How Does a Maryland LLC Pay Taxes?
[Updated 2/5/24]
A Limited Liability Company (LLC) is organized under state laws. Many companies choose a Maryland LLC as their business entity because it provides limited liability protection from personal liability. State laws govern the operation of an LLC in Maryland. However, the Internal Revenue Code provides alternatives for how an LLC is taxed for the income it earns.
How Does a Maryland Limited Liability Company Pay Income Taxes?
A single-member Maryland LLC is not recognized as a business entity for tax purposes, but instead, a single-member Maryland LLC can elect to be taxed as a corporation or an S corporation. If a Maryland LLC does not elect to be taxed as a corporation or an S-corporation, a single-member LLC will be taxed as a sole proprietorship by default, and as a partnership, if it has more than one member.
Paying Income Taxes as a Corporation
A Maryland LLC can elect to be taxed as a corporation. If so, the LLC submits corporate tax returns and the LLC pays income taxes on the business profits. Electing to be taxed as a corporation if the Maryland LLC intends to retain a substantial amount of profits in the company each year can reduce the amount of current taxes paid on the company's profits as the members pay personal income tax only on profits actually received as dividends.
By retaining the LLC profits in the company taxed as a corporation, an LLC in Maryland pays corporation income tax at a corporate tax rate based on the corporation income tax return. The current corporate tax rate is lower than the top individual income tax rates. However, money disbursed to members is subject to double taxation. The LLC pays corporate taxes on income, and the members pay income taxes on dividends received from the LLC.
In electing to be taxed as a corporation, a Maryland LLC might be able to offer members and employees other tax-advantaged benefits not subject to double taxation.
Paying Income Taxes as an S-Corporation
A Maryland LLC can elect to be taxed as an S-corporation. Many LLCs in Maryland that do not want to be a regular corporation apply to the IRS for S Corp status. Unlike a corporation, an S-corporation does not pay income tax for its profits.
Instead, the profits are allocated to the members of the LLC whether received or not as distributions. Beyond not paying income tax at the company level, the primary advantage of an S corporation is that LLC members can be employees of the LLC, be paid a salary, and receive employee benefits.
Paying Income Taxes as a Partnership
If a multi-member LLC does not elect to be taxed as a corporation or S corporation, the Internal Revenue Service (IRS) will treat the LLC as a partnership by default. Profits and losses of the Maryland LLC will be allocated among the members based on the LLC's operating agreement and reported on the members' tax returns.
The LLC does not pay income taxes on the profits earned by the company. The LLC reports profit allocations and distributions to the IRS a Form 1065 informational tax return and provides each member a form K-1 showing the member’s allocation of profits and distributions received. The members report company profits on Schedule C or E of their personal income tax returns. Members pay income tax based on their allocation of profits even if the LLC retains all or a portion of the money in the LLC's accounts.
Paying Income Taxes as a Sole Proprietor
If a single-member LLC does not choose to be taxed as an s-corporation or corporation, it will be treated as a sole proprietorship by the IRS. As with a sole proprietorship, all income passes through the business directly to the owner. The owner reports the business income and losses on Schedule C or E of the owner's personal income tax returns.
The owner pays taxes on the LLCs' net profits based on the owner's personal income tax rate. Unlike being taxed as a corporation, the single-owner LLC member pays income tax on the LLC’s profits for the year and not on the LLC profits actually distributed to the owner.
Does an LLC Pay Payroll Taxes in Maryland?
The company must collect and pay federal payroll taxes if an LLC has employees. Employment taxes include federal income tax, Social Security tax, Medicare tax, and additional Medicare tax. Employers must withhold taxes from an employee’s wages and submit the taxes to the appropriate government agency. Employers must match the amounts withheld for Medicare and Social Security taxes.
IRS Form 941 is filed each quarter to report federal income taxes withheld from payroll. It also reports the employees' and employers' portion of Social Security and Medicare taxes. IRS Form 940 is filed annually to report unemployment taxes – employees are not responsible for paying unemployment taxes, only the employer.
