A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in Utah, 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 Utah LLC and related aspects.
On this page, you’ll learn about the following:
- Classification of Utah LLC Taxes
- 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 Utah 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. Utah 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 Utah. These taxes are handled through Utah Workforce Commission.
- Franchise Tax Report – In Utah, the LLCs file a Franchise Tax Report with the Utah Tax Commission.
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 Utah
According to the Utah classification of LLC taxes, an LLC which is operating in the state of Utah is required to pay the below-specified taxes:
State Income Tax
Any amount you pay to yourself as a business owner is entitled to Utah income tax. These revenues are reflected on your tax return. You’ll be taxed at Utah’s ordinary rates, with regular allowances and deductions available. Employees must likewise pay state income tax. Utah has a 4.95 percent flat tax for all income levels.
State Sales & Use Tax
You may be required to collect sales tax and pay it to the Utah State Tax Commission if you sell tangible goods or certain types of services. The sales tax in Utah is collected at the point of transaction. The current sales tax rate in Utah is 4.85 percent. However, an additional sales tax is levied by some counties, municipalities, and towns. These additional charges are variable, making the total sales tax range from 6.10 percent to 9.05 percent.
State Franchise Tax
This tax is also known as Business Privilege Tax in some states, due to the fact that operating an LLC in a state is a privilege. The state of Utah does not levy any franchise tax.
Federal Self-employment Tax
Any profit bearer or management of a Utah LLC who turns a profit must pay the Federal Self-Employment Tax. The profits of individual members of management are subject to the federal self-employment tax. The federal self-employment tax in Utah is 15.3%.
Federal Income Tax
Profits earned by your LLC are taxed at the federal level in addition to the state level. Your federal income tax rate is determined by your revenues, your LLC’s industry, the proper LLC tax bracket, reductions, and other several considerations.
Employer & Employee Tax
When you have employees, you have certain employment tax requirements to meet and documentation to file. Employers doing business in Utah must deduct Utah individual income tax from their employees’ salaries, with a few exceptions. At the time of receiving a payout, all LLC employees are required to collect and withhold the Payroll tax. Your employees may be obliged to submit their own tax forms no matter whether you withhold federal and state income taxes or not.
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. Utah 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 Utah.
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 Utah 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 Utah 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 Utah
Any LLC operating in Utah is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.
Limited Liability Companies (LLCs) have become an increasingly popular form of business structure in Utah and across the United States. The primary reason for entrepreneurs choosing LLCs over other options like sole proprietorships or corporations is due to the liability protection that LLCs offer. LLCs are seen as hybrid entities, combining the benefits of a corporation with the ease of administration and taxation of a partnership.
However, when it comes to taxes, many new LLC owners in Utah can get overwhelmed and confused. This confusion is not limited to first-time business owners, but also includes experienced business owners who are new to the LLC structure. The main question then arises, how do LLCs pay taxes in Utah?
To answer this question, one must first understand that LLCs are classified as “pass-through” entities for federal tax purposes, meaning LLCs do not pay taxes directly to the government. Instead, profits and losses of the LLC are passed on to the individual members of the company, who pay taxes on their share of the profits or losses on their personal income tax returns.
In Utah, however, LLCs are treated as a separate legal entity for state taxation purposes. Utah State requires LLCs to file an annual report and pay an annual fee. The amount of the fee is dependent on the total value and income of the LLC. Additionally, Utah LLCs must pay a state business income tax based on their net income earned within the state. This business income tax rate ranges from 5% to 6.98% and is applied to the LLC’s Utah taxable income.
Moreover, it’s essential to understand that since LLCs are pass-through entities, individual members may be responsible for paying both state and federal self-employment taxes. These taxes are based on the profits of the individual members and are used to fund social security and Medicare.
In the case that an LLC makes an election to be taxed as a corporation, it will be subject to federal corporate income taxation, while the members will still have the liability protection of an LLC. In Utah, corporations must file a Utah corporate income tax return which is subject to a 5% flat rate on their Utah taxable income.
LLCs that have employees must also pay employment taxes such as state unemployment insurance tax, federal unemployment insurance tax, and federal payroll taxes like Social Security, Medicare, and worker’s compensation. Along with that, they need to provide a W-2 form to their employees indicating the taxable wages received and other withholdings like Social Security, Medicare, federal, and state income tax.
In conclusion, LLC owners in Utah must keep in mind that while they may receive liability protection and ease of administration, they must deal with the multi-layered tax reporting, depending upon how they elect to be taxed federally and state-wise recognizing their type of services, assets, and business profits. Before forming an LLC, it’s always a good idea to speak to a tax professional to ensure you are aware of all the tax implications and report the obligations of the structure. Ultimately, however, by conducting vast-scale research and working with tax professionals, LLC owners can ensure they remain in compliance and uphold a positive reputation for their business while demonstrating following Utah tax regulations.
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.