New Jersey LLC Tax Structure – Classification of LLC Taxes To Be Paid


Steve Goldstein
Steve Goldstein
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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 Jersey, 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 an LLC in New Jersey and related aspects.

Classification of New Jersey 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:

  1. 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.
  2. Federal Tax Identification Number – An LLC with employees must obtain a Federal Tax Identification Number. New Jersey does not have a separate State Tax Identification number.
  3. State Employer Taxes – If an LLC has employees on the payroll, it must pay state employer taxes in New Jersey. These taxes are handled through New Jersey Workforce Commission.
  4. Franchise Tax Report – In New Jersey, the LLCs do not file a Franchise Tax Report. Because they don’t have any Franchise Tax. Instead, they file an Annual Report with the Secretary of State.

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 Jersey

An LLC in the state of New Jersey has to pay two main types of taxes to the New Jersey Division of Taxation:

State Income Tax

While representing your LLC in New Jersey, you pay yourself through the earnings you make from the LLC. You’ll be taxed at the New Jersey income tax rate based on your income. The Standard New Jersey State Tax rate for residents and non-residents ranges from 1.4% to 10.7% depending on your earnings. You may also get the opportunity to claim all the standard allowances & deductions upon filing the tax return.

State Sales & Use Tax

The State Sales & Use tax rate in New Jersey is 6.625%. The New Jersey state does not allow any collection of local sales tax further and the Use Tax is paid directly to the New Jersey Division of Taxation. The New Jersey state provides an extensive list of items to be exempted from sales tax.

Corporation Business Tax

New Jersey does not levy a tax on certain businesses for the right to exist as a legal entity and do certain business in the state. However, the state implies Corporation Business Tax, which roughly serves the same purpose. LLCs are exempt from paying the corporation business tax unless they file their taxes as corporations.

Federal Self-Employment Tax

The LLC doesn’t file its own federal return, instead, the members who take out the profit from the LLC must pay the self-employment tax.

The Federal Self-Employment Tax applies to all the earnings of an LLC member. The Federal Self-Employment Tax rate in New Jersey is 15.3%. The members can deduct half of the tax paid from their adjusted gross income.

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, 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.

In some states, a member has to pay tax on LLC income that exceeds a certain amount. While other states may require the LLC to pay an annual fee.

Employee & Employer Taxes

There are certain payroll taxes that both the employees and the employers pay. The Employee & employer tax implications are different from all the other types mentioned above. All employees of an LLC have to collect and withhold the Payroll tax at the time of receiving the salary. Whether you withhold the Federal Tax or not, each employee has to file an individual Tax return. In New Jersey, all the employers are subject to a 1% tax on their gross payroll.

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 Jersey 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 Taxes

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:

C-Corporation

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.

C-corporation Taxes

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.

S-Corporation

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.

S-corporation 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 Jersey.

Liabilities

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.

Taxation

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 Jersey 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 Jersey 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 LLCS- CorporationC-CorporationSole Proprietorship
TaxationAs 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 TaxationThe LLC does not have Double TaxationThere 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 TaxThe 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/LossAn 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.

FAQ

Which Type of Corporation has double taxation?

C-Corporation. It taxes the dividends of the shareholders at the corporate level as well as at an individual level.

Why is an LLC called a pass-through business entity?

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.

What is the default classification of the LLC?

The LLCs have two default classifications. It can be termed as a single-member LLC or a multi-member LLC.

What should be taken into consideration while changing the default classification of the LLC?

When choosing a different classification for taxation, it is essential to understand the liabilities & taxes applicable in that classification.

How Do LLCs Pay Taxes in New Jersey

One of the key benefits of operating as an LLC is the pass-through taxation structure. This means that the LLC itself does not pay taxes on the income it generates. Instead, the profits and losses of the business “pass through” to the owners, who report this income on their personal tax returns. In New Jersey, LLC owners are required to pay state income tax on their share of the LLC’s profits, as well as any applicable federal taxes.

While the pass-through taxation structure simplifies the tax filing process for LLCs, it can also lead to some complexity when it comes to tax planning. Owners need to be aware of their tax liabilities and ensure that they are setting aside enough funds throughout the year to cover their tax obligations. Additionally, New Jersey imposes a minimum tax on LLCs, which must be paid annually regardless of the business’s profitability.

Another important consideration for LLC owners in New Jersey is the state’s corporate business tax, which applies to all businesses operating in the state, including LLCs. The corporate business tax is based on a business’s net income and is assessed at a rate determined by the state. LLC owners should be aware of their potential tax liability under this tax and plan accordingly to meet their obligations.

In addition to state taxes, LLC owners in New Jersey must also be mindful of federal tax obligations. LLCs are required to file an annual tax return with the IRS, reporting their income and expenses. Depending on the structure of the LLC, owners may also be required to pay self-employment taxes on their share of the business’s profits.

Overall, understanding how LLCs pay taxes in New Jersey is essential for any business owner looking to operate in the state. By staying informed about their tax obligations and planning accordingly, LLC owners can ensure that they remain compliant with state and federal tax laws while maximizing their tax benefits. Consulting with a qualified tax professional can help LLC owners navigate the complexities of tax planning and ensure that they are meeting all of their obligations in a timely and accurate manner.

In Conclusion

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.

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