A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in West 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 West Virginia LLC and related aspects.
On this page, you’ll learn about the following:
- Classification of West Virginia LLC Taxes
- LLC Taxes to be paid in West Virginia
- 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 West 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:
- 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. West Virginia 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 West Virginia. These taxes are handled through West Virginia Workforce Commission.
- Franchise Tax Report – In West Virginia, the LLCs file a Franchise Tax Report with the West Virginia Department of State 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 West Virginia
Based on the West Virginia classification of LLC taxes, any LLC conducting business within the state of West Virginia is required to pay the following sorts of taxes:
State Income Tax
As a business owner, you’ll need to pay West Virginia income tax on any amount you pay to yourself. These earnings are included in your individual tax return. You’ll be taxed at West Virginia’s standard rates, and you’ll also be able to apply regular allowances and deductions. In West Virginia, you’ll be taxed at the regular rate, with standard exemptions and deductions.
State Sales & Use Tax
Unless a clear exemption is stated, all sales of goods and services are deemed to be subject to Sales & Use Tax. The seller imposes sales tax on the sale of goods and services at the moment of purchase. In West Virginia, a use tax is charged on the use of commodities for which the corresponding sales tax has not been paid.
Business & Occupation Tax
The business and occupation tax applies to public utilities, electric power generators, and natural gas storage companies. This tax is calculated using net sales (public utilities), taxable generation capacity, or net Dekatherms (gas storage).
State Excise Tax
Certain products are subject to excise taxes imposed by the state. Manufacturers or distributors of such products typically pay excise taxes, which are subsequently included in the sales price. Wholesalers, retailers, and others who buy these products without paying the excise tax must declare their purchases and pay the tax. State excise taxes apply to gasoline and specialized fuels, liquor, tobacco products, carbonated beverages, etc.
Federal Self-employment Tax
The Federal Self-Employment Tax is payable by each member or administrator of an LLC based in the state of West Virginia who earns a profit. Each partner’s or manager’s profits are subject to the federal self-employment tax. West Virginia has a 15.3% federal self-employment tax. You can calculate the Self-Employment Tax your LLC owes in order to deduct your LLC’s expenses from the money earned.
Federal Income Tax
Federal income tax is paid on all sorts of earnings made from your LLC. It is based on your income, the rate at which you are taxed, reductions, and filing status. Only the gains you take out of the company are subject to federal income tax, with various exemptions and deductions. This covers, among other things, tax-free salary, company costs, and various medicare and retirement plan exemptions.
Employer & Employee Tax
Any LLC with working staff on the payroll is required to pay a variety of taxes that apply to all employees. Employee and employer tax effects are distinct from those of the other types. For example, at the time of receiving a payout, all working staff of an LLC must collect and withhold the Payroll tax. Whether you have withheld the federal tax or not, each employee is required to file a separate 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. West 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 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 West Virginia.
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. A West 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 West 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||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 West Virginia
Any LLC operating in West Virginia is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.
If you’re starting a business in West Virginia, you may be wondering: How do LLCs pay taxes? As an employer, you’re obligated to withhold and pay employee income taxes. If you have employees, you must register with the State Tax Department and file quarterly withholding tax returns using Form WV/IT-101Q. You must reconcile these taxes with the IRS every quarter.
First, you must file the Articles of Organization with the Business and Licensing Division of the State of West Virginia. To do this, you can file online or in person. You can also fax the paperwork if you prefer. You must wait five to ten days for your filing to be processed unless you opt for an expedited service. You can pay an expedited fee of $25 to get the documents processed within a day or two.
In addition to employment taxes, LLCs also have to pay employer taxes. These taxes are called withholding taxes and vary by state. LLCs can elect to be treated as corporations by filing IRS Form 2553. In West Virginia, however, LLCs have to file their own tax returns and pay corporate income taxes. The West Virginia corporate tax is 6.5% of taxable income. The tax must be paid using Form CNF-120.
Before starting an LLC, consider its name. Make sure it’s not a similar business in the state. If you have a name in mind, check if it’s available in West Virginia. Be aware that certain words and phrases may have restrictions, so you might need to submit additional paperwork and licensure. One of the most important considerations when choosing an LLC name is URL availability. Buy a domain name, even if you think you’ll only need a website later.
The state tax department in West Virginia requires LLCs to file quarterly or annual reports. These returns are reconciled with Form IT-103. LLCs typically pay less than corporations do. This is because they are pass-through tax entities. However, there are exceptions. Some LLCs have income but no taxes. If your LLC doesn’t have any income during a particular year, you must still file a tax return.
In West Virginia, LLC members and administrators are responsible for paying self-employment tax. This tax covers Medicare and Social Security. Despite this, members of LLCs in West Virginia can deduct business expenses from their income, including their salaries. But the profits from these businesses are also subject to this tax. In West Virginia, self-employment tax is 15.3% of profits. Therefore, you’ll need to determine whether or not the income generated from the business is taxable.
Before forming an LLC, make sure you hire a registered agent in West Virginia. This person will receive legal documents for the company and act as a registered agent for the LLC. The registered agent must have a West Virginia physical address and an email address. The registered agent should be accessible during normal business hours to receive notifications of annual reports. Otherwise, you may want to leave the registered agent field blank.
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.