How to File LLC Taxes in Arizona? (A Complete Guide)
If you're an LLC owner in Arizona, navigating tax obligations can often become intricate and overwhelming.
To provide you with comprehensive insights into the array of tax responsibilities your LLC must fulfill, we've harnessed the expertise of our team of seasoned LLC specialists, boasting a combined two decades of experience in the field.
We also spent three weeks researching the state website and curated this article highlighting the state and federal taxes Arizona LLCs file.
Quick Summary
- LLCs in Arizona are taxed based on the members and the corporation's status.
- The federal self-employment tax is 15.3% of the owner's salary.
- All C-corps are taxed with a federal income tax return of 4.9%.
How Are LLCs Taxed in Arizona?
A limited liability company (LLC) in Arizona is taxed based on the members or number of owners by default status. The default LLC status is based on a single or multiple-member metric by the IRS.
LLC owners are responsible for reporting profits on their personal tax returns due to pass-through taxation.
Additionally, instead of filing as default status mentioned above, an Arizona LLC may elect to be taxed as a corporation.
But first, you must meet certain requirements and file specific forms with the IRS. Once your corporation status is approved, the IRS must recognize and tax your LLC as a corporation, either S-Corporation or C-Corporation.
"An LLC owner must keep the operating agreement updated on how your LLC is taxed."
- U.S. Small Business Administration
State Taxes for Arizona LLCs
How you file state income tax for LLC in Arizona heavily depends on how you choose your LLC to be taxed with the IRS.
Unlike some states, Arizona does not impose a franchise tax on LLCs, which is a separate tax or fee for the privilege of conducting business.
The IRS classifies an LLC for tax purposes based on whether it's a corporation or by the number of LLC members. Here's how they pay taxes.
1. Single-Member LLCs
The Internal Revenue Service (IRS) categorizes the entity as a sole proprietor, branch, or division of the parent company if another company owns the LLC [1].
A single-member LLC usually does not file its return, but the owner files a personal state-level return (Arizona Form 1040), including the LLC's profits or losses [2].
While there are a few types of Form 1040, you must use Form 1040 if:
- Your Arizona taxable income is $50,000 and above (regardless of filing status).
- You are making adjustments to your income.
- You are claiming estimated payments.
- You list deductions.
- You claim tax credits.
2. Multi-Member LLCs
A multi-member LLC pays taxes as a partnership. At the state level, the LLC must file a partnership return form (Form 165). The owners will then file a personal state-level return with the LLC's profits or losses.
The LLC must file a 1065 Partnership Return and issue a Schedule K-1 to its owners with the IRS [3].
The K-1s report every owner's fair share of profits. Furthermore, the K-1 income "flows through" to the owners and is paid by each member on their personal tax return (Form 1040).
3. LLCs taxed as S-corp
All LLCs taxed as S-corp must file a tax return with the Department of Revenue to pay your Arizona income tax.
To do this, you must file all the correct documents, including AZ Form 120.
The due date to pay income taxes is April 15th if the S-corp runs on the calendar year. If not, the deadline is the 15th day of the 3rd month after the close of the fiscal year.
Your LLC can request to be taxed as an S-Corporation by filing Form 2553 with the IRS [4].
4. LLCs taxed as C-corp
All LLCs taxed as C-corp must file Arizona tax return Form 120S and pay a corporate income tax of 4.9% [5].
According to the Department of Revenue, the due date to pay your C-corp taxes is April 15th if the LLC runs during the fiscal year.
If running on a different calendar year, the deadline should be the 15th day of the 4th month after the end of the financial year.
To elect your LLC as a C-corp, file Form 8832 with the IRS.
Federal Taxes for Arizona LLCs
The IRS treats all Arizona LLCs for federal self-employment tax and income tax in several ways. Here's a breakdown of how LLCs pay self-employment and income taxes based on members and type of corporation.
For more information on estimated taxes and obtaining an Employer Identification Number (EIN), visit the IRS website.
1. Federal Self-Employment Tax
The Federal self-employment tax governed by the Federal Insurance Contributions Act (FICA) mandates all individual members who draw profits from the LLC to pay self-employment tax of 15.3% [6].
This 15.3% LLC tax rate is constant for all LLCs except S-corps. S-corps are taxed as pass-through entities like an LLC's default status.
With the S–corp election status, you can pay yourself a salary subject to a 15.3% federal self-employment tax and also issue yourself a dividend from retained profits that is not subject to the self-employment tax.
