income Tax
For any earnings you take out from your LLC, you need to pay a regular income tax. The income tax payable depends on various factors such as your earnings, current income tax bracket, deductions, etc. One pays federal income tax only on profits that you take out of the business and allowances.
Employee & Employer Taxes
If your LLC pays employees, then there are some slightly different tax implications. The employee & employer tax implications are different from all the other types mentioned above. Both the employer and the employee withhold 7.65% of their taxable wages, which results in the current federal tax rate of 15.3%.
Irrespective of whether you withhold the Federal Tax and Nevada state tax or not, each employee has to file an individual Tax return. The employer might also need to pay insurance for certain employees, such as unemployment tax, etc.
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. Nevada 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 Nevada.
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 Nevada 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 Nevada 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 Nevada
Any LLC operating in Nevada is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.
In Nevada, Limited Liability Companies (LLCs) are subject to the same tax regulations as any other form of business. LLCs in Nevada are not required to pay income taxes, but they must pay other taxes such as payroll taxes, sales taxes, and property taxes.
The most common form of taxation for LLCs in Nevada is the payroll tax. LLCs are required to pay payroll taxes on wages and salaries paid to employees. This tax is paid to the Nevada Department of Employment, Training and Rehabilitation (DETR). In addition, LLCs must also pay federal payroll taxes, such as Social Security, Medicare, and unemployment taxes.
Sales taxes are also applicable for LLCs in Nevada. Sales taxes are imposed on the sale of goods or services and are collected from customers by the business. The rate of sales tax in Nevada is 6.85%. LLCs must register with the Nevada Department of Taxation in order to collect and remit sales taxes.
Property taxes are another form of taxation for LLCs in Nevada. This tax is imposed on the value of real property, such as land, buildings, and other business assets. Property taxes are assessed and collected by the county assessor in each county. Property taxes are used to fund public services, such as schools and roads.
In addition to the taxes mentioned above, LLCs in Nevada must also pay self-employment taxes. LLCs are considered self-employed entities and are subject to self-employment taxes. Self-employment taxes are paid to the Internal Revenue Service (IRS) and are used to fund Social Security and Medicare benefits.
Finally, LLCs in Nevada must also register for a business license. A business license is required for any business that operates in the state, regardless of its size or structure. The business license is issued by the Nevada Secretary of State and must be renewed every two years.
As you can see, LLCs in Nevada are subject to a variety of taxes and fees. Although they do not have to pay income taxes, they must pay payroll taxes, sales taxes, property taxes, self-employment taxes, and business license fees. It is important to understand all of the taxes and fees that apply to your LLC in order to ensure that you are in compliance with all of the applicable laws and regulations.
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.