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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 South Carolina, 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 LLC in South Carolina and related aspects.
On this page, you’ll learn about the following:
Classification of South Carolina 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. South Carolina 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 South Carolina. These taxes are handled through South Carolina Workforce Commission.
- Franchise Tax Report – In South Carolina, the LLCs submit the form of a Franchise Tax Report to the South Carolina 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 South Carolina
Any LLC that is registered in the state of South Carolina is liable to pay the following types of taxes that are levied by the State government:
State Income Tax
Income tax is paid on the earnings obtained by your business. The state Income tax of South Carolina is in accordance with the Federal Income Tax laws. It means that all sorts of exemptions and allowances on federal tax returns are accepted in the state of South Carolina. The current rate of income tax in SC is up to 7%.
State Sales Tax
For an LLC that is involved in selling products and services in the state of South Carolina, it is required to pay the Sales Tax. In SC, sales tax is imposed on mostly all kinds of retail sales. Sales tax is charged at a rate of 6% in the whole of the state. However, you may be required to pay an additional 1% local tax imposed by counties.
State Use Tax
If you have purchased goods and items from outside of the state of SC, but using those for your business registered in SC, you are liable to pay State Use Tax. It is charged at the rate of 6% of the selling price.
State Franchise Tax
In some states, the Franchise tax is also referred to as Business Privilege Tax. It is imposed on LLCs operating in the state for having the privilege to do business there. The State of South Carolina is free from the franchise tax.
Federal Self-employment Tax
Self-employment tax is payable by all the profit holders and management who earn from the LLC. It includes all sorts of earnings you make out of the LLC. The Federal Insurance Contributions Act (FICA) is responsible for regulating the Federal self-employment taxes. FICA also manages the Medicare and Social Security benefits. The federal self-employment tax is charged at the rate of 15.3% in South Carolina currently.
Federal Income Tax
Just like the State Income, Federal Income Tax is also collected on the earnings collected from your registered LLC. The tax rate is determined by the type of LLC, profits earned, deductions and allowances applicable, and the tax bracket corresponding to the LLC.
Employee and Employer Tax
An employer is a person, partner, or any organization that has hired people to work for them. Being an LLC owner, if you have hired the staff then you are liable to file a return or deposit to the SC Department of Revenue for the taxes that have been withheld in the state. The employees are required to file the tax return, no matter whether you have withheld the payroll tax or not.
Other Taxes
For operating a business in the state of South Carolina, you are liable to pay some exclusive taxes, if you are dealing in certain products and services.
Electric Power Tax
This tax is payable by an LLC that is involved in the resale of electric power as well as by any public utility departments that sell electricity to consumers. For each kilowatt-hour of electric power sold, charges equal to one mill (0.0005) are payable. For more details, please visit- Electric Power Tax.
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. South Carolina 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 South Carolina.
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 South Carolina 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 South Carolina 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. |
FAQ
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.
How Do LLCs Pay Taxes in South Carolina
LLCs are considered pass-through entities for tax purposes, which means that the profits and losses of the business pass through to the owners’ individual tax returns. This simplifies the tax process for many small business owners, as they do not have to file a separate business tax return. Instead, they report their share of the LLC’s profits or losses on their personal tax returns.
In South Carolina, LLCs are subject to state income taxes. The exact amount of tax owed by an LLC will depend on a variety of factors, including the business’s income, deductions, and credits. The state income tax rate for LLCs varies depending on the total income of the business, with higher income LLCs typically subject to a higher tax rate.
LLCs in South Carolina are also required to pay any applicable federal taxes. The federal tax obligations of an LLC will depend on how the business is structured for tax purposes. Depending on the structure chosen (such as a sole proprietorship, partnership, S-corporation, or C-corporation), the federal tax requirements of an LLC can vary significantly. Therefore, it is essential for business owners to consult with a tax professional to ensure their LLC is compliant with all federal tax regulations.
Another important factor to consider when it comes to taxes is the South Carolina Department of Revenue’s requirements for LLCs. The Department of Revenue requires LLCs to file an annual report and pay an annual fee to maintain their good standing with the state. Failure to do so can result in penalties and potential legal consequences for the business.
It is also worth noting that LLC owners in South Carolina may be required to pay self-employment tax if they are actively involved in the day-to-day operations of the business. This tax is in addition to any state and federal income taxes owed by the LLC. Understanding and complying with all tax obligations as an LLC owner is essential to avoid potential fines, interest, or legal issues.
Overall, navigating the tax requirements for LLCs in South Carolina can be complex and overwhelming, especially for new business owners. Seeking the guidance of a tax professional or accountant is highly recommended to ensure compliance with all state and federal tax regulations. By staying informed and proactive about their tax responsibilities, LLC owners can avoid potential pitfalls and set their businesses up for long-term success.
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.