Limited Liability Companies (LLCs) are commonly referred to as a tax pass-through entity. Where corporations pay corporate taxes, LLCs do not pay taxes at the business level.
Instead, the company’s profits and losses are passed to the owners, who report their respective gain or loss on their annual income tax return.
Paying Taxes on Income From an LLC in Arizona
The IRS does not distinguish LLCs. Instead, the LLC must elect to be treated for tax purposes as a sole proprietorship, a partnership, or a corporation.
Sole Proprietorship and Partnerships
When there’s only one business owner, the member can elect to be taxed as an individual or as a corporation.
When there’s two or more business owners, the members can elect to be taxed as partners or as a corporation. Note that for partnerships, the members can split the profits and losses as they see fit, regardless of ownership percentage.
For LLCs that elect to be taxed as a proprietorship or partnership (the most common scenario), the member(s) pay their annual taxes through quarterly estimated tax payments.
The easiest way to pay quarterly estimated tax payments is online through IRS Direct Pay, but you can also elect to send a check by mail.
The state of Arizona also requires estimated tax payments to fulfill state income taxes, but only when the member’s individual income is over $75,000 (or joint income over $150,000 for married individuals).
If you are subject to estimated tax payments for Arizona income taxes, you must pay at least 90% of the tax due for the current year or 100% of the tax due for the previous year.
LLCs that elect to be taxed as a corporation are much trickier when it comes to taxes, so you’ll want to discuss your situation with a small business attorney.
Generally speaking, an owner who reports income from an LLC taxed as an S Corp will report their income on a Schedule K-1. They may also receive income in the form of corporate dividends, which would be taxed as capital gains.
How Much Tax Should You Pay on Your Salary in Arizona?
Tax brackets are frequently changing, so it’s important to consult the most recent tax publications from the IRS and the Arizona Department of Revenue.
There are seven federal tax brackets as of 2019: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your tax bracket depends on your taxable income and filing status.
There are only four income tax brackets in Arizona. As of 2019, the tax rates are 2.59%, 2.88%, 3.36%, 4.24%, and 4.54%. Again, your tax bracket hinges on your taxable income and filing status.
Federal and state income taxes are often the first taxes on Arizonans’ minds, but don’t forget about Medicare and Social Security taxes.
As of 2019, the Medicare tax rate is 1.45% and the Social Security tax is 6.2%. That’s a combined 7.65% tax, though there’s an annual maximum of $8,239.80 that kicks in for high-income households.
That’s all the taxes you have to worry about as an employee, but if you’re self employed in Arizona you also have to pay the self employment tax of 7.65%.
Before you start complaining how unfair that is, keep in mind that employers pay that tax for their employees, too. It may not come directly out of an employee’s paycheck like it does for self employed professionals, but rest assured an employee’s compensation package takes that tax into effect.
How to Pay Payroll Taxes for a Small Business in Arizona
The easiest way to pay payroll taxes in Arizona is through the state’s e-filing portal, AZTaxes.
Small businesses can also use this website to file and pay transaction privilege taxes (i.e. sales tax), pay corporate income taxes, verify the status of tax licenses, and find the answers to frequently asked questions.
Note that filing taxes electronically is actually a requirement for businesses of a certain size in Arizona. As of 2019, the following criteria determines which Arizona taxpayers are required to pay electronically:
Withholding taxes: taxpayers with an average quarterly liability of $2,500 or more for withholding tax during the prior tax year
Corporate estimated tax: corporations with a prior tax year liability of $10,000 or more
Transaction privilege tax: taxpayers with a prior tax year liability of $10,000 or more
Tobacco luxury tax: all licensed distributors must submit all documents and payments electronically through Arizona Luxury Tax Online (ALTO)
How Much Can I Pay Someone Without Paying Taxes in Arizona?
An employer’s obligation to withhold taxes for an employee depends on whether they are an employee or an independent contractor. As long as the individual in question is actually an employee, you’ll need to withhold payroll taxes regardless of how much you pay them.
For independent contractors, you are not required to withhold any taxes. However, you are required to report their income to the IRS on Form 1099 MISC if the income is greater than $600.
Do YouHave to Pay Self Employment Tax on a 1099 MISC in Arizona?
Independent contractors are required to pay self employment taxes on all of their freelance income — not just the total reported on their 1099 MISC. For example, taking payments via PayPal or Venmo doesn’t result in a 1099 MISC, but your income from these sources is still subject to income taxes and self employment taxes.
How to Pay Taxes Monthly When Self Employed in Arizona
Just as an employer withholds an employee’s income in anticipation of taxes due at the end of the fiscal year, self-employed professionals are required to send the IRS estimated tax payments throughout the year.
You may be fined for not sending in enough estimated taxes, so it’s important to forecast your annual income to estimate your tax bracket.
The IRS requires quarterly estimated tax payments, though some self-employed professionals choose to send in monthly payments. As long as you’re meeting the quarterly minimum requirement, it doesn’t actually matter whether you send in payments monthly, bi-monthly, or every three months.
Receive Legal Help With Your Arizona Small Business
Owning a business is rewarding, but also comes with responsibility and important decisions to make, like deciding how the business files taxes. Working with a small business legal professional can help your Arizona business thrive.
A small business attorney can help you decide on the best direction for your company, which can result in your business qualifying for tax breaks and exemptions.
Call JacksonWhite’s Small Business Law Team at (480) 464-1111 to discuss your case today.