A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in Oregon, 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 Oregon LLC and related aspects.
On this page, you’ll learn about the following:
- Classification of Oregon LLC Taxes
- LLC Taxes to be Paid in Oregon
- 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 Oregon 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. Oregon 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 Oregon. These taxes are handled through Oregon Workforce Commission.
- Franchise Tax Report – In Oregon, the LLCs file a Franchise Tax Report with the Oregon 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 Oregon
As stated in the Oregon classification of LLC taxes, a registered LLC owner in the state of Oregon is liable to pay these taxes:
State Income Tax
Income Tax is levied on the earnings you get from your business. Depending on Oregon’s rates, you need to pay the State Income Tax based on the income you earn. The State Income Tax rates are variable, ranging from 5% to 9.9%, in Oregon.
State Sales Tax
Oregon is among the only 5 states where Sales & Use Taxes are exempted for all kinds of businesses.
State Corporate Activity Tax
The Oregon Corporate Activity Tax (CAT) is a fee charged for the opportunity of doing business in the state, equivalent to the franchise tax in other states. The activity tax is calculated based on the commercial activities of the business. It means the amount realized in all sorts of transactions carried out with respect to the business. All types of business entities in Oregon state are liable to pay the Corporate Activity Tax.
Federal Self-employment Tax
All the members who get earnings from the LLC must pay self-employment tax. This fee is monitored by the Federal Insurance Contributions Act (FICA), which provides Social Security, Medicare, and several other benefits. It covers every penny you take out of your company. The current rate of the self-employment tax is 15.3 percent.
Federal Income Tax
Any earnings from your LLC must be subject to regular federal income tax. This value is influenced by your earnings, tax rate, deductions, and filing status.
Just like the state income tax, only the profits you take out of your business are subject to federal income tax, minus some deductions and exclusions. This covers, among other things, tax-free income, business expenses, and other deductions for healthcare and retirement programs.
Employee & Employer Tax
If you have hired working staff for your business, you are liable to pay employee tax as well as other state-related obligations. You also need to withhold and pay employee income tax to Oregon’s Department of Revenue. If the employer withholds employees’ income taxes, in such a case, employees should file the tax returns.
Based on the type of products or services offered by your business, there are some other taxes that you may have to pay. Some of them are listed below:
Forest Products Harvest Tax
If your business is based on the harvested timber from land under Oregon’s state authority, then you are liable to pay this type of tax. Timber from most tribal regions is exempted from Forest Products Harvest Tax. No matter whether you are harvesting timber from government-owned or any private land, you need to pay the taxes. For more information, you can visit- Oregon Timber & Forest Harvest Tax.
Vehicles Privilege & Use Tax
The vehicles privilege tax is applicable if you are involved in a vehicle selling business in the state of Oregon. You are required to pay vehicle use taxes on the vehicles used for business in the state of Oregon. For further details, you can visit- Vehicle Privilege & Use Tax.
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. Oregon 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 Oregon.
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. An Oregon 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 Oregon 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
|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.
|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
|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.
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.
How Do LLCs Pay Taxes in Oregon
In Oregon, LLCs are subject to income tax. Unlike corporations, which are taxed separately from their owners, LLCs are considered pass-through entities for tax purposes. This means that income generated by the LLC is not taxed at the entity level, but rather passed through to the members or owners who report it on their personal income tax returns. This simplicity is one of the reasons why many entrepreneurs opt for forming LLCs.
LLCs in Oregon can choose to be treated as partnerships or as corporations for tax purposes. If an LLC chooses to be treated as a partnership, it needs to file an Oregon Partnership Return of Income (Form OR-65). This tax form includes detailed information on the income generated by the LLC and how it is divided among the members. Each member receives a Schedule K-1 form, indicating their share of the company’s profit or loss, which they report on their own individual tax returns.
Alternatively, LLCs can elect to be taxed as corporations by filing Form 8832 with the Internal Revenue Service (IRS). This classification can be beneficial if the LLC wants to take advantage of specific corporate tax treatment, such as potential lower tax rates. In such cases, the LLC would then file an Oregon Corporate Excise Tax Return (Form OR-20) annually.
It is worth noting that LLCs in Oregon may also have additional taxes to pay, such as the Oregon Minimum Tax, which is applicable to all entities conducting business in the state. This is an annual tax with a minimum amount that must be paid, regardless of the LLC’s profitability. LLCs with significant income may also be subject to a special assessment, known as the Corporate Activity Tax.
While it’s important for LLCs in Oregon to comply with tax obligations, business owners should also explore possible deductions and credits. LLCs with employment expenses, property expenses, or making qualifying investments may be eligible for deductions or credits, thus reducing their overall tax liability.
Given the complexities of the tax system and the potential consequences of non-compliance, it is strongly advised that Oregon LLCs seek the guidance of experienced accountants or tax professionals who can navigate through the ins and outs of the system. A qualified professional can ensure compliance while also exploring all possible tax planning strategies to maximize benefits for the LLC and its members.
In conclusion, owning an LLC in Oregon entails specific tax responsibilities that greatly impact its members. Understanding the tax framework is paramount to the long-term financial health of the company. By aligning with tax professionals and staying informed, businesses can effectively manage their tax obligations, and ultimately contribute to a thriving business landscape within the state of Oregon.
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.