A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in Virginia, 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 Virginia LLC and related aspects.
On this page, you’ll learn about the following:
- Classification of Virginia LLC Taxes
- LLC Taxes to be Paid in Virginia
- 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 Virginia 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. Virginia 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 Virginia. These taxes are handled through Virginia Workforce Commission.
- Franchise Tax Report – In Virginia, the LLCs file a Franchise Tax Report with the Virginia Department of Tax.
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 Virginia
The Virginia Tax Commission has imposed below mentioned state taxes on an LLC operating in the state, based on the Virginia classification of LLC taxes:
State Income Tax
Income tax is levied on the amount earned from your business. Virginia levies standard rates of income tax which are applicable for deductions and allowances. The income tax will be charged to all of your employees. In Virginia, charges of income tax vary from 2% to 5.75% based upon the amount earned.
State Sales & Use Tax
Typically any product or service sold, rented out, or leased within the boundaries of Virginia is applicable to Sales and use tax unless it comes under the list of exemptions. For most of the regions, the sales tax is chargeable at the rate of 5.3%. Some counties or cities may have an additional sales tax. However, food and hygiene products are charged at 2.5%.
State Franchise Tax
This special type of tax is levied by several states. However, some of the states do not apply Franchise tax on LLCs. Virginia is one of them.
Federal Self-employment Tax
All members of management who make gains out of the LLC must pay self-employment tax. The Federal Insurance Contributions Act (FICA) regulates federal income taxes. The current self-employment tax rate in the state of Virginia is 15.3 percent. You’ll be able to reduce some of your business payments from your salary when calculating how much self-employment tax you owe.
Federal Income Tax
Similar to state income tax, your profits earned from the LLC are subject to federal income taxes as well. Whatever amount you have to pay for income tax, is calculated on the basis of the amount earned, your filing status, any sort of allowances, and the tax bracket.
Only the profits are subject to the federal income tax. This means that the tax is not applicable on any kind of allowances and deductions, like tax-free income, your expenses made for the purpose of business, any sort of healthcare plans, etc.
Employer & Employee Tax
If you have employed paid personnel for your business, you are entitled to withhold and reduce the amount equal to state income tax from their payout. Virginia rules and laws are in accordance with the federal law system. This means that if as per the federal laws, you can withhold taxes, then those taxes can be withheld from payment in Virginia as well.
These taxes are levied on the sales and use of some special products. An LLC based in the state of Virginia is liable to pay excise tax on the following items:
Apple Excise Tax
Apple excise tax is charged on someone who produces apples to be sold in the market. This tax is charged at the rate of 2.5 cents per tree run bushel. To get more information about this, visit- Apple Excise Taxes.
Egg Excise Tax
This tax is imposed on eggs or egg products that are sold or used in the state of Virginia. The rate at which egg excise tax is charged at the rate of 5 cents for each case of shelled eggs. One case of eggs contains 30 dozen eggs. To know more about this tax, you can visit- Egg Excise Taxes.
Peanut Excise Tax
Any business dealing with the processing of peanuts is liable to pay the peanut excise tax. A tax of 25 cents is charged for every 100 pounds of peanuts. Visit- Peanut Excise Taxes to get more details.
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. Virginia 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 Virginia.
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 Virginia 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 Virginia 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 Virginia
Any LLC operating in Virginia is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.
As an LLC, how your business is taxed depends on the classification chosen for tax purposes. The Internal Revenue Service (IRS) allows for flexibility in this matter, offering LLCs multiple classification options. By default, a single-member LLC, where the company has only one owner, is considered a disregarded entity. This implies that the LLC itself does not pay taxes directly; instead, the income and expenses pass through to the owner who reports them on their personal income tax return.
On the other hand, LLCs with multiple members have the choice to be taxed as a partnership or elect to be treated as a corporation. If the LLC chooses to be taxed as a partnership, the income and expenses are still passed through to the members, who then report them on their individual tax returns. This method avoids the double taxation that occurs in corporations, where both the company and individuals may have to pay separate taxes on corporate profits.
However, a Virginia LLC also has the option to file for corporate taxation status. Under this approach, the LLC is treated as a separate entity and pays taxes to the state. In such cases, the LLC must complete Form 500 for Virginia corporation income tax return. It is important to note that the federal classification chosen does not automatically dictate the LLC’s tax treatment at the state level. Virginia tax law assesses LLC income taxation separately, meaning that an LLC classified as a partnership or disregarded entity at the federal level may still choose to be treated as a corporation in Virginia.
When an LLC elects to be taxed as a corporation, it must meet additional reporting and filing requirements. Corporations, including those structured as LLCs, are required to file annual Virginia corporation income tax returns, providing detailed information about their income, deductions, credits, and tax liability calculations. Failure to fulfill these obligations can result in penalties, including fines, and potentially even loss of the corporation’s status.
Understanding the tax obligations of your LLC and fulfilling them on time is essential for the smooth operation of your business. Consulting with a qualified tax professional or accountant who is well-versed in Virginia tax regulations for LLCs is highly advisable. They can assist you in navigating the intricate tax landscape, ensuring that your LLC remains in good standing with the state while minimizing your tax burden.
By equipping yourself with the necessary knowledge about your LLC’s tax requirements, you demonstrate your commitment to running your business responsibly. Maintaining meticulous tax records and collaborating with tax professionals will help you navigate the sometimes complex requirements, confidently meeting your tax responsibilities year after year.
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 Virginia
LLCs in Virginia have the advantage of being treated as “pass-through” entities for federal tax purposes. This means that the LLC itself does not pay taxes directly to the federal government. Instead, any profits or losses generated by the LLC are passed through to its owners or members, who report and pay these taxes on their individual tax returns. This pass-through structure allows for the avoidance of double taxation, as the business income is only taxed once at the individual level.
In Virginia, the tax treatment of LLCs at the state level follows the same “pass-through” principle as the federal level. The state imposes no additional taxes on the LLC itself. Rather, the income or losses are reported by the LLC members on their individual Virginia state income tax returns. However, it is essential for business owners to be aware that specific fees and minimum taxes might still apply.
LLCs in Virginia are also subject to the state’s Corporate Income Tax. If the LLC prefers to be taxed as a corporation for federal purposes, or if it has elected to be treated as one, it becomes liable for this tax. Corporate Income Tax rates vary based on the amount of taxable income earned by the corporation.
In addition to income taxes, Virginia LLCs should be mindful of their obligations related to sales and use tax. Sales tax is imposed on the retail sale, lease, or rental of taxable tangible personal property, as well as certain taxable services, in Virginia. Depending on the nature of the LLC’s activities, it may need to register and collect sales tax from customers.
Furthermore, LLCs will likely need to navigate employment tax obligations, particularly if they have hired employees. These obligations include withholding federal income tax, Social Security and Medicare taxes, and federal unemployment tax.
Virginia provides ample resources to guide LLC owners through tax obligations. The Department of Taxation offers comprehensive information on their website, including specific requirements, tax forms, and instructions that can assist businesses in meeting their tax obligations effectively.
Business owners should consider seeking professional tax advice to ensure compliance with all applicable tax laws. Consulting with tax professionals, such as accountants or tax attorneys, can provide valuable insights tailored to the unique circumstances of each LLC.
While understanding how LLCs pay taxes in Virginia may appear daunting at first, it is a necessary step for any business owner. By acquiring knowledge on tax responsibilities and availing oneself of available guidance and expertise, LLC owners in Virginia can fulfil their obligations while navigating the state’s tax landscape. Such understanding and compliance contribute to a healthy business environment, benefiting both the entrepreneurs themselves and the overall prosperity of the Commonwealth.
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.