How Your LLC Will Be Taxed
In this guide, we’ll cover the primary New Jersey business taxes, including self-employment, payroll and federal taxes. The profits generated by an LLC aren’t taxed at the business level the way they are in C Corporations. Instead, taxes are as follows:
State Taxes for New Jersey LLCs
You'll need to pay two main types of tax to the NJ Division of Taxation: sales and income. Depending on how your business is set up, you may also need to pay use tax and a corporate business tax.
NJ Sales Tax
If you sell certain types of physical products (such as furniture, cars, electronics, appliances, books, raw materials, etc.) or services, you may need to collect New Jersey sales tax at the point of purchase. Most states don't levy sales tax on goods that are considered necessities, such as medication, clothing, gas or some groceries. The state provides an extensive list of items exempt from NJ sales tax.
The New Jersey sales tax rate is 6.625 percent statewide, and the state does not allow the collection of local sales taxes.
Use our sales tax calculator to determine how much you'll need to pay. Also check with the New Jersey Division of Taxation to confirm whether your business is required to collect sales tax, and to ensure you pay the correct amount.
NJ Income Tax
As a business owner, you’ll need to pay New Jersey income tax on the money you pay yourself. These earnings flow through to your personal tax return. You’ll be taxed at a New Jersey income tax rate based on your income. You may also be able to apply some allowances and deductions.
Your employees will also need to pay state income tax. Tax rates vary depending on income.
NJ Use Tax
If you purchase physical products outside the state for use in New Jersey, you may need to pay use tax. You may also hear this referred to as the NJ sales and use tax.
For example, if you buy furniture for your New Jersey business from a company in a state that either doesn't have a sales tax or has a sales tax that is lower than New Jersey's, you'll be responsible for paying the New Jersey use tax.
The current NJ use tax rate is 6.625 percent, and it's paid directly to the NJ Division of Taxation.
New Jersey Corporation Business Tax
Some states levy a tax on certain businesses for the right to exist as a legal entity and do business in the state. It's usually called a privilege tax, transaction privilege tax or a franchise tax. There is no New Jersey franchise tax. However, the New Jersey Corporation Business Tax (NJ CBT) serves roughly the same purpose.
The NJ CBT only applies to C Corporations and S Corporations; LLCs are exempt from paying this tax. However, if your LLC is classified for tax purposes as either of those other entities, you will have to pay the New Jersey CBT.
The NJ Corporation Business Tax rates vary according to corporation type, net income and length of tax period, among other factors. Talk to your accountant or tax advisor to determine whether you're required to pay the NJ CBT, and if so, how much you must pay.
Federal Taxes for New Jersey 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 New Jersey 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.
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.
Speak to your accountant or professional tax preparer for more information on reducing your LLC self-employment tax through an S Corporation tax election.
Note: Be aware that while treating your LLC as an S Corp can save you money, it also means you'll have to pay the New Jersey Corporation Business Tax. Consult your accountant or professional tax preparer to determine how this will affect your business finances.
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 for things 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
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 or duties 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: