Virginia 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 Virginia, 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 Virginia LLC and related aspects.

Classification of Virginia 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. Virginia 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 Virginia. These taxes are handled through Virginia Workforce Commission.
  4. Franchise Tax Report – In Virginia, the LLCs file a Franchise Tax Report with the Virginia Department of Tax.

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 Virginia

The Virginia Tax Commission has imposed below mentioned state taxes on an LLC operating in the state, based on the Virginia classification of LLC taxes:

State Income Tax

Income tax is levied on the amount earned from your business. Virginia levies standard rates of income tax which are applicable for deductions and allowances. The income tax will be charged to all of your employees. In Virginia, charges of income tax vary from 2% to 5.75% based upon the amount earned.

State Sales & Use Tax

Typically any product or service sold, rented out, or leased within the boundaries of Virginia is applicable to Sales and use tax unless it comes under the list of exemptions. For most of the regions, the sales tax is chargeable at the rate of 5.3%. Some counties or cities may have an additional sales tax. However, food and hygiene products are charged at 2.5%. 

State Franchise Tax

This special type of tax is levied by several states. However, some of the states do not apply Franchise tax on LLCs. Virginia is one of them.

Federal Self-employment Tax

All members of management who make gains out of the LLC must pay self-employment tax. The Federal Insurance Contributions Act (FICA) regulates federal income taxes. The current self-employment tax rate in the state of Virginia is 15.3 percent. You’ll be able to reduce some of your business payments from your salary when calculating how much self-employment tax you owe.

Federal Income Tax

Similar to state income tax, your profits earned from the LLC are subject to federal income taxes as well. Whatever amount you have to pay for income tax, is calculated on the basis of the amount earned, your filing status, any sort of allowances, and the tax bracket.

Only the profits are subject to the federal income tax. This means that the tax is not applicable on any kind of allowances and deductions, like tax-free income, your expenses made for the purpose of business, any sort of healthcare plans, etc.

Employer & Employee Tax

If you have employed paid personnel for your business, you are entitled to withhold and reduce the amount equal to state income tax from their payout. Virginia rules and laws are in accordance with the federal law system. This means that if as per the federal laws, you can withhold taxes, then those taxes can be withheld from payment in Virginia as well.

Excise Taxes

These taxes are levied on the sales and use of some special products. An LLC based in the state of Virginia is liable to pay excise tax on the following items:

Apple Excise Tax

Apple excise tax is charged on someone who produces apples to be sold in the market. This tax is charged at the rate of 2.5 cents per tree run bushel. To get more information about this, visit- Apple Excise Taxes.  

Egg Excise Tax

This tax is imposed on eggs or egg products that are sold or used in the state of Virginia. The rate at which egg excise tax is charged at the rate of 5 cents for each case of shelled eggs. One case of eggs contains 30 dozen eggs. To know more about this tax, you can visit- Egg Excise Taxes.  

Peanut Excise Tax

Any business dealing with the processing of peanuts is liable to pay the peanut excise tax. A tax of 25 cents is charged for every 100 pounds of peanuts. Visit- Peanut Excise Taxes to get more details.

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. Virginia 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 Virginia. 

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 Virginia 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 Virginia 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 Virginia

LLCs pay taxes in Virginia based on the net income they generate. The state taxes LLCs at a rate of 6% of net income. In addition to filing annual returns, LLCs must file corporate tax returns with the Department of Taxation, also known as Form 500. Likewise, businesses must withhold taxes from employee paychecks. For more information about the requirements for forming and operating an LLC in Virginia, see our article on LLC taxation.

In Virginia, LLCs are pass-through entities, meaning the profits from the business flow through to the owners. As such, members of an LLC must file a tax return reporting all business profits and losses. However, in many other states, LLCs are required to file federal and state tax returns separately. This makes it harder for business owners to understand which tax obligations they have. If you run an LLC, you must understand these tax obligations to avoid any unnecessary hassles.

When registering an LLC, businesses must file with the state using the VATAX service or on paper by filing Form R-1. Moreover, businesses must file withholding tax reports periodically, semi-weekly or monthly, and reconcile the withholdings at least once a year. For more information, contact a qualified tax attorney to help you understand the laws that apply to your specific business situation. There are several options for forming an LLC, so it is important to choose wisely.

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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