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 Mexico, 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 Mexico LLC and related aspects.
On this page, you’ll learn about the following:
- Classification of New Mexico LLC Taxes
- LLC Taxes to be Paid in New Mexico
- 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 Mexico 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 Mexico 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 Mexico. These taxes are handled through New Mexico Workforce Commission.
- Franchise Tax Report – In New Mexico, the LLCs have to file the Franchise Tax Report. The report is submitted to the New Mexico Department of Revenue.
Federal Tax Classifications
When LLCs was 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 Mexico
Two main types of taxes, that you might have to pay to your state Department of Revenue:
- New Mexico State Income Tax &
- New Mexico State Sales Tax
State Income Tax
In New Mexico, you pay yourself through the earnings, while representing an LLC. These earnings get reflected in your personal Tax return & are calculated at the time of paying the Income Tax.
The Standard New Mexico State Tax rate ranges between 1.7% to 4.9% depending on your earnings. You may also get the opportunity to claim all the standard allowances & deductions upon filing the tax return.
Gross Receipts Tax (Sales Tax)
The Gross Receipts Tax (GRT) rate varies throughout the state from 5.125% to 8.6875%. The GRT is applied on the basis of the location of the business. The New Mexico state provides an extensive list of items (food, medications, clothing, gas) to be exempted from GRT.
New Mexico levy a tax on certain businesses for the right to exist as a legal entity and do certain business in the state. $50 is taken as yearly franchise tax from every LLC in the state.
Federal Self-Employment Tax
Every member or manager of the New Mexico LLC earning profit out of the LLC has to pay the Federal Self-Employment Tax (it also includes the Social Security Tax & 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 New Mexico is 15.3%. To deduct your LLC’s expenses from the income earned, you must calculate the Self-Employment Tax your LLC owes. The IRS does not require a non-active member to pay self-employment taxes.
Federal Income Tax
New Mexico’s overall income tax system is modeled after the Federal Income Tax. The state has fewer income tax brackets and significantly lower rates. 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
The employees on the payroll in an LLC have to play 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. 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 Mexico 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 Mexico.
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 Mexico 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 Mexico 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 Mexico
Any LLC operating in New Mexico is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.
One important aspect of LLC taxation in New Mexico is the default classification known as “pass-through taxation.” This means that, by default, LLCs do not pay taxes at the entity level. Instead, the profits and losses “pass through” to the individual members of the LLC, who then report them on their personal tax returns. This is a significant advantage as it eliminates the risk of double taxation that can occur with other business entities like corporations. LLC members only pay taxes at a personal level, based on their individual income tax rates.
Moreover, New Mexico offers another tax benefit for LLCs called the gross receipts tax deduction. This tax deduction allows LLCs to subtract gross receipts from their taxable income, effectively reducing the amount of tax they owe. Gross receipts tax is a tax on the gross revenue generated by a business, and it is often collected at the point of sale or service. By being able to deduct this tax from their taxable income, LLCs can lower their overall tax liability.
However, it is important to note that New Mexico, like many other states, treats LLCs differently if they have multiple members versus a single member. An LLC with multiple members is usually classified as a partnership for tax purposes. As mentioned earlier, the LLC does not pay taxes at the entity level, but rather the profits or losses pass through to the individual members. These members then report their share on their personal tax returns, according to their ownership percentages.
On the other hand, a single-member LLC, as the name implies, has only one owner. For tax purposes, a single-member LLC is considered a “disregarded entity” by the Internal Revenue Service. This means that the LLC is treated as a sole proprietorship, and the owner reports the business’s profits and losses on their individual tax return. For these entities, the LLC itself does not file a separate tax return.
In conclusion, understanding how LLCs pay taxes in New Mexico is crucial for anyone owning or considering forming an LLC. The pass-through taxation structure that LLCs enjoy at the state level allows the profits and losses of the business to transfer directly to the individual members for reporting on their personal tax returns. Additionally, the gross receipts tax deduction provides another tax benefit for LLCs, further reducing their tax liability. By comprehending these tax implications, entrepreneurs can make informed decisions about structuring their businesses and take advantage of the available tax advantages.
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.