Rhode Island LLC Tax Structure – Classification of LLC Taxes To Be Paid


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A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in Rhode Island, 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 a Rhode Island LLC and related aspects.

Classification of Rhode Island 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:

  1. 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.
  2. Federal Tax Identification Number – An LLC with employees must obtain a Federal Tax Identification Number. Rhode Island does not have a separate State Tax Identification number.
  3. State Employer Taxes – If an LLC has employees on the payroll, it must pay state employer taxes in Rhode Island. These taxes are handled through Rhode Island Workforce Commission.
  4. Franchise Tax Report – In Rhode Island, the LLCs submit the form of a Franchise Tax Report to the Rhode Island Department of Revenue.

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 Rhode Island

An LLC in Rhode Island has to pay two types of taxes to the Secretary of State:

  • State Income Tax
  • State Sales Tax

State Income Tax

While representing your LLC in Rhode Island, you pay the income tax yourself through the money you pay to yourself. This money gets reflected in your personal Tax return & is calculated at the time of paying the State Income Tax. The Standard Rhode Island State Tax rate ranges from 3.75% to 5.99% depending on your earnings. One gets the opportunity to claim all the standard allowances & deductions upon filing the tax return.

State Sales & Use Tax 

The Rhode Island state implies Sales & Use tax on tangible goods & services provided by an LLC. Rhode Island has a single, statewide static tax rate of 7%. The Sales tax is typically collected at the time of purchase and is paid to the state Division of Taxation.

Federal Self-Employment Tax

All members or managers of the Rhode Island LLC earning profit out of the LLC has to pay the Federal Self-Employment Tax. This tac is controlled by the Federal Insurance Contributions Act (FICA). It covers social security, Medicare, and other benefits as well. The Federal Self-Employment Tax rate in Rhode Island currently is 15.3%. An individual is allowed to deduct some of his business expenses from his income when calculating how much self-employment tax you owe.

Federal Income Tax 

 Just like State Income Tax, this tax also applies to the earnings you make in your LLC. The Federal Income Tax Rate is subject to the earnings you make, your current income tax bracket, your deductions, and filing status.  

Employee & Employer Taxes 

Any LLC that has employees on the payroll has to pay different kinds of taxes that are applicable to all the employees. Both the employer and the employee withhold 7.65% of their taxable wages, which results in the current federal tax rate of 15.3%. All employees of an LLC have to collect and withhold the Payroll tax at the time of receiving the salary.

Regardless of whether an employee withholds the federal tax and state income tax or not, each employee has to file an individual tax return.

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. Rhode Island 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 Taxes

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:

C-Corporation

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. 

C-corporation Taxes

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.

S-Corporation

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.

S-corporation 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 Rhode Island. 

Liabilities

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.

Taxation

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. A Rhode Island 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 a Rhode Island 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             LLCS- CorporationC-CorporationSole Proprietorship 
TaxationAs 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 TaxationThe LLC does not have Double TaxationThere 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 TaxThe 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/LossAn 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 Rhode Island

Any LLC operating in Rhode Island is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.

In the state of Rhode Island, LLCs are required to collect sales tax when they sell goods or services to the general public. They must register with the Department of Taxation and make periodic payments of sales tax. They can do this online and pay a $50 fee. They will also need to file periodic sales tax returns.

While most states require LLCs to file state tax returns, some owners elect to be treated as a corporation and pay corporate income tax. This is done by filing IRS Form 2553. Corporations are also subject to the Rhode Island corporation income tax, which is a flat 7% of net income. The minimum tax is $400. These taxes are paid to the state’s Comptroller of Public Accounts.

To file for an LLC in Rhode Island, you’ll need to file an application. The form must be signed by the owner. Alternatively, you can find a professional LLC formation service to complete the paperwork and file it for you. Once you file, the Rhode Island Secretary of State will contact you. This process can take a few days for an online filing, and up to 14 days for a mail filing.

In addition to state income tax, LLCs also pay Federal employer taxes. Some of these taxes are paid to the federal government, while others must be paid to the state. Getting a federal employer identification number will help you manage your federal tax obligations. However, if your company is located in Rhode Island, you’ll still need to file state taxes as an employer.

Whether your LLC is a single member entity or a partnership, you must file Form RI-1065 annually. If you are an individual, you’ll need to file a federal tax return for yourself, but the income from the business will be passed through to the members. Moreover, you’ll need an EIN if you have more than one member or employees. Upon dissolution, members of an LLC must file an Articles of Dissolution with the State of Rhode Island to dissolve the LLC.

Rhode Island LLCs can claim a 20% tax discount under the Tax Cuts and Jobs Act. This means that your LLC can avoid paying double taxes if you don’t pay taxes on your earnings. This tax discount makes it easier for businesses to start up and grow in Rhode Island.

If you are a registered agent, you must be available to receive correspondence during normal business hours. This is especially important for LLCs in the state, as the failure to receive service of process can result in devastating default judgments for your LLC. In addition, failing to receive service of process can result in your LLC losing its “good standing” status, which means it cannot conduct business in the state.

LLCs in Rhode Island must file annual reports with the Secretary of State to stay compliant and preserve their limited liability status. They must pay an annual fee of $50 to file this report.

FAQ

Which Type of Corporation has double taxation?

C-Corporation. It taxes the dividends of the shareholders at the corporate level as well as at an individual level.

Why is an LLC called a pass-through business entity?

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.

What is the default classification of the LLC?

The LLCs have two default classifications. It can be termed as a single-member LLC or a multi-member LLC.

What should be taken into consideration while changing the default classification of the LLC?

When choosing a different classification for taxation, it is essential to understand the liabilities & taxes applicable in that classification.

In Conclusion

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.

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