Forming a limited liability company (LLC) means that your business will become its own separate entity. This also means that the owners of the LLC will then be able to protect themselves from personal liability for company debts. Forming an LLC provides liability protection for its owners, and also allows these members to be taxed at their personal tax rates.
Starting an LLC is done by filling in the state of Florida and paying a fee. Although an LLC is a legal business entity, the Internal Revenue Service does not recognize LLCs for tax purposes. This means that LLCs pay taxes differently than other types of businesses.
How is a Florida LLC Taxed?
Because business taxes are a fact of life, and when forming a Florida LLC, there are a variety of taxes that must be paid to both the federal and Florida governments. These taxes are paid in different ways and depend on the makeup of the members. LLCs are given the right to elect taxation and be treated as a different type of business for tax purposes.
Limited Liability Companies are automatically pass-through entities. This means that an LLC will be taxed similar to that of a partnership or sole proprietorship. All income from the LLC will be passed through to the owners, who will then pay tax based on their own individual tax rates.
- Self-employment tax on business profits
- State tax on profits
- Federal income tax on profits
- Florida sales tax on products
- Payroll tax on any salaries paid to employees
- Employees pay federal, state, and payroll tax on earnings
There are two forms of Florida income taxes that need to be paid.
Florida State Tax on Earnings
As a Florida business owner, you will be required to pay Florida state tax on any money that is paid to you as income. These earnings will “flow-through” to your personal tax return. You will be taxed at the standard tax rate for Florida, which is 4.25%. Any salaried employees will also need to pay personal Florida state taxes.
Florida State Tax on Sales
If you sell physical products then you might also need to collect sales tax. This will then be paid to the Florida Department of Treasury, at the point of purchase. Florida sales tax will need to be collected and paid on:
- Tangible, personal property and goods sold
- Services that a Florida business provides
Federal LLC Self-Employment Taxes
All Florida LLC business members (or managers) who take profits from the LLC will be required to pay self-employment tax. This tax is also known as FICA, Social Security or Medicare tax. The current federal self-employment tax rate is 15.3%. Federal self-employment taxes do allow LLC owners to deduct business income for different business expenses. This can help to reduce the amount of tax owed by the LLC.
How to Report Income as an LLC Member
If you are the sole member of an LLC then you will simply pay personal taxes for your LLC on any income you make from the business. If you are a member of a multi-member LLC, then you should take the following step.
4 Steps to Report LLC Member Income
- File an informational return with the IRS using Form 1065
- Receive a Schedule K-1 form to show the profit and loss of each member
- The Schedule K-1 form will hold information that you will then need to transfer to a Schedule E- Supplemental income form.
- Take the information from the Schedule E form, and input it into Form 1040 or 1040-SR.
Electing Taxation as a Florida LLC
LLCs are given the option to elect taxation. This means that rather than being taxed as a sole proprietor or partnership, an LLC can be taxed as a corporation. When you elect corporate taxation, your LLC is taxed at the corporate tax rate of 21%. This rate is lower than all top three individual income tax rates which range from 32% to 37%. This is why it sometimes makes sense for LLC owners to elect this form of taxation.
Who Should Consider Corporate Taxation?
For those who qualify for a higher tax bracket (one that is over 21%), it would make sense to elect corporate taxation. Although this may seem incredibly appealing, it is good to note that any income distributed from a C corporation is subject to double taxation. This means that although the LLC will pay the 21% corporate tax rate, there will also be individual income tax paid on capital gains as well.
Retained earnings are never subject to double taxation, and sometimes electing corporate taxation can allow an LLC to offer fringe benefits to its owners and employees. It may also offer the opportunity to obtain stock options and stock ownership plans.
What is Tax Deductible for an LLC?
There are many expenses that LLCs must pay for, and because of this, it allows LLCs to deduct these expenses from their overall taxable income. Tax-deductible expenses for an LLC include:
- Start-up costs
- Health benefits
How LLCs Pay State Income Tax
Members of an LLC pay personal income taxes on their personal tax returns. This means that an LLC itself will not pay state income tax nor federal taxes. Instead, the profits of an LLC will always be reflected on the individual tax return of each member.
Filing your taxes can be difficult on your own, especially if you operate an LLC on your own. When business owner’s file their taxes on their own, they often miss out on write-offs and other tax advantages. We can help you file your taxes to maximize your savings. Speak with a professional today before filing your Florida LLC taxes.