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How Your LLC Will Be Taxed
In this guide, we’ll cover the main business taxes required in Hawaii, including payroll, self-employment and federal taxes. The profits of an LLC aren’t taxed at the business level like C Corporations. Instead, taxes are as follows:
- Owners pay self-employment tax on business profits.
- Owners pay state income tax on any profits, less allowances and deductions.
- Owners pay federal income tax on any profits, less allowances and deductions.
- Employers pay payroll tax on any wages they pay to employees.
- Employees pay state and federal taxes on their earnings.
Items 1 and 2 fall under pass-through taxation for LLC owners, managers and members who profit from the business. Profits are reported on personal federal tax returns.
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State Taxes for LLCs
There are two main types of state tax you must pay to the Hawaii Department of Taxation: income taxes, and general excise taxes.
Hawaii Income Tax
As a business owner, you’ll need to pay Hawaii income tax on any money you pay to yourself. These earnings flow through to your personal tax return. You’ll be taxed at Hawaii's standard rates, and you’ll also be able to apply regular allowances and deductions.
Any employees will also need to pay state income tax.
The Hawaii income tax rate varies between 1.4 and 11%, depending on how much you earn.
Hawaii Corporate Income Tax
In the case that you have elected your Hawaii LLC to be classified as a corporation, you will be subjected to Hawaii’s Corporation Income Tax.
Corporations in Hawaii are liable to pay rates between 4.4 and 6.4%, broken down as follows:
Hawaii General Excise Tax (GET) and Use Tax
Hawaii does not have a sales tax; instead, they have the GET, which is assessed on all business activities. The tax rate is 0.15% for Insurance Commission, 0.5% for Wholesaling, Manufacturing, Producing, Wholesale Services, and Use Tax on Imports For Resale, and 4% for all others.
The Hawaii Legislature also authorized county governments to adopt a county surcharge on state GET at the 4% rate. The county surcharge does not apply to activities at the 0.5% and 0.15% rate.
The following counties have adopted a county surcharge:
In Hawaii, it is not mandatory for a business to charge the GET to its customers. A seller may choose to visibly pass on the general excise and any applicable county surcharge to its customers, but is not required to do so. The tax is on the business and not on the customer.
If the business passes on its GE tax, the maximum pass-on rates, which include the county surcharge if applicable, are as follows:
Federal Taxes for LLCs
As the owner of an LLC, you must pay self-employment tax and federal income tax, both of which are levied as “pass-through taxation." Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Hawaii LLC is paying the correct amount.
Federal Self-Employment Tax
All members or managers who take profits out of the LLC must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA), and covers Social Security, Medicare and other benefits. The current self-employment tax rate is 15.3%. You’ll be able to deduct some of your business expenses from your income when calculating how much self-employment tax you owe.
Here are some examples of how much self-employment tax you may need to pay, depending on your earnings:
On profits of $60,000, you would pay self-employment tax of $9,180.
On profits of $90,000, you would pay self-employment tax of $13,770.
On profits of $120,000, you would pay self-employment tax of $18,360.
On profits of $150,000, you would pay self-employment tax of $22,950.
Pay Less Self-Employment Tax by Treating Your LLC as an S Corporation
The Internal Revenue Service allows an LLC to be treated as an S Corporation for tax purposes, provided your business meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary and other income as distributions or withdrawals. Speak to your accountant or professional tax preparer for more information on reducing your LLC self-employment tax through an S Corporation tax election.
Treating Your LLC as an S Corp Can Help You Save Money.
Get My LLC Treated as an S Corp
Federal Income Tax
You must also pay regular federal income tax on any earnings you take out of your LLC. The amount of income tax you pay depends on your earnings, current income tax bracket, deductions and filing status. You only pay federal income tax on profits you take out of the business, less certain deductions and allowances. This includes your tax-free amount, plus business expenses and other deductions for areas such as healthcare and some retirement plans. Speak to your accountant for more information.
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.
Employer Payroll Tax Withholding
All employers are required to withhold federal taxes from their employees’ wages. You’ll withhold 7.65% of their taxable wages, and your employees will also be responsible for 7.65%, adding up to the current federal tax rate of 15.3%. Speak to your accountant for more information.
Employees May Need to File Tax Returns
Regardless of whether you withhold federal and state income tax, your employees may need to file their own tax returns.
Employee Insurance and Other Requirements
You may also need to pay insurance for any employees, such as employee compensation insurance or unemployment tax.
Other Taxes and Duties
Depending on your industry, your LLC may be liable for certain other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Likewise, if you import or export goods, you may need to pay certain duties. Speak to your accountant about any other taxes or duties you may need to withhold or pay.
Estimated Taxes
Most LLCs must pay estimated taxes throughout the year, depending on the amount of profit and income you expect to make. The most common types of estimated tax are:
- Federal income tax
- Federal self-employment tax
- Hawaii Income Tax
Most LLCs will pay estimated taxes on a quarterly basis. Learn more on the IRS website, and speak to your accountant for more information.
FAQs on Hawaii Business Taxes
Does Hawaii Have a Sales Tax?
No, unlike many states Hawaii does not have a sales tax, but it does have a General Excise Tax and Use Tax.
What Is the Hawaii Corporate Income Tax?
The Hawaii Corporate Income tax is a tax on the Hawaii taxable income of every domestic or foreign corporation which enjoys the benefits and protections of the government and laws in the State of Hawaii.
Does Hawaii Have a State Income Tax?
Yes. Hawaii does have a state income tax.
Does Hawaii Have a Franchise Tax?
No. Unlike many other states, Hawaii does not have a franchise tax.
Do I Need to Pay Estimated Taxes?
Yes. In most cases, you must pay estimated taxes to the state and federal governments.
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