How Your LLC Will Be Taxed
In this guide, we’ll cover the main business taxes required in Washington DC, including payroll, self-employment 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.
Employers pay payroll tax on any wages they pay to employees.
Employees pay state and federal 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.
Incfile provides a complete Business Tax Filing service.
State Taxes for LLCs
There are two main types of state tax you have to pay to the District of Columbia Office of Tax and Revenue: Washington DC income tax and Washington DC sales tax.
Washington DC Income Tax
As a business owner, you’ll need to pay Washington DC income tax on any money you pay to yourself. These earnings flow through to your personal tax return. You’ll be taxed at the District of Columbia's standard rates, and you’ll also be able to apply regular allowances and deductions.
Any employees will also need to pay state income tax. The District of Columbia has tax rates ranging between 4% to 8.95%.
Washington DC Sales Tax
If you sell physical products or certain types of services, you may need to collect sales tax (also known as sales and use tax) and then pay it to your local or regional authority. Washington DC sales tax is collected at the point of purchase at a fixed rate of 6%.
You will typically need to collect Washington DC sales tax on:
- Certain services that your Washington DC business might provide
- Tangible, personal property and goods that you sell like furniture, cars, electronics, appliances, books, raw materials, etc.
Most states do not levy sales tax on goods that are considered necessities, like food, medications, clothing or gas.
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 Washington DC 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), and covers Social Security, Medicare and other benefits. The current self-employment tax rate is 15.3 percent.
You’ll be able to deduct some of 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 $40,000, you would pay self-employment tax of $6,120
- On profits of $60,000, you would pay self-employment tax of $9,180
- On profits of $100,000, you would pay self-employment tax of $15,300
- 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.
Speak to your accountant or professional tax preparer for more information on reducing your LLC self-employment tax through an S Corporation tax election.
You can do this by making an “S Corporation Tax Election” with the IRS using Form 2553. We can file your Form 2553 with the IRS on your behalf.
Federal Income Tax
You must also pay regular federal income tax on any earnings you take out of your Washington DC 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.
Employer Payroll Tax Withholding
All employers are required to withhold federal taxes from their employees’ wages. You’ll withhold 7.65 percent of their taxable wages, and your employees will also be responsible for 7.65 percent, adding 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 other 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 withhold or pay.
Estimated Taxes for Your LLC
Most LLCs must pay estimated taxes throughout the year, depending on the amount of profit and income you expect to make. The most common types of estimated tax are:
Federal income tax
Federal self-employment tax
Washington DC income tax
Most LLCs will pay estimated taxes on a quarterly basis. Learn more on the IRS website, and speak to your accountant for more information.
FAQs on Washington DC Business Taxes
Yes, Washington DC has a fixed sales tax rate of 6%. You can read more about it above.
Yes, Washington DC levies an income tax of rates between 4% and 8.95%. You can read more about it above.
No, Washington DC does not have a franchise tax.
Yes. In most cases, you must pay estimated taxes to the state and federal governments. You can find more information above.
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