A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in New Hampshire, 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 New Hampshire LLC and related aspects.
On this page, you’ll learn about the following:
- Classification of New Hampshire LLC Taxes
- LLC Taxes to be Paid in New Hampshire
- 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 New Hampshire 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. New Hampshire 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 New Hampshire. These taxes are handled through New Hampshire Workforce Commission.
- Franchise Tax Report – In New Hampshire, the LLCs do not file a Franchise Tax Report. LLCs in New Hampshire file the Annual Report that reflexes all the information regarding the LLC.
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 New Hampshire
In the state of New Hampshire an LLC has to pay two types of taxes to the state Department of Revenue:
- State Interest & Dividends Tax
- Business Profits Tax
Unlike most other states in the US, New Hampshire does not have a Sales Tax or State Income Tax.
State Interest & Dividends Tax
One has to pay income tax on any money you pay to yourself as a business owner. In New Hampshire there is no state income tax, instead, you’ll be taxed a percentage on any interest and dividends income. The State Interest & Dividends tax rate in New Hampshire is 5%.
Business Profits Tax
If your LLC generates less than $50,000 in gross revenue in a tax year, then you’ll not be required to file for business profit tax. The Business Profit Rate in New Hampshire is 7.7% currently.
An LLC is commonly treated as a pass-through entity for federal income tax. This states that the LLC itself is not bound to pay taxes on business income. Instead the members of the LLC pay taxes on their share of the LLC’s profits. An LLC employee has to pay two kinds of Federal Taxes. Those are:
Federal Self-Employment Tax
Every member or manager of the New Hampshire LLC earning profit out of the LLC has to pay the Federal Self-Employment Tax (also known as the Social Security or Medicare Tax), 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 New Hampshire is 15.3%. Both the employer and the employee withhold 7.65% of their taxable wages, which results in the current federal tax rate of 15.3%. To deduct your LLC’s expenses from the income earned, you must calculate the Self-Employment Tax your LLC owes.
Federal Income Tax
Like State Income Tax, this tax also applies to the earnings you make in your LLC. The Federal Income Tax Rate is subject to 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 pays Federal income tax on profits you take out of the business, allowances, and less certain deductions.
Employee & Employer Taxes
Any LLC that has employees has to pay different kinds of taxes that are applicable to all the employees. The federal employer tax starts with obtaining a federal employer identification number. The Employee & employer tax implications are different from all the other types mentioned above. Irrespective of whether you withhold the Federal Tax or not, each employee has to file an individual Tax return.
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. New Hampshire 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 New Hampshire.
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 New Hampshire 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 New Hampshire 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 New Hampshire
Any LLC operating in New Hampshire is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.
Unlike corporations, LLCs are considered “pass-through” entities, meaning they do not pay federal income taxes at the entity level. Instead, the profits and losses of the LLCs are passed through to the individual members, who then report these amounts on their personal tax returns. This “pass-through” taxation structure provides an advantage to LLC owners, as it helps avoid the problem of double taxation common in corporations.
In New Hampshire, LLCs are not subject to a state-level income tax. This simplifies the tax obligations for LLCs operating in the state. However, LLC members are still responsible for reporting their LLC income on their individual tax returns.
Individual members can choose to be taxed in either of two typical IRS classifications for LLCs: as a partnership or as a disregarded entity (for LLCs with a single member). In partnership tax classification, LLC members file IRS Form 1065 and issue Schedule K-1 to the members, summarizing their share of LLC profits or losses. Each LLC member then includes this information on their personal tax return (Form 1040) using Schedule E. For LLCs with a single member, the LLC’s income and expenses are reported on Schedule C of the member’s individual tax return.
New Hampshire employs the Business Profits Tax (BPT) and Business Enterprise Tax (BET) for businesses operating in the state. However, these taxes do not directly apply to LLCs. Instead, if an LLC engages in activities that trigger these taxes, it must file the appropriate forms and pay the taxes applicable to that activity, which aligns with the philosophy of LLCs being pass-through entities.
It’s important to note that LLCs may have additional tax requirements if they have employees or interactions with specific industries regulated by different laws that affect taxed obligations. Business owners must be aware of any additional taxes they may have to pay based on their specific circumstances.
While understanding how LLCs pay taxes in New Hampshire is vital for every owner, seeking professional advice from a certified accountant or tax attorney is highly recommended. Tax law can be complex, and it’s crucial to ensure accurate tax reporting which complies with federal and state requirements. By seeking professional guidance, business owners can confidently fulfill their tax obligations and maximize their LLC’s tax benefits.
In summary, LLCs in New Hampshire enjoy the benefit of pass-through taxation at both the federal and state levels. While New Hampshire does not impose state-level income taxes on LLCs, individual members are required to report their LLC income on personal tax returns. Familiarizing oneself with the specific tax classifications and requirements for LLCs is essential to ensure compliance with tax regulations and optimize the benefits of this business structure.
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.