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How Your LLC Will Be Taxed
In this guide, we’ll cover the main Tennessee business tax types, including state income and sales tax, and self-employment, payroll and federal taxes. LLC profits 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 federal income tax on any profits, less feeral allowances and deductions.
- Employers pay payroll tax on any salaries they pay to employees.
- Some LLCs pay Tennessee sales tax on products.
- Employees pay federal and payroll tax on their earnings.
Items 1 and 2 fall under pass-through taxation for any LLC owners, managers or members who receive profits from the business. Any profits are reported on federal and state personal tax returns.
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State Taxes for LLCs
There are two main types of tax you'll pay to the Tennessee Department of Revenue: sales, and franchise and excise tax.
Tennessee Income Tax
Tennessee doesn’t collect income tax on earnings. You'll only pay state income tax on stock dividends and interest received from bonds and notes. This is called the Hall income tax.
Get more information about the Tennessee Hall income tax here.
Tennessee Sales Tax
If you sell physical products or certain types of services, you may need to collect sales tax and then pay it to the state's Department of Revenue. Tennessee sales tax is collected at the point of purchase, and rates vary depending on the region, county or city where you're located.
You'll typically need to collect Tennessee sales tax on:
- Tangible, personal property and goods you sell like furniture, cars, electronics, appliances, books, raw materials, etc.
- Certain services your Tennessee business might provide
Most states do not levy sales tax on goods considered necessities, like 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 Department of Revenue to confirm whether your business is required to collect Tennessee sales tax, and to ensure you're paying the correct amount.
Federal Taxes for LLCs
As the owner of an LLC, you must pay federal self-employment and 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 your Tennessee 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 and Medicare and other benefits. It applies to all the earnings you withdraw from your business. The current self-employment tax rate is 15.3%.
You'll be able to deduct your business expenses from your income when working out 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 self-employment tax of $3,060.
- On profits of $50,000, you would pay self-employment tax of $7,650.
- On profits of $80,000, you would pay $12,240.
- On profits of $120,000, you would pay self-employment tax of $18,360.
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.
Treating Your LLC as an S Corp Can Save You Money.
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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 several factors, including your earnings, current income tax bracket, deductions and filing status.
You only pay federal income tax on profits you take out of the business, minus certain deductions and allowances. This includes your tax-free amount, plus business expenses and other deductions in areas such as healthcare and some retirement plans.
Speak to your accountant for more information.
Employee and Employer Taxes for Your Tennessee LLC
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.
- Employee and Employer Taxes for Your Tennessee LLC
All employers are required to withhold federal taxes from their employees’ wages. You’ll withhold 7.65% of their taxable wages, and your employees will also be responsible for 7.65%. That adds up to the current federal tax rate of 15.3%.
Speak to your accountant for more information.
Employees May Need to File Tax Returns
Regardless of whether 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 your industry, you may be liable for certain additional taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Likewise, 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 must pay estimated taxes throughout the year, depending on your adjusted gross income, taxable income, taxes, deductions, and credits for the year. In Tennessee, you'll pay estimated tax for:
- Federal income tax
- Federal self-employment 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 Tennessee Business Tax
Does Tennessee Have Sales Tax?
Yes. Tennessee does have a sales tax, which may vary among cities and counties. You can find more information above.
Does Tennessee Have an Income Tax?
Tennessee doesn’t tax wages. However, it does levy taxes on dividend and interest income. You can find more information above.
Does Tennessee Have a Franchise Tax?
Yes. Tennessee does have a franchise and excise 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 federal government. You'll find more information above.