How Your LLC Will Be Taxed
In this guide, we’ll cover the main business taxes required in Massachusetts, including self-employment, payroll, federal and sales tax. 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 two main types of state tax you must pay to the Massachusetts Department of Revenue: sales, income and use tax.
Massachusetts Sales Tax
If you sell physical products or certain types of services, you may need to collect sales tax. Then you’ll need to pay it to the Massachusetts Department of Revenue. Sales tax is collected at the point of purchase. The current Massachusetts sales tax rate is 6.25 percent.
Most states don't levy sales tax on goods that are considered necessities, such as food, medications, clothing or gas. Use our sales tax calculator to determine how much you'll need to pay, but also check with your accountant and the Department of Revenue to confirm whether your business is required to collect Massachusetts sales tax, and to ensure you pay the correct amount.
Massachusetts Income Tax
As a business owner, you’ll need to pay Massachusetts income tax on any money you pay to yourself if your gross income is $8,000 or more. These earnings flow through to your personal tax return. You’ll be taxed at Massachusetts' standard rates, and you'll also be able to apply regular allowances and deductions.
Any salaried employees will also need to pay state income taxes.
The Massachusetts income tax rate is 5 percent.
Massachusetts Use Tax
If you purchase physical products outside the state for use in Massachusetts, you may need to pay use tax. This tax is paid directly to the Massachusetts Department of Revenue. The current Massachusetts use tax rate is 6.25 percent.
For example, if you buy furniture for your Massachusetts business from a company in a state that doesn't have a sales tax, you'll be responsible for paying the Massachusetts use tax.
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 be sure to speak to your accountant or professional tax preparer to ensure that your Massachusetts 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) and covers Social Security, Medicare and other benefits. The current self-employment tax rate is 15.3 percent.
When calculating how much self-employment tax you owe, you'll be able to deduct business expenses from your income.
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 are required to 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 have employees that you pay, there are some slightly different tax implications. Speak to your accountant for more specific guidance on 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 and other requirements.
Other Taxes and Duties for Your Massachusetts LLC
Depending on your industry, you may be liable for certain other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Likewise, if you import or export goods, you may need to pay certain duties.
Speak to your accountant about any other taxes you may need to withhold or pay.
Most LLCs must pay estimated taxes throughout the year, depending on the amount of profit and income you expect to make. The most common types of estimated tax are: