Ohio LLC Tax Structure – Classification of LLC Taxes To Be Paid

A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in Ohio, 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 Ohio LLC and related aspects.

Classification of Ohio 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. Ohio 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 Ohio. These taxes are handled through Ohio Workforce Commission.
4. Franchise Tax Report – In Ohio, 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 Ohio Department of Taxation.

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 Ohio

Based on the Ohio classification of LLC taxes, as an owner of an LLC in the state of Ohio, you are required to pay the following taxes to the Ohio Department of Revenue.

State Income Tax

As a business owner, the money you pay yourself is referred to as your earnings. This money will be subject to Ohio income tax. These earnings are included in your individual tax return. The income tax rates in Ohio range from 2.85 percent to 4.797 percent. While filing your tax return, you can claim all your deductions and different types of allowances.

State Sales & Use Tax

Ohio sales and use tax is collected on physical items like furniture, cars, raw materials, electrical appliances, etc., and services that are subjected to rent, lease, or retail selling. If your LLC deals in selling such products and services, you are liable to collect and pay sales and use tax. The rate of Sales and Use tax in Ohio is 5.75%.

State Franchise Tax

This is a special type of tax that is levied in some states for permitting any LLC to do business in those states. In some states, it is also known as Business Privilege tax or Transaction Privilege Tax, referring to the privileges of involving in business in the state. Since 2008, Ohio has not had a Franchise Tax. 

Federal Self-employment Tax

Self-employment or social security tax is the tax paid by the profit-holders or managers of an LLC. It is levied on the collective earnings from your business. Currently, LLC owners in Ohio are liable to pay Self-employment tax at the rate of 15.3%.

Federal Income Tax

Any earnings you take out of your LLC must also be subject to regular federal income tax. Your income tax liability is determined by your wages, current tax bracket, deductions, and filing status.

Only the profits you take out of the firm are subject to federal income tax, minus certain deductions and allowances. This includes your tax-free income, as well as business expenditures and other deductions for things like healthcare and retirement programs.

Employee and Employer Taxes

When you have employees, you have particular employment tax responsibilities to pay and papers to file as the employer. Employers doing business in Ohio are liable for withholding Ohio individual income tax from their employees’ compensation, with limited exceptions. At the time of receiving a salary, all workers of an LLC must collect and withhold the Payroll tax. Your employees may need to submit their own tax returns, regardless of whether you withhold federal and state income taxes.

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. Ohio 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 Ohio. 

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. An Ohio 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 an Ohio 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 Ohio

Any LLC operating in Ohio is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.

Limited liability companies (LLCs) are popular business entities, particularly among small business owners, due to the limited personal liability they provide. LLCs are set up either as pass-through entities or as S-Corps. In Ohio, LLCs are taxed like sole proprietorships, partnerships, and S-Corps, which means they will pay taxes on the income they earn, but not on the profits they make.

Income Tax

LLCs in Ohio are required to pay income taxes on their net income. This is the same as any other business entity, and LLCs must pay taxes on the amount of money that is left after subtracting expenses from gross income. LLCs are generally considered pass-through entities, which means that the income generated by the business is passed through to the owners, who then pay taxes on their personal income tax returns. The owners of the LLC are responsible for reporting and paying taxes on their individual income tax returns.

Self-Employment Tax

LLCs in Ohio are subject to the self-employment tax. This is the same as the Social Security and Medicare taxes that are paid by employees of corporations. When an LLC has employees, the employer is responsible for paying the employer’s portion of the taxes. However, when the LLC is a pass-through entity, the owners of the LLC are responsible for paying their own self-employment taxes. The self-employment tax is calculated on the net income of the LLC, and the owners are required to pay this tax on their individual income tax returns.

Sales Tax

LLCs in Ohio are required to collect and remit sales tax on any goods or services they sell. The Ohio Department of Taxation requires businesses to register for a sales tax license and obtain a sales tax permit. Once the LLC is registered, it is responsible for collecting and remitting sales tax on any taxable goods or services it sells. The LLC is responsible for calculating the correct amount of sales tax and submitting the appropriate remittance to the state.

Employment Taxes

LLCs in Ohio are responsible for withholding and paying employment taxes on any employees they have. This includes federal and state income tax, Social Security and Medicare taxes, and state and local unemployment taxes. The LLC is responsible for withholding the appropriate amount of taxes from employee paychecks and submitting the appropriate payments to the federal and state governments. The LLC is also responsible for filing the required employment tax forms with the IRS and the Ohio Department of Taxation.

In addition to the taxes outlined above, LLCs in Ohio may be subject to other taxes, such as franchise taxes and local taxes. It is important for LLCs to understand the tax requirements of the state in which they operate, as these requirements may vary from state to state. Consulting with a qualified tax professional can help LLCs ensure that they are in compliance with all applicable tax laws.

FAQ

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.