How Your LLC Will Be Taxed
In this guide, we’ll cover the main business taxes required in Arizona, including state sales tax, and self-employment, payroll and federal taxes. The profits of an LLC are not taxed at the business level like those of C Corporations. Instead, taxes are as follows:
State Taxes for LLCs
There are three main types of state tax you must pay to the Arizona Department of Revenue: income, sales and transaction privilege.
Arizona Income Tax
As a business owner, you'll need to pay income tax on any money you pay to yourself. These earnings flow through to your personal tax return. You'll be taxed at the standard rates for Arizona, and you'll get to apply regular allowances and deductions.
Any salaried employees will also need to pay state income tax.
Arizona income tax rates run between 2.59 percent and 4.50 percent, depending on income.
Arizona Sales Tax
If you sell physical products or certain types of services, you may need to collect sales tax and then pay it to the state's Department of Revenue. Arizona sales tax is collected at the point of purchase. Sales tax rates vary depending on the region, county or city where you're located.
Most states do not levy sales tax on goods that are considered necessities, like food, medications, clothing or gas. Use our sales tax calculator to get an idea of how much you'll need to pay, but always check with your accountant and the Department of Revenue to confirm whether your business is required to collect Arizona sales tax, and to ensure you're paying the correct amount.
Arizona Transaction Privilege Tax
If you don't collect tax for personal property used, stored or consumed, you may need to pay the Arizona Transaction Privilege Tax (TPT). If your business sells a product or engages in a service subject to TPT, you'll likely need to get a license from the Arizona Department of Revenue or the city or cities in which you operate.
Federal Taxes for LLCs
As the owner of an LLC, you must pay self-employment tax and federal income tax, both of which are levied as “pass-through taxation."
Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Arizona LLC is paying the correct amount.
Federal Self-Employment Tax
All members or managers who take profits out of the LLC must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA), which covers Social Security and Medicare and other benefits. The current self-employment tax rate is 15.3 percent.
You’ll be able to deduct some of your business expenses from your income when calculating how much self-employment tax you owe.
Pay Less Self-Employment Tax by Treating Your LLC as an S Corporation
The Internal Revenue Service allows an LLC to be treated as an S Corporation for tax purposes, provided your business meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary and other income as distributions or withdrawals.
You do this by filing Form 2553, also known as an S Corp Election form, with the IRS. Incfile can also file the form for you. Use our S Corp Tax Calculator to get an idea of how much money you could save with this election.
Consult with your accountant or tax advisor for more information on reducing your LLC self-employment tax through an S Corporation tax election.
Federal Income Tax
You must also pay regular federal income tax on any earnings you take out of your LLC. The amount of income tax you pay depends on your earnings, current income tax bracket, deductions and filing status.
You only pay federal income tax on profits you take out of the business, less certain deductions and allowances. This includes your tax-free amount, plus business expenses and other deductions in areas such as healthcare and some retirement plans.
Speak to your accountant for more information.
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.
Employees May Need to File Tax Returns
Regardless of whether you withhold federal and state income tax, your employees may need to file their own tax returns.
Employee Insurance and Other Requirements
You may also need to pay insurance for any employees, such as employee compensation insurance or unemployment tax.
Other Taxes and Duties for Your LLC
Depending on your industry, you may be liable for other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on the fuel you sell. Likewise, if you import or export goods, you may need to pay duties.
Speak to your accountant about any other taxes or duties you may need to withhold or pay.
Most LLCs must pay estimated taxes throughout the year, depending on your adjusted gross income, taxable income, taxes, deductions, and credits for the year. The most common types of estimated tax are: