A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in Oklahoma, we know that it is a pass-through taxation structure. Typically, the profit LLC makes passes through the LLC to its members. Based on the profit share, members file their income tax returns. LLCs, unlike other corporations, do not have to pay income taxes based on profit or revenue.
IRS (Internal Revenue Service) allows LLCs to choose their preferable classification of tax at the beginning of the LLC formation. In general, a single-member LLC is taxed as a sole proprietor and a multi-member LLC is taxed as a partnership. As there is no fixed tax structure for LLCs, anyone certainly wants to opt for the most beneficial one. Keep reading till the end to know more about the tax structure of an Oklahoma LLC and related aspects.
On this page, you’ll learn about the following:
- Classification of Oklahoma LLC Taxes
- LLC Taxes to be Paid in Oklahoma
- Default LLC Tax Classification Rules
- Options to Change Default Tax Classification
- Choosing a Classification for Your LLC
- Classification of LLC Taxes – At a Glance
Classification of Oklahoma LLC Taxes
An LLC is considered a Pass-through Entity because it allows the income to pass through & become self-employment income. The members of the LLC have to pay Self-employment tax or Self-Employment Taxes on any income they earn through the LLC. The LLC has to pay Franchise Tax on its income. In addition to the Self-employment tax, there are some other requirements that an LLC has to consider, such as:
- Franchise Tax – Franchise tax applies to or levies upon LLCs, C-corporations, & S-corporations. Sole Proprietorship & Partnerships (directly owned by individuals) are exempted from the Franchise Tax. This tax is to be paid with the office of the Comptroller of Public Accounts.
- Federal Tax Identification Number – An LLC with employees must obtain a Federal Tax Identification Number. Oklahoma does not have a separate State Tax Identification number.
- State Employer Taxes – If an LLC has employees on the payroll, it must pay state employer taxes in Oklahoma. These taxes are handled through Oklahoma Workforce Commission.
- Franchise Tax Report – In Oklahoma, the LLCs file a Franchise Tax Report with the Oklahoma Tax Commission.
Federal Tax Classifications
When LLCs was recognized as one of the types of Business Corporations, IRS did not create a new tax classification just for the LLC. LLCs were allowed to choose from the current tax classifications.
LLC Taxes to be Paid in Oklahoma
As per the Oklahoma classification of LLC taxes, any LLC must pay the Oklahoma Tax Commission the following types of taxes:
State Income Tax
Any money you pay to yourself as a business owner will be subject to Oklahoma income tax. These earnings are included in your individual tax return. You will be taxed at Oklahoma’s ordinary rates, with customary allowances and deductions available. Depending on your earnings and filing status, the Oklahoma income tax rate ranges from 0.5 to 5.25 percent.
State Sales Tax
Sales tax must be assessed and paid on all transfers of title or possession of tangible personal property that take place within the state, according to Oklahoma law. Certain services offered in the state are also subject to sales tax. The tax rate from the sale or rental of tangible personal property, as well as the provision of particular services, is 4.5 percent in Oklahoma.
State Use Tax
You may be required to pay use tax if you buy physical goods outside of Oklahoma for use in the state. Let us take an example, if you have bought an electrical appliance to be used in your business based in Oklahoma, from outside the state, you are liable to pay the state use tax in Oklahoma.
State Franchise Tax
This special type of tax is also called Business Privilege Tax, because of the fact that doing business in the state is a privilege. Some states have levied this type of tax, while others have not. All businesses and associations in Oklahoma are required to pay a Franchise tax. For every $1,000 of investment, $1.25 of tax is levied, with a maximum limit of $20,000 in a year. Foreign businesses need to pay an additional amount of $100 annually.
The State of Oklahoma suspended the franchise tax in the past for several years. During that period, companies were liable to pay Business Activity Tax.
Federal Self-employment Tax
Self-employment tax must be paid by all members or managers who take earnings from the LLC. The Federal Insurance Contributions Act (FICA), which provides Social Security, Medicare, and other benefits, administers this levy. It covers all of the money you take out of your business. The self-employment tax rate in the state of Oklahoma is 15.3 percent.
Federal Income Tax
Regular federal income tax must be paid on any earnings from your LLC. Your earnings, tax bracket, deductions, and filing status all factor into this figure. Federal income tax applies only to the profits you take out of the company, minus some deductions and exemptions. This includes tax-free income, business expenses, and other deductions for healthcare and retirement plans, among other things.
Employer and Employee Tax
As an employer, you have specific employment tax obligations to meet and paperwork to file when you have employees. With a few exceptions, employers doing business in Ohio must deduct Ohio individual income tax from their employees’ pay. All LLC employees must collect and withhold the Payroll tax at the time of receiving a salary. Depending on whether you withhold federal and state income taxes, your employees may be required to file their own tax returns.
License & Permit
If an LLC deals with some special product or services, like alcohol or tobacco, it is required to pay an additional license & permit fee.
Alcohol & Tobacco Permit
In addition to entry fees, all purchases of liquor, wine, and beer are subject to a 13.5 percent mixed beverage tax. Over-the-counter retail cigarette licenses expire three years after they are issued. A three-year license costs $30. Over-the-counter tobacco licenses are valid for three years from the date they are issued. The charge for a three-year license is $30.
Default LLC Tax Classification Rules
By default, the LLCs are categorized as below (In both the categories, separate filing of income is not required):
Disregarded Entity (Single-Member LLC)
A single-member LLC is usually disregarded from the taxes. Hence a single-member LLC is also called a disregarded entity. Under the U.S. tax law, it is assumed that a single-member LLC is owned by an individual (& not by another LLC), so the U.S. tax law levies rules on it as a Sole Proprietor. Single-member LLC’s owner (Sole Proprietor) has to report all the income of the LLC via his own income tax return.
Sole Proprietorship Taxes
As mentioned earlier, the single owner of the LLC is treated as the Sole proprietor of the LLC & has to file the Self-Employment Tax on all of the LLC’s earnings. Oklahoma does not levy State Income Tax, so a single-member LLC must file only the Federal Income Tax.
Partnership (Multi-Member LLC)
Any LLC with more than one owner is referred to as Multi- Member LLC & it is taxed as a partnership by default. Similar to the Single Owner or Single Member LLC, this LLC is also a pass-through entity. This means that the income of the LLC passes through the income of the members & they have to file taxes through their own earnings.
Partnership or Multi-Member LLC has to pay taxes similar to the Single Member LLC. If the Partnership LLC is directly owned by individuals, it is exempted from the Franchise Tax. All the members of the Multi-Member LLC are liable to pay Self-Employment Tax & Federal Income Tax.
Options to Change Default Tax Classification
The LLCs are categorized either as sole proprietorships or as partnerships, depending on the number of members the LLC has. This is the default tax classification applicable to LLCs. However, the LLCs have an option of changing the default classification & opting to register under the following categories for taxation purposes:
An LLC can prefer to be treated as a C-corporation by filing form 8832 (the Entity Classification Election Form) with the IRS. The C-corporation is a regular corporation that is subject to corporate taxes & it is not a pass-through entity.
An LLC taxed as a C-Corporation is not a pass-through entity. In a C-corporation, the members/shareholders/ owners are taxed separately. The shareholders of the C-corporation are taxed twice on the dividends that they earn. The dividends of the shareholders are taxed at the corporate level – with a Corporate Tax filed with Form 1120 & at a Shareholder level – an Income Tax filed with Form 1040. Shareholders are subjected to Federal Income Tax.
The S-Corporation is the most common type of corporate structure used by small businesses. It was created to provide corporations with limited liability protection while maintaining the benefits of being a separate legal entity. An LLC can prefer to be treated as S-Corporation by filing Form 2553. S-corporations are small business corporations, that choose to pass through the corporate income, losses, deductions, & credits to the shareholders for the purposes of Federal Taxes.
An S-Corporation is similar to an LLC except that it is treated by the IRS as a corporation for tax purposes. S-Corps do pay corporate income taxes; however, they are still considered disregarded entities for federal tax purposes.
Like an LLC, an S-Corp reports its annual earnings on a separate Schedule E on the member’s personal account. An S-Corp is treated by the IRS much like a partnership for tax purposes. Unlike Partnership, in S Corporation, the shareholders are required to pay Federal Self Income tax on their share of the company’s profits.
Choosing a Classification for Your LLC
In terms of owners’ protection against liability, perpetual existence, & savings in Taxation, Both LLCs (Limited Liability Companies) & Corporations are very much alike. However, with regard to formalities, Taxation, & capital, LLCs & Corporations differ in Oklahoma.
Both LLCs and Corporations provide liability protection to their owners. The LLC provides protection against inside liability (towards the employee) & outside liability (towards the creditor). The Corporation usually provides only the inside liability.
Tax Classification Flexibility
For taxation purposes, an LLC has a choice of being treated as a sole proprietorship, Partnership or C-corporation or S-corporation. A corporation can choose to be treated only as C or S Corporation.
As mentioned earlier, the LLC can choose to be treated as a corporation; the Corporation does not have the option of being treated as the LLC. An Oklahoma LLC is subjected to Franchise tax, Federal Income Tax, Sales & Use Taxes & State Employment Taxes (for LLCs that have employees)
A regular corporation or a C- Corporation is subjected to corporate tax, which can be filed through Form 1120 every year. The shareholders have to pay the Income-tax, only when they receive dividends from the Corporation. These dividends are taxed twice at the corporate level (on a corporate form)& at the shareholder level (on shareholder form).
