A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in Wisconsin, 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 Wisconsin LLC and related aspects.
On this page, you’ll learn about the following:
- Classification of Wisconsin LLC Taxes
- LLC Taxes to be Paid in Wisconsin
- 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 Wisconsin 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. Wisconsin 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 Wisconsin. These taxes are handled through Wisconsin Workforce Commission.
- Franchise Tax Report – In Wisconsin, the LLCs submit the form of a Franchise Tax Report to the Wisconsin 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 Wisconsin
In accordance with the Wisconsin classification of LLC taxes, any LLC indulged in business in the state of Wisconsin is required to pay the below-mentioned taxes:
State Income Tax
Every LLC that operates inside Wisconsin’s state borders is required to pay state income taxes. The earnings from your business as an LLC owner are subject to this tax. The earnings must also be reported on an income tax return. This tax is calculated using Vermont’s normal income tax rates, which are calculated using your earnings. In Vermont, the income tax rate ranges from 3.54 percent to 7.65 percent.
State Sales & Use Tax
On the sale of certain products and services, a sales tax is paid to Wisconsin’s governing authority. There may be one or more local sales taxes, as well as one or more special district taxes, in addition to the state sales tax, each of which can range from 0% to 0.50%. Combined sales tax rates in Wisconsin currently range from 5% to 5.6 percent, depending on where the sale is made.
State Franchise Tax
Corporations operating in Wisconsin must pay either a corporate income tax or a corporate franchise tax. The corporate income tax is a tax imposed on the net income of businesses operating in the state. The corporate franchise tax is a fee for doing business in a particular state.
Federal Self-employment Tax
The Federal Self-Employment Tax is payable by each member or administrator of an LLC based in the state of West Virginia who earns a profit. Each partner’s or manager’s profits are subject to the federal self-employment tax. West Virginia has a 15.3% federal self-employment tax. You can calculate the Self-Employment Tax your LLC owes in order to deduct your LLC’s expenses from the money earned.
Federal Income Tax
Federal income tax is paid on all sorts of earnings made from your LLC. It is based on your income, the rate at which you are taxed, reductions, and filing status. Only the gains you take out of the company are subject to federal income tax, with various exemptions and deductions. This covers, among other things, tax-free salary, company costs, and various medicare and retirement plan exemptions.
Employer & Employee Tax
Any LLC with working staff on the payroll is required to pay a variety of taxes that apply to all employees. Employee and employer tax effects are distinct from those of the other types. For example, at the time of receiving a payout, all working staff of an LLC must collect and withhold the Payroll tax. Whether you have withheld the federal tax or not, each employee is required to file a separate 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. Wisconsin 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 Wisconsin.
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 Wisconsin 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 Wisconsin 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 Wisconsin
Any LLC operating in Wisconsin is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.
One key advantage of forming an LLC in Wisconsin is the pass-through taxation feature. This means that the income earned by the LLC is not directly taxed at the entity level, unlike a C corporation. Instead, the profits and losses of the LLC “pass through” to the owners or members of the company. These individuals report their share of the LLC’s income on their personal tax returns and are responsible for paying the corresponding income taxes.
Wisconsin LLCs, similar to other states, can choose from three different tax classifications. They can be treated as a sole proprietorship, a partnership, or as a corporation. The default classification for an LLC with multiple members is a partnership, whereas a single-member LLC is typically classified as a sole proprietorship. However, LLCs do have the option to elect corporate taxation by filing Form 8832 with the IRS. It is important for LLC owners to carefully consider which tax classification is most beneficial to their specific situation.
Regardless of the tax classification chosen, Wisconsin LLCs are generally required to submit the appropriate forms and pay taxes to both state and federal authorities. At the state level, LLCs are subject to the Wisconsin franchise tax, which is calculated based on the LLC’s total authorized and issued shares. The franchise tax, along with an annual report, is due by the 15th day of the 3rd month following the end of the LLC’s fiscal year.
For federal taxes, LLCs classified as partnerships, sole proprietorships, or disregarded entities follow the same tax filing requirements as individual taxpayers. The members or owners of the LLC report the company’s income and losses on their personal tax returns using Schedule C or Schedule E, depending on the nature of their involvement. This pass-through taxation allows profits to only be taxed once at the individual level.
LLCs can also opt for corporate tax treatment by electing to be taxed as an S corporation or a C corporation. If electing to be treated as an S corporation, the LLC must file Form 2553 with the IRS. This triggers the requirement to file a separate tax return for the LLC, Form 1120S, and issue K-1 forms to the individual members. C corporations, on the other hand, file Form 1120 and are subject to double taxation—profits are first taxed at the corporate level, and then shareholders pay personal income tax on any dividends received.
Understanding how LLCs pay taxes in Wisconsin is crucial for business owners looking to establish or operate an LLC in the state. Navigating the complexities of tax requirements can be a daunting task, so seeking professional assistance from tax advisors or certified public accountants is highly recommended. By ensuring compliance with tax regulations and making well-informed decisions regarding the tax classification of their LLC, entrepreneurs can fully enjoy the benefits and advantages that operating an LLC in Wisconsin brings.
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.