Alabama Business Taxes for LLCs
What taxes does an Alabama LLC pay? Learn about the Business Privilege Tax, state income tax, self-employment tax, sales tax, and payroll tax requirements for Alabama LLCs.
Bizee Editorial Staff
Editorial Team
Alabama tax quick facts
Filing fee: $200 (domestic LLC)
Processing time: Varies by filing method; standard processing typically 3–5 business days
State agency: Alabama Secretary of State (formation); Alabama Department of Revenue (taxes)
Annual report due: No separate annual report; Business Privilege Tax return due by the 15th day of the 3rd month after the close of the tax year (March 15 for calendar-year filers)
State tax rate: Business Privilege Tax: 0.025%–0.225% of net worth (minimum $100); Corporate income tax (C Corp election only): 6.5%; Individual income tax on pass-through income: 2%–5%
How Alabama taxes your LLC
Alabama LLCs pay several taxes: the Alabama Business Privilege Tax (every LLC, every year), pass-through state and federal income tax on profits, self-employment tax on members' earnings, and sales tax if the business sells taxable goods or services. LLCs with employees also handle payroll taxes. The exact mix depends on how your LLC is classified for federal tax purposes.
Most Alabama LLCs are taxed as pass-through entities, which means the business itself doesn't pay income tax. Profits flow to the members, who report them on their personal returns. The one tax that hits the LLC directly — regardless of classification — is the Business Privilege Tax. That's the one most people don't expect.
- Business Privilege Tax — owed by every Alabama LLC, minimum $100 per year
- Pass-through income tax — members pay Alabama individual income tax (2%–5%) on their share of profits
- Federal self-employment tax — 15.3% on net earnings for members not electing corporate taxation
- Sales and use tax — required if the LLC sells taxable goods or certain services
- Payroll taxes — required if the LLC has employees
Alabama Business Privilege Tax
Every Alabama LLC owes the Business Privilege Tax each year — there's no exemption for new businesses or small LLCs. The tax is calculated on the LLC's net worth (or federal taxable income, whichever produces the higher amount), with rates ranging from 0.025% to 0.225%. The minimum tax is $100.
The return is due by the 15th day of the 3rd month after the close of the LLC's tax year — March 15 for calendar-year filers. LLCs classified as partnerships file Form PPT. LLCs classified as corporations file Form CPT. Both forms are filed with the Alabama Department of Revenue.
This is the tax that catches Alabama LLC owners off guard most often. Even if the business had no income, the $100 minimum is still due.
State income tax for LLC members
Alabama taxes LLC income at the member level, not the entity level — for LLCs taxed as sole proprietorships or partnerships. Members pay Alabama individual income tax on their share of profits at rates between 2% and 5%, depending on total income. The LLC itself doesn't file a state income tax return in those cases.
Multi-member LLCs classified as partnerships must file Alabama Form 65 (Partnership Return of Income) and pay a filing fee. Income still passes through to members, who report it on their individual returns.
If your LLC elected to be taxed as a C Corporation, Alabama applies a flat 6.5% corporate income tax on net income at the entity level. A tax professional can help you figure out whether a corporate election makes sense for your situation.
Federal self-employment tax
LLC members who are taxed as sole proprietors or partners — not as W-2 employees of their own business — owe federal self-employment tax on their net earnings. The rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. You report this on Schedule SE of Form 1040.
Self-employment tax is calculated on net earnings — gross business income minus allowable deductions. You can deduct half of the self-employment tax you pay when calculating your adjusted gross income on Form 1040, which reduces your federal income tax bill.
Most Alabama LLC members also need to make quarterly estimated tax payments to the IRS to cover both income tax and self-employment tax throughout the year. Missing those payments can mean an underpayment penalty at filing time.
Alabama sales and use tax
Alabama has a state sales tax, and your LLC needs to collect and remit it if you sell taxable goods or certain services. The state base rate is 4%, but cities and counties add their own rates on top — so the total rate varies by location. You register for a sales tax license through the Alabama Department of Revenue.
Use tax applies when your LLC buys taxable goods from out-of-state sellers who didn't charge Alabama sales tax. If you're purchasing equipment or supplies from vendors who don't collect Alabama tax, you're responsible for reporting and paying the use tax directly to the state.
Payroll taxes for Alabama LLCs with employees
If your LLC pays employees, you take on payroll tax responsibilities at both the federal and state level. Federally, you withhold income tax, Social Security, and Medicare from employee wages and pay the employer's matching share of Social Security and Medicare. You also pay federal unemployment tax (FUTA).
At the state level, Alabama requires employers to withhold state income tax from employee wages and remit it to the Alabama Department of Revenue. You'll also register for and pay Alabama unemployment insurance tax through the Alabama Department of Labor. A payroll service or accountant can help you stay on top of the filing schedule — payroll tax deadlines are frequent and the penalties for missing them add up.
Frequently asked questions
It depends on how your LLC is classified for federal tax purposes. Single-member LLCs are taxed as sole proprietorships by default — profits pass through to the owner's personal return. Multi-member LLCs are taxed as partnerships by default — profits pass through to each member. LLCs that elected C Corporation status pay Alabama's 6.5% corporate income tax at the entity level. Every Alabama LLC also owes the Business Privilege Tax regardless of classification.
Most Alabama LLCs pay 4 types of tax: the Business Privilege Tax (minimum $100 per year, owed by every LLC), pass-through state income tax on members' profits, federal self-employment tax at 15.3% on net earnings, and sales tax if the business sells taxable goods or services. LLCs with employees also handle payroll taxes. The Business Privilege Tax is the one that applies no matter what — even in a year with no income.
Yes. Alabama doesn't have a traditional annual report fee, but every LLC owes the Business Privilege Tax each year — with a minimum of $100. The return is due by the 15th day of the 3rd month after the close of the tax year (March 15 for calendar-year filers). There's no exemption for new LLCs or businesses with no income. Missing the deadline means interest and penalties on top of the tax owed.
Every LLC doing business in Alabama or formed in Alabama is required to pay the Business Privilege Tax. That includes single-member LLCs, multi-member LLCs, and LLCs that elected corporate tax status. The tax is based on the LLC's net worth or federal taxable income, whichever produces the higher amount, with rates from 0.025% to 0.225% and a $100 minimum.
Yes. Alabama has a state sales tax with a base rate of 4%, and local jurisdictions add their own rates on top — so the total rate varies by city and county. If your LLC sells taxable goods or certain services, you need to register for a sales tax license with the Alabama Department of Revenue and collect and remit sales tax on those transactions.
The self-employment tax rate is 15.3% of net earnings — 12.4% for Social Security and 2.9% for Medicare. This is a federal tax, not a state tax, and it applies to LLC members who are taxed as sole proprietors or partners rather than as W-2 employees of their own business. You report it on Schedule SE of Form 1040. You can deduct half of the self-employment tax paid when calculating your adjusted gross income.
Yes. If you expect to owe tax at the end of the year, you generally need to make quarterly estimated tax payments to both the IRS and the Alabama Department of Revenue. This covers income tax and, at the federal level, self-employment tax. Missing estimated payments can mean an underpayment penalty when you file your annual return. A tax professional can help you figure out the right payment amounts for your situation.
