How to File LLC Taxes in Alabama? (Simple Guide)

Alabama LLCs must file several state and federal taxes to maintain good standing with the state and avoid administrative dissolution. Filing taxes keeps the IRS, and the Department of Revenue updated on the income earned and taxes paid by the business.

To inform you of the taxes an LLC in Alabama pays, we have assembled a team of seasoned LLC professionals leveraging their 20 years of collective experience.

We spent four weeks researching the state's website to detail all the taxes an Alabama LLC files.

Quick Summary

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How Are LLCs Taxed in Alabama?

LLCs in Alabama are taxed according to the number of members the LLC has. The IRS will not expect the LLC to file taxes, but its income flows through to the members who will pay taxes in their personal income returns.

The way the IRS taxes your LLC is determined by its ownership structure by default or based on its chosen tax status.

The default status categorizes LLCs as single or multi-member, while the elective status regards LLCs as corporations for tax purposes.

"Talk to your accountant before requesting a corporation filing status, as there are several expenses to having your LLC taxed as a corporation."
- Blake Wolley, Senior Tax Associate

State Taxes for Alabama LLCs

Once the IRS approves your LLC status for tax purposes, the Alabama Department of Revenue follows through with your taxation status to the state level.

1. Single-Member LLCs

A single-member LLC in Alabama is a disregarded entity and does not file a separate form 65 [1].

In this regard, an individual member LLC is treated as a sole proprietorship. Therefore, the LLC itself does not file any state or federal income taxes; instead, the owner files a personal return that includes the LLCs profits and losses.

Additionally, if a partnership or corporation owns a single-member LLC, the LLC taxes should be expected on the owner's income tax return.

2. Multi-Member LLCs

A multi-member LLC in Alabama is treated like a partnership when filing taxes.

The LLC must file a Partnership return and issue its owners a Schedule K-1 (Form 1065) [2].

This report allows the LLC owners to pay income taxes from their personal income tax (Form 1040) on the profits they've drawn from the business.

3. LLCs taxed as S-corp

All LLCs with S-corp status are taxed as pass-through entities, meaning the business itself doesn't pay taxes.

An S-corporation doing business in Alabama must file the Alabama Corporation Income Tax Return (Form 20C). The Alabama corporate return rate is at 6.5% of the corporation's taxable income [3].

An LLC can request to be taxed as an S-corporation by filing Form 2553 with the IRS. Once approved, an S-corp must file Form 1120-S income return with the IRS [4].

4. LLCs taxed as C-corp

C-corps are subject to "double taxation," meaning that the C-corp files corporate income tax on taxable income, and the individual shareholders also pay taxes on their dividends.

Unlike regular LLCs, C-corps are eligible for more tax breaks than regular LLCs, so electing C-corp status can be a worthwhile move for some businesses.

You can make this decision by filing Form 8832 with the IRS. Once approved, a C-corporation must file Form 1120 [5].

Find out how to elect an LLC to be taxed as a C-corp.

Federal Taxes for Alabama LLCs

As an LLC owner, you must pay federal self-employment and income taxes.

1. Federal Self-Employment Tax

All individual LLC members or managers who draw profits from the business must pay self-employment tax.

This tax is managed by the Federal Insurance Contributions Act (FICA), which covers Social Security, Medicare, and other benefits. The self-employment tax rate is 15.3% [6].

However, unlike regular LLCs, S-corporations can make distributions to their owners that aren't subject to the 15.3% self-employment tax.

Read our article and learn how to avoid & reduce self-employment tax.

2. Federal Income Tax

Besides self-employment tax, you must pay standard federal income tax on any profits you take from your LLC.

Your earnings, current income tax bracket, deductions, and filing status determine the amount of income tax you pay.

Only the profits you withdraw from the business, less specific deductions and allowances, are subject to federal income tax.

Related Articles:

• How to Open an LLC in Alabama
• Top Registered Agent Services in Alabama
• Premium LLC Formation Services in Alabama

Other Taxes

Below are other business taxes an LLC must file and pay in Alabama.

1. Alabama Business Privilege Tax

The Alabama business privilege tax return is levied for the privilege of being under the Alabama laws. All LLCs in Alabama must file an annual business privilege tax on the total amount of income passed through to LLC members.

The tax rate varies depending on how much your business brings to Alabama. So, your rate will differ from year to year.

Alabama business privilege tax rate ranges from $0.25 to $1.75 for each $1000 of your entity's Alabama net worth with a minimum tax of $50.

The Alabama Business Privilege Tax return for pass-through entities Ike LLCs (Form PPT) includes the annual report with the business tax return.

The deadline is 2.5 months after the start of your taxable year.

2. Sales and Use Tax

Alabama sales and use tax rates vary across counties and municipalities, in addition to what is taxed by the state.

Here are Alabama's sales and use tax as of 2022:

• 4% General
• 1.5% Manufacturing
• 2% Automotive
• 4% Amusement Sales & Use
• 4% Vending (not machines) Sales & Use
• 1.5% Farm Machinery
• 3% Vending Machines

Given that these state taxes vary by municipality, the total sales tax can increase to 10% for some counties.

3. Local Alabama Taxes

Cities and counties in Alabama impose several other local taxes. Your LLC will have to pay taxes in the municipality your business is at and any other cities/counties you do business.

The local Alabama taxes include: 

• Sales tax
• Consumers use tax
• Sellers use tax
• Rental tax
• Lodgings tax

4. Alabama State Employer Taxes

Employers in Alabama need to pay unemployment insurance and workers' compensation taxes: 

• Unemployment Insurance (UI) Tax: Employers are subject to tax on the first $8,000 of wages they give their staff members yearly. The first $8,000 in wages paid to each employee is subject to a 2.7% unemployment insurance levy for new businesses. You can look up your tax rate on the Alabama Department of Labor website.
• Workers' compensation: In Alabama, companies with five employees or more are obliged to carry this insurance. The insurance cost will be determined by your history of claims and the level of risk present in your workers' jobs. 

Furthermore, as an employer, you must submit other payroll taxes, including: 

• Federal income tax withholding
• State income tax withholding
• Local/county deductions
• Employee deductions

5. Industry Taxes

Some of the industries that get taxed include: 

• Contractors 
• Dry Cleaning 
• Utility services 
• Pharmaceuticals
• Rental or Leasing 
• Telephone and Telegraph Services 
• Mobile Telecommunications Services
• Nursing & Hospital Facilities 
• Hydroelectric 
• Lodgings & accommodations

FAQs

Do You Need Help Filing Your Alabama LLC Taxes?

Filing your Alabama LLC taxes is an intricate process that requires an accurate and timely response. We recommend updating your tax information with accounting software, such as QuickBooks.

With QuickBooks, you can record your tax payments, do sales tax calculations for easy and accurate filings, and keep up with the latest tax legislation.

Their service also pairs you with a tax professional to help clean up your tax issues.