2. Federal Income Tax
The IRS expects all LLCs to pay regular federal income taxes on any earnings taken from the LLC.
The income tax varies depending on the income tax bracket, earnings, and corporations filing status.
It's important to note that the LLC doesn't directly pay taxes; instead, taxes are calculated based on the profits withdrawn from the business after deducting applicable allowances.
Other Taxes
Besides the federal and state income tax, your LLC may be mandated to pay sales tax and local, employer, and industry taxes.
In addition to the Transaction Privilege Tax (TPT), businesses may also be subject to state sales tax, which is imposed on vendors for the privilege of conducting business.
1. Transaction Privilege Tax
A Transaction Privilege Tax (TPT), often known as the Arizona sales tax, is required for the privilege of doing business in Arizona.
Although TPT is a requirement for all businesses that make sales, the tax rate you pay depends on the industry sector and location of your business.
You must submit the Arizona Joint Tax Application (JT-1) to start selling. This application applies to sales tax, use tax, employer withholding tax, and unemployment insurance tax.
You can download JT-1 and go to the bottom to check the city/county fees.
This sales tax license must be renewed on January 1st of every year. You must also get a new TPT license if you change location or sell your business.
2. Local County/City Taxes
Each city and county in Arizona will have its own business tax laws. Local tax laws can have different tax rates and fees, so check with your city and county.
For instance, Tempe's TPT and use tax are each 1.80%, and Phoenix's are 2.30%.
3. Arizona State Employer Taxes
If you hire employees in Arizona, you'll need to pay the following taxes:
- Withholding Employment Taxes: Employees must fill out Arizona Form A-4, Arizona Withholding Percentage Election. If not, you automatically withhold payroll taxes at 2% of their wages until a percentage is elected and pay them to the Department of Revenue.
- Unemployment Insurance Taxes: This tax requirement is mandatory for all businesses and ranges from 0.08% to 20.93%, depending on the "reserve ratio" your business meets. Check your unemployment tax ratio rate on the Department of Economic Security's website.
- Workers' Compensation Taxes: All employers in Arizona must file for workers' compensation through an insurance policy from a company approved by the Arizona Department of Insurance. This policy benefits employees with job-related illnesses or injuries by providing medical benefits, temporary and permanent compensation, or even death benefits.
4. Industry Taxes
Arizona businesses must also apply for industry taxes which vary from city to city. A few of the industry taxes include alcohol luxury tax, tobacco luxury tax, and bingo tax.
To maintain your compliance with the state, ensure that you check with your local clerk, county office, and Arizona's Department of Revenue.
Related articles:
- Forming an LLC in Arizona
- Professional LLC Formation Services in Arizona
- Premium Registered Agent Services in Arizona
Compliance and Record Keeping
1. Annual Reports and Fees
As an Arizona LLC, you are not required to file annual reports with the state. However, it’s essential to keep your information current with the Arizona Corporation Commission (ACC).
If there are any changes in your LLC’s address, statutory agent, or management structure, you must file an amendment with the ACC.
Additionally, you may need to pay annual fees for business licenses and permits, which vary depending on your industry and location.
2. Business Licenses and Permits
Arizona LLCs are required to obtain business licenses and permits from the state or local government.
These licenses and permits may include a sales tax license, employer identification number (EIN), and other industry-specific licenses.
It’s crucial to research and obtain the necessary licenses and permits to operate your business legally.
3. Operating Agreement
An operating agreement is not mandatory in Arizona, but it’s highly recommended for LLCs.
The operating agreement outlines the management structure and operating procedures of the LLC, clarifying roles and responsibilities within the business.
This document can provide proof of the LLC’s separation from personal assets in legal situations.
FAQs
Do Foreign LLCs in Arizona Need to Pay Arizona Taxes?
Yes, foreign LLCs in Arizona need to pay Arizona taxes. They include federal and state income taxes, among other local, industry, and employer taxes.
Do I Need to File an Arizona State Tax Return for My LLC?
Yes, you need to file an Arizona state tax return for your LLC. The tax return is a mandatory requirement from the state and the IRS.
References:
- https://www.irs.gov/businesses/small-businesses-self-employed/llc-filing-as-a-corporation-or-partnership
- https://azdor.gov/forms/individual-income-tax-highlights
- https://www.irs.gov/forms-pubs/about-form-1065
- https://www.irs.gov/forms-pubs/about-form-2553
- https://azdor.gov/forms/corporate-tax-forms/arizona-corporation-income-tax-return
- https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes
