Establishing a Tennessee LLC can be a fantastic way to bring your business vision to life, but understanding the Tennessee LLC tax landscape is crucial for ongoing success.
We teamed up with LLC experts with fifteen years of experience and conducted comprehensive research on the Tennessee Secretary of State's website to delve into the tax landscape.
This article explores the taxes your Tennessee LLC will encounter and provides insightful tips on navigating the complex world of state and federal taxes.
Quick Summary
- Tennessee limited liability companies may be subject to additional taxes, such as franchise and excise taxes, local income taxes, sales tax, withholding taxes, employer's state unemployment tax, and employer's federal unemployment tax.
- Foreign LLCs operating in Tennessee are obligated to register for local & state taxes, while the tax rate varies depending on type & structure.
- Tennessee LLCs may be required to file and pay local income taxes, depending on the specific regulations of the municipality in which they are located.
How Are LLCs Taxed in Tennessee?
LLCs in Tennessee are taxed based on their tax classification. By default, LLCs in Tennessee are taxed as pass-through entities.
The LLC's profits and losses are passed to the member's tax returns. The members are then taxed on their share of the profits or losses, regardless of whether they are distributed to them.
State Taxes for Tennessee LLCs
The state tax requirements for Tennessee LLCs depend on the number of members and the chosen taxation structure.
Additionally, Tennessee LLCs may need to collect sales tax on certain goods and services [1].
1. Single-Member LLC
For federal income tax purposes, a single-member LLC (SMLLC) is categorized as a sole proprietorship, while a multi-member LLC is automatically categorized as a partnership.
While this simplifies the tax process for single-member LLCs, knowing your tax obligations is crucial in ensuring you accurately report your income.
You contribute to your future social safety net when you pay self-employment tax.
Just like traditional employees have a portion of their earnings withheld for these programs, you'll need to calculate and set aside a portion of your income to fulfill your self-employment tax obligations.
2. Multi-Member LLC
A limited liability company (LLC) can have multiple members; in such cases, these multi-member LLCs are taxed as partnerships.
Each member is held accountable for declaring their share of income and remitting taxes on their tax return.
Each member must file a 1065 Partnership Return and report their distributive share of profits via a Schedule K-1 [2].
3. LLCs Taxed As S-Corp
An LLC can elect to be treated as an S Corporation for tax purposes, with its own benefits.
LLCs classified as S-corps benefit from LLC pass-through taxation and can divide income into salary and dividends, potentially reducing self-employment taxes.
To elect S-corp taxation, LLCs must fulfill certain Internal Revenue Service (IRS) requirements and submit IRS Form 2553 [3].
Consider consulting with an accountant before making this election, as it may affect your federal income tax obligations.
4. LLCs Taxed As C-Corp
LLCs can also elect to be taxed as C-corporations, providing more tax deductions and making them attractive to investors. However, they are subject to annual franchise and sales/use taxes.
To make this election, LLCs must file Form 8832 with the IRS. It's wise to consult with an accountant before making this election, as it may affect whether you must pay federal income tax obligations.
Federal Taxes for Tennessee LLCs
As we dive into federal tax matters, it's important to highlight that Tennessee LLCs navigate self-employment and federal income taxes.
Members bear responsibility for taxation on their portion of the LLC's earnings.
This includes the self-employment tax rate, determined by aligning it with personal federal income taxes, which you'll usually report via Schedule C.
The amount of federal income tax paid by Tennessee LLCs is contingent upon multiple factors, such as:
- Earnings
- Current income tax bracket
- Deductions
- Filing status
Understanding these taxes and working with a qualified accountant or tax professional can ensure accurate federal tax filings for your Tennessee LLC.
Other Taxes
In addition to state and federal taxes, Tennessee LLCs are subject to various other taxes. Each of these taxes has unique requirements, so it's essential to understand which ones apply to your LLC and how to file those LLC taxes properly.
1. Tennessee Franchise Tax
Tennessee LLCs must pay a franchise tax based on their net worth or book value, whichever is greater.
LLC taxes are calculated based on a property's net worth or book value, whichever figure is greater. This applies to all real and tangible personal properties owned or used in Tennessee.
2. Sales and Use Tax
Tennessee LLCs selling physical products or certain services must collect and pay sales tax.
Sales and use tax in Tennessee is set at 7% [4]. This rate applies to all parts of the state, and it's important to note that Tennessee has no state income tax.
3. Tennessee State Employer Taxes
For Tennessee LLCs with employees, state employer taxes include unemployment insurance tax and workers' compensation insurance.
These taxes help provide financial support and medical care for employees who become injured or unemployed while working for your LLC.
4. Industry Taxes
Certain types of businesses may be subject to industry-specific taxes, such as:
- Fuel tax for gasoline sellers
- Import/export duties
- Lodging taxes
- Rental taxes
These taxes are levied on businesses in specific industries.
Research any industry-specific taxes that may apply to your LLC and ensure proper compliance.
5. Local Income Tax for Tennessee LLCs
Tennessee LLCs may need to file and pay local income taxes depending on the regulations of the municipality in which they are located.
Be aware of your municipality's local income tax filing and payment requirements to avoid any issues.
6. Tennessee Excise Tax
Excise tax is imposed on certain goods and services, such as alcohol and tobacco.
For Tennessee LLCs, the excise tax is determined based on the net income for the relevant tax year.
This net income also determines the corresponding income tax for Tennessee LLC.
In some cases, excise taxes may vary depending on the specific goods or services involved.
7. Tennessee Business Tax
Business tax is a tax levied on companies for engaging in activities within the jurisdiction of the state.
The LLC's annual gross receipts, primary business purpose, and whether it is a retailer or wholesaler are considered when calculating the cost.
These factors play an important role in determining the fee. Managing a business bank account can help keep track of these financial aspects.
Tax-Deductible Expenses for an LLC in Tennessee
Tax-deductible expenses for Tennessee LLCs include:
- Business-related expenses, such as rent, utilities, office supplies, and employee salaries
- Cash discounts
- Trade-in amounts
- Payments to licensed subcontractors
- Sales of services
- Startup expenses
- Home office expenses
- Business use of a car
- Other business-related expenses
Consult with a tax professional or the Tennessee Department of Revenue to optimize your LLC taxes deductions and credits.
FAQs
How Much Is A Tax On A TN Business?
A tax on a TN business can vary depending on the type of tax and the specific business structure. Retailers typically incur a tax rate of 0.001 or 0.00025, while wholesalers are generally subject to a tax rate of 0.001 or 0.000375.
What Are The Penalties For Not Filing The Excise Tax Return For Tennessee LLCs?
The penalties for not filing the excise tax return for Tennessee LLCs can also be steep. The state can charge interest, late fees, and even administrative penalties.
Do You Need Help Filing Virginia LLC Taxes?
If you require assistance filing your Tennessee LLC taxes, enlisting the support of a proficient accountant or tax expert is advisable.
This step will ensure that your tax filings are precise and punctual. These professionals bring valuable insights into maximizing deductions and credits and ensuring adherence to state and federal tax regulations.
In addition, leveraging QuickBooks can further streamline your tax management process.
By integrating QuickBooks into your financial practices, you can maintain your business's financial health while concentrating on expanding your Tennessee LLC.
Our #1 Recommendation
QuickBooks
- Easy-to-use interface
- Excellent privacy protection
- Useful integrated tools
- Great value for money
- Simplified tax management
- Get the BEST PRICE until the end of October
- Lack of business-specific features
