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How Your LLC Will Be Taxed
In this guide, we’ll cover the main Alabama business taxes you'll be responsible for, including state income and sales tax, and self-employment, payroll and federal taxes. The profits of an LLC aren’t taxed at the business level like C Corporations. Instead, taxes are as follows:
- Owners pay self-employment tax on business profits.
- Owners pay state income tax on any profits, minus state allowances or deductions.
- Owners pay federal income tax on any profits, minus federal allowances or deductions.
- Some LLCs pay Alabama sales tax on products.
- Employers pay payroll tax on any salaries paid to employees.
- Employees pay federal and state income taxes on their earnings.
Items 1, 2 and 3 fall under pass-through taxation for any LLC owners, managers or members who receive profits from the business. Profits are reported on federal and state personal tax returns.
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State Taxes for LLCs
There are three main types of state tax you must pay to the Alabama Department of Revenue: income, sales and privilege tax.
Alabama Income Tax
As a business owner, you’ll need to pay Alabama income tax on any money you pay to yourself. These earnings flow through to your personal tax return. You’ll be taxed at the standard rates for Alabama, and you’ll get to apply regular allowances and deductions.
Any salaried employees will also need to pay Alabama income tax.
Alabama income tax rates range between 2 and 6 percent, depending on how much you earn.
Alabama Sales Tax
If you sell physical products (such as electronics, books, cars, furniture, appliances, raw materials, etc.) or certain services, you may need to collect Alabama sales tax at the point of purchase. You'll remit the taxes you collect to the Alabama Department of Revenue.
Most states don’t levy sales tax on goods that are considered necessities, such as food, medications, clothing or gas.
Use our sales tax calculator to get an idea of what you'll need to pay, but always check with your accountant and the Alabama Department of Revenue to find out whether your business is required to collect sales tax and ensure you remain in compliance.
Alabama Franchise Tax
Some states levy a tax on certain businesses for the right to exist as a legal entity and do business in the state. Though some states call it a franchise tax, in this state, it's called the Alabama Business Privilege Tax.
Federal Taxes for LLCs
As the owner of an LLC, you must pay self-employment tax and federal income tax, both of which are levied as “pass-through taxation."
Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Alabama LLC is paying the correct amount.
Federal Self-Employment Tax
All members or managers who take profits out of the LLC must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA), which covers Social Security, Medicare and other benefits. The current self-employment tax rate is 15.3 percent.
You'll be able to deduct your business expenses from your income when calculating how much self-employment tax you owe.
Here are some examples of how much self-employment tax you may need to pay, depending on your earnings:
- On profits of $20,000, you would pay $3,060.
- On profits of $40,000, you would pay $6,120.
- On profits of $80,000, you would pay $12,240.
- On profits of $100,000, you would pay $15,300.
Pay Less Self-Employment Tax by Treating Your LLC as an S Corporation
The Internal Revenue Service allows an LLC to be treated as an S Corporation for tax purposes, provided your business meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary and other income as distributions or withdrawals.
You do this by filing Form 2553, also known as an S Corp Election form, with the IRS. Bizee can also file the form for you. Use our S Corp Tax Calculator to get an idea of how much money you could save with this election.
Consult with your accountant or tax advisor for more information on reducing your LLC self-employment tax through an S Corporation tax election.
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Federal Income Tax
You must also pay regular federal income tax on any earnings you take out of your LLC. The amount of income tax you pay depends on your earnings, current income tax bracket, deductions and filing status.
You only pay federal income tax on profits you take out of the business, less certain deductions and allowances. This includes your tax-free amount, plus business expenses and other deductions for areas such as healthcare and some retirement plans.
Speak to your accountant for more information.
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.
Employees May Need to File Tax Returns
Whether or not you withhold federal and state income tax, your employees may need to file their own tax returns.
Employee Insurance and Other Requirements
You may also need to pay insurance for any employees, such as employee compensation insurance or unemployment tax.
Other Taxes and Duties for Your LLC
Depending on the industry that your LLC operates in, you may be liable for certain other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Or if you import or export goods, you may need to pay certain duties.
Speak to your accountant about any other taxes or duties you may need to pay.
Most LLCs are required to pay estimated taxes throughout the year, depending on your adjusted gross income, taxable income, taxes, deductions, and other credits for the year. The most common types of estimated tax are:
- Federal self-employment tax
- Federal income tax
- Alabama income tax
Most LLCs will pay estimated taxes four times a year. Learn more on the IRS website, and speak to your accountant for more information.
FAQs on Alabama Business Taxes
FAQs on Alabama Business Taxes
Yes. Alabama does have a sales tax, which may vary among cities and counties. You can find more information above.
Does Alabama Have a Franchise Tax?
Yes. Alabama does have a franchise tax, but the state calls it the Alabama Business Privilege Tax. You can find more information above.
Does Alabama Have a State Income Tax?
Yes. Alabama does have a general state income tax. You can find more information above.
Do I Need to Pay Estimated Taxes?
Yes. In most cases, you must pay estimated taxes to the state and federal governments. You can find more information above.