A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in Rhode Island, 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 Rhode Island LLC and related aspects.
On this page, you’ll learn about the following:
- Classification of Rhode Island LLC Taxes
- LLC Taxes to be Paid in Rhode Island
- 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 Rhode Island 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. Rhode Island 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 Rhode Island. These taxes are handled through Rhode Island Workforce Commission.
- Franchise Tax Report – In Rhode Island, the LLCs submit the form of a Franchise Tax Report to the Rhode Island 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 Rhode Island
An LLC in Rhode Island has to pay two types of taxes to the Secretary of State:
- State Income Tax
- State Sales Tax
State Income Tax
While representing your LLC in Rhode Island, you pay the income tax yourself through the money you pay to yourself. This money gets reflected in your personal Tax return & is calculated at the time of paying the State Income Tax. The Standard Rhode Island State Tax rate ranges from 3.75% to 5.99% depending on your earnings. One gets the opportunity to claim all the standard allowances & deductions upon filing the tax return.
State Sales & Use Tax
The Rhode Island state implies Sales & Use tax on tangible goods & services provided by an LLC. Rhode Island has a single, statewide static tax rate of 7%. The Sales tax is typically collected at the time of purchase and is paid to the state Division of Taxation.
Federal Self-Employment Tax
All members or managers of the Rhode Island LLC earning profit out of the LLC has to pay the Federal Self-Employment Tax. This tac is controlled by the Federal Insurance Contributions Act (FICA). It covers social security, Medicare, and other benefits as well. The Federal Self-Employment Tax rate in Rhode Island currently is 15.3%. An individual is allowed to deduct some of his business expenses from his income when calculating how much self-employment tax you owe.
Federal Income Tax
Just 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 current income tax bracket, your deductions, and filing status.
Employee & Employer Taxes
Any LLC that has employees on the payroll has to pay different kinds of taxes that are applicable to all the employees. Both the employer and the employee withhold 7.65% of their taxable wages, which results in the current federal tax rate of 15.3%. All employees of an LLC have to collect and withhold the Payroll tax at the time of receiving the salary.
Regardless of whether an employee withholds the federal tax and state income 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. Rhode Island 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 Rhode Island.
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 Rhode Island 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 Rhode Island 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 Rhode Island
Any LLC operating in Rhode Island is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.
If you are considering starting an LLC in Rhode Island, there are several important questions to ask. First, you need to know how you are required to pay taxes. This will help you avoid unexpected costs or penalties.
There are two different types of income taxes you will need to pay in Rhode Island. The first is self-employment tax, which is administered through the Federal Insurance Contributions Act. It covers Social Security, Medicare, and other benefits. The second is employer taxes, which are administered by the Department of Taxation. When you employ a worker, you must purchase workers’ compensation through a private insurer.
Another tax you will need to pay in Rhode Island is the business corporation tax. The rate is generally flat 7% of net income. However, a business with annual gross income exceeding $100,000 must file an annual report with the Division of Taxation taxpayer portal. A company that makes a retail sale to customers must register and submit periodic sales tax returns.
You will also need to register for an Employer Identification Number, or EIN. An EIN is a nine-digit number issued by the Internal Revenue Service that uniquely identifies your business. You can apply for an EIN online through the IRS website. Alternatively, you can register for an EIN through a local office. Many businesses in Rhode Island are required to have an EIN, and you may be asked to provide one when you open a bank account.
Whether you are opening a bank account or using an EIN to process employee payroll, it’s important to stay on top of your state filings. This will keep your business current with the state, and avoid accidentally omitting any information. Depending on your business, you may also need to renew your business license.
If you are selling goods to clients, you will need to register with the Department of Taxation and receive a retail sales permit. In order to receive this permit, you must show that you are in good standing with the Secretary of State.
In addition to paying income taxes, you will need to register for an employer identification number and withholding taxes. Rhode Island employers must register with the Department of Transportation and the Department of Employment. They must also register with the Employer Tax Section of the Department of Taxation to pay unemployment insurance and self-employment taxes.
Rhode Island offers simplified methods for filing Articles of Organization and Annual Reports. For a small fee, you can also get an Employer Identification Number. These documents are a critical part of your business and form a written contract between you and your LLC.
Your Articles of Organization can be filed in person, by mail, or online. They must contain the name of your LLC, the name and address of your registered agent, and the tax status of your LLC. Choosing a memorable name is essential. The name can’t be too similar to other entities or imply affiliation with the government.
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.