Alabama LLC Taxes
The general low cost of living and temperate climate of Alabama has made it an appealing state to live in and start a business in. But like with all states, Alabama has its own personalized taxes and regulations placed on businesses which may be confusing for those unaware of them.
No matter how long your business has been in operation or its size, if you operate a limited liability company (LLC) in Alabama, you will need to ensure you stay up to date on your finances and pay federal, state, and local taxes. Our guide will help you understand which taxes you will need to pay for your Alabama LLC.
Recommended: Schedule a free consultation with an accountant to stay on top of your taxes.
Alabama Business Privilege Tax
All LLCs formed in Alabama must pay a