Rhode Island LLC Tax Structure – Classification of LLC Taxes To Be Paid


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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 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.

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:

  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. Rhode Island 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 Rhode Island. These taxes are handled through Rhode Island Workforce Commission.
  4. 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 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 Rhode Island.

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 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 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 Rhode Island

Rhode Island law recognizes LLCs as a separate legal entity, distinct from their owners. This important distinction brings various tax implications. One of the major advantages of LLCs is their “pass-through” taxation, where the profits and losses of the business ‘pass through’ to each individual owner’s tax return. This is similar to the tax treatment of partnerships, thus potentially reducing taxes on business income.

For most LLCs, federal taxes are determined at the individual level, not the entity level. The federal government does not tax the LLC directly; rather, it is up to each member of the LLC to report and pay taxes on their share of the profits based on their individual tax brackets. This system allows for simplicity and avoids the phenomenon of double taxation that traditional corporations often face.

In Rhode Island, LLCs are also subject to state taxation, although the specifics can vary. For most LLCs, the state tax treatment generally mirrors federal tax treatment. The Rhode Island Division of Taxation treats the LLC as a disregarded entity, just as the federal government does. This means that LLC members are responsible for reporting and paying state income taxes based on their share of the LLC’s profits.

Some LLCs, however, may choose to be treated as partnerships or corporations for tax purposes in Rhode Island. This election is made by filing the appropriate forms with the Rhode Island Division of Taxation. If an LLC decides to be treated as a partnership for tax purposes, it must file a Rhode Island Partnership Return.

On the other hand, if an LLC wants to be treated as a corporation, it must file a Rhode Island Corporation Tax Return. In this case, the LLC could be subject to both federal and state corporate income taxes. The tax rate for corporations is generally higher than the individual tax rate, which may influence the decision to elect corporate tax treatment.

It is important for Rhode Island LLCs to meet the state’s tax reporting requirements to ensure compliance. LLCs must acquire an Employer Identification Number (EIN) from the IRS, even if they do not have employees. Additionally, LLCs with multiple members must file an Annual Report with the Rhode Island Secretary of State, providing key information such as the business’s address and member names.

Understanding how LLCs pay taxes is crucial for both owners and potential investors. LLCs offer flexibility and potential tax benefits, making them an attractive option for many businesses. Yet, compliance with federal and state tax requirements is essential to ensure legal operation and avoid any penalties. By carefully following the guidelines provided by the Rhode Island government, LLCs can fully embrace the benefits of their chosen business entity structure.

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.


About Author & Editorial Staff

Steve Goldstein, founder of LLCBuddy, is a specialist in corporate formations, dedicated to guiding entrepreneurs and small business owners through the LLC process. LLCBuddy provides a wealth of streamlined resources such as guides, articles, and FAQs, making LLC establishment seamless. The diligent editorial staff makes sure content is accurate, up-to-date information on topics like state-specific requirements, registered agents, and compliance. Steve's enthusiasm for entrepreneurship makes LLCBuddy an essential and trustworthy resource for launching and running an LLC.

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