An S- Corporation in LLC is not subjected to corporate taxes. But the shareholders are subjected to Taxation – even if they do not receive any dividends. A member of an Oklahoma S-corporation has to pay Federal Self employment Tax only on his salary; any other profits that he makes through the LLC are not subject to the 15.3% Self Employment Tax.
Classification of LLC Taxes – At a Glance
|Points of Difference||LLC||S- Corporation||C-Corporation||Sole Proprietorship|
|Taxation||As an LLC, by default, there is no tax levied at the entity level. The members’ income or even the loss is passed through to members or owners.||Similar to LLC, no tax is levied on an S-Corporation at the entity level. The members’ income or even the loss is passed through to members or owners.||The C-Corporation is often taxed at the entity level. The Dividends are taxed at the shareholders’ level.||The Sole- proprietorship as an entity is not taxable. The Sole Proprietor pays taxes as an Individual.|
|Double Taxation||The LLC does not have Double Taxation||There is no Double Taxation in S-Corporation||There is Double Taxation in C-Corporation, only when the Shareholders earn in the form of dividends.||No Double Taxation in a sole proprietorship.|
|Self Employment Tax||The net income of the members or owners is subject to self-employment tax.||The salaries of the shareholder are subject to self-employment tax, but any other profits that the shareholder makes are not subject to the employment tax.||The C-Corporation is subject to self-employment tax.||The Sole-proprietorship is subject to self-employment tax|
|Pass-Through Income/Loss||An LLC is often referred to as a Pass-through entity because its income passes through/ passes to its members.||Yes, An S Corporation is a Pass-through Entity.||No, A C-Corporation is not a Pass-through Entity.||Yes, A Sole-proprietorship is a Pass-through Entity.|
How Do LLCs Pay Taxes in Oklahoma
Any LLC operating in Oklahoma is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.
Depending on your state of incorporation, your limited liability company (LLC) may be subject to taxation at the entity level, the federal level, or both. Some states require that an LLC register with the state and pay state taxes, while others do not. In Oklahoma, LLCs do not pay state taxes, but are still responsible for filing a federal income tax return and paying taxes on profits earned. The tax rate is determined by your LLC’s profits.
Oklahoma is the 10th lowest state in the country for corporate taxes. The corporate tax rate is 4% of taxable income. However, some LLCs qualify for an S corp tax structure, which may save them in self-employment tax. Using an S corp can be a good option, but you need to decide whether it is a good choice for your business.
If you own an LLC, you will need to register with the Oklahoma Tax Commission. You will need to complete a certificate renewal form every year, and you will also need to pay a $25 fee each year. You can register online or by paper. You may also choose to register with a corporation, which requires a more formal structure and allows for a lower corporate tax rate. If you plan to sell goods or services, you will need to register with the Oklahoma Department of Revenue and collect sales tax. You can also register online to pay your sales tax.
Oklahoma LLCs must also register for a Federal Employer Identification Number (EIN) with the Internal Revenue Service. You can get an EIN free of charge from the IRS website. You may also need to obtain a Federal Tax Identification Number (FTI) if you have employees, and you will need to withhold employee income taxes from your employees’ paychecks.
If you have employees, you will need to register with the Oklahoma Employment Security Commission. You will need to set up an account with the Commission to collect unemployment taxes, and you will also need to set up an account with the Oklahoma Tax Commission to collect income tax from your employees. You can also register with the Oklahoma Taxpayer Access Point (OTC) to receive assistance with your taxes. You can also find information about Oklahoma taxes on the Oklahoma Tax Commission website.
Oklahoma’s state sales tax rate is 4.5%. This tax applies to most physical goods and services. However, certain business supplies are exempt from the tax. Your business may also be subject to local municipality use taxes. These taxes may apply on top of the state rate, depending on the local municipality.
The Oklahoma Tax Commission will send you a permit to collect sales tax if you are selling goods in Oklahoma. You will then need to register with OTC to collect the tax, and you can also use the Oklahoma Taxpayer Access Point to register and pay online. You can also use the IRS’ website to obtain a Federal Tax Identification Number.
C-Corporation. It taxes the dividends of the shareholders at the corporate level as well as at an individual level.
An LLC is often referred to as the pass-through entity because the income or the assets pass through the members or owners of the LLC.
The LLCs have two default classifications. It can be termed as a single-member LLC or a multi-member LLC.
When choosing a different classification for taxation, it is essential to understand the liabilities & taxes applicable in that classification.
Every Tax classification has its own set of benefits & restrictions. Every state will have different taxation rules for each of the categories of business corporations. Depending on the objective of formation of the business entity (Eg. To avoid dual Taxation- one can choose S Corporation, for more flexibility, one can choose the LLC format). It is essential to understand the taxing structure of each country & each Classification; to decide how you wish to treat your LLC.