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:

1

Owners pay self-employment tax on business profits.

2

Owners pay state tax on any profits, less state allowances or deductions.

3

Owners pay federal income tax on any profits, less federal allowances or deductions.

4

Some LLCs pay Arizona sales tax on products.

5

Employers pay payroll tax on any salaries they pay to employees.

6

Employees pay federal and state taxes on their earnings.

Items 1, 2 and 3 fall under pass-through taxation for any LLC owners, managers or members who receive profits from the business. Profits are reported on federal and state personal tax returns.

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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.

You'll typically need to collect Arizona sales tax on:

  • Tangible, personal property and goods that you sell like furniture, cars, electronics, appliances, books, raw materials, etc.
  • Certain services your business might provide

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.

What Is a Nonprofit Corporation?

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.

Here are some examples of how much self-employment tax you may need to pay, depending on your earnings:

  • On profits of $20,000, you would pay self-employment tax of $3,060.
  • On profits of $50,000, you would pay self-employment tax of $7,650.
  • On profits of $90,000, you would pay self-employment tax of $13,770.
  • On profits of $120,000, you would pay self-employment tax of $18,360.

Pay Less Self-Employment Tax by Treating Your LLC as an S Corporation

If your LLC meets certain requirements, the Internal Revenue Service may allow you to treat it as an S Corporation. This can help you lessen 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.

Speak to your accountant or professional tax preparer for more information on reducing your LLC self-employment tax through an S Corporation tax election.

Treating your LLC as an S Corp can help you save money.

You can do this by making an “S Corporation Tax Election” with the IRS using Form 2553. We can file your Form 2553 with the IRS on your behalf.

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.

Employer Payroll Tax Withholding

All employers must withhold federal taxes from their employees’ wages. You’ll withhold 7.65 percent of their taxable wages, and your employees will also be responsible for 7.65 percent, totaling the current federal tax rate of 15.3 percent.

Speak to your accountant for more information.

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.

Estimated Taxes

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:

1

Federal income tax

2

Federal self-employment tax

3

Arizona income tax

Most LLCs will pay estimated taxes four times a year. Learn more on the IRS website, and speak to your accountant for more information.

FAQs on Arizona LLC Business Taxes

Does Arizona Have Sales Tax?

Yes. Arizona does have a sales tax, which may vary among cities and counties. You can find more information above.

Does Arizona Have a Franchise Tax?

Yes. It’s called the Arizona Transaction Privilege Tax. Details are above.

Does Arizona Have an Income Tax?

Yes. Arizona does have a state income tax. You can find more information above.

Do I Need to Pay Estimated Taxes?

Yes. In most cases, you must pay estimated taxes on a quarterly basis to both the state and federal governments. You can find more information above.

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