Even though you file quarterly reports for employment taxes, you must make payroll tax deposits throughout the year in either monthly or semiweekly deposits. The schedule is based on the amount of your tax liability. Unemployment taxes are paid quarterly.
Workers also pay state income taxes in Maryland. Employers withhold state income taxes from an employee’s wages. The employer must deposit the funds into a withholding account. An LLC must file its withholding reports based on the schedule set for the business based on filing categories.
An LLC with employees must ensure they comply with all federal and state employment tax requirements. Mistakes with employment taxes can be very costly for the LLC.
Is an LLC Better for Tax Purposes Than a Sole Proprietorship or Partnership?
An LLC provides tax benefits over other business structures. Tax considerations for an LLC include:
Tax rates could fluctuate depending on the tax treatment for the LLC.
Double taxation is an issue if you choose a corporate tax structure for your LLC.
Business expense deductions can reduce tax liability. However, the tax treatment for the LLC could impact how beneficial some deductions are for the LLC.
You might be able to claim a deduction on capital expenditures for business equipment with an LLC.
A business owner might assume that switching their business structure to an LLC will reduce taxes. Talk with an attorney before assuming you can reduce taxes by creating a Limited Liability Company. Besides tax liability, there are many things to consider, including the expense of creating and operating an LLC compared to partnerships or sole proprietorships.
How Does an LLC Work in Maryland?
Getting an LLC in Maryland begins with filing Articles of Organization with the Maryland Department of Assessments and Taxation. You can file online through the Maryland Business Express to register an LLC in Maryland. You can handle all business for your LLC in Maryland through the Maryland Business Express account, including:
Performing a business entity search
Ordering business documents
Registering a business for an LLC in Maryland
Registering a trade name
Filing annual reports for an LLC in Maryland
Paying state and local taxes
Update licenses
Filing a personal property tax return
And much more
Completing the requirements for a Maryland LLC online saves time and money. It makes filing an LLC in Maryland more convenient for business owners.
As discussed above, a single-member LLC generally operates as a sole proprietorship. If the LLC has more than one member, the multi-member LLC can be operated as a partnership or corporation. It depends on the terms and agreements in the LLC Operating Agreement.
Other Steps Involved in Starting an LLC in Maryland
After you file Articles of Organization to register your LLC in Maryland, before opening your doors for business, other steps to take include:
Obtain a Federal Employer Identification Number (EIN) from the IRS. You need a federal tax identification number to open your bank account, even if you are a single-member LLC.
Appoint a resident agent or registered agent service. A registered agent and resident agent services accept service of legal documents for an LLC.
Create an LLC operating agreement. An operating agreement dictates the daily operations and the rights and responsibilities of LLC members.
Secure the required business licenses and permits. Maryland’s One Stop Portal makes applying for business permits and licenses from state agencies quick and easy. Don’t forget to apply for required local licenses, permits, and inspections.
Review your tax reporting requirements. In addition to paying corporate taxes, if you elect to have your LLC taxed as a corporation, you may be required to pay use tax, sales tax, unemployment insurance tax, and employer withholding.
Purchase business insurance to protect your business and personal assets. Business insurance includes but is not limited to, general liability, automobile liability, data breach/cyber security, business interruption, workers’ compensation, professional liability, general property, and business owner insurance policies.
Open a business bank account and other financial accounts.
There may be other steps you need to take before beginning operations as an LLC in Maryland. The specific steps you must take depend on the type of business you operate and other factors. Working with a Maryland business attorney to set up an LLC in Maryland is the best way to ensure all items are addressed and you comply with all federal and state laws and regulations governing businesses.
Get Help From a Professional Before Choosing a Tax Structure for Your LLC in Maryland
If you do not elect a corporate tax structure, the IRS chooses the tax structure based on whether the Maryland LLC has one or multiple members. Before defaulting to the IRS choice, consult a Columbia, Maryland tax attorney to ensure you choose the best tax structure for your Limited Liability Company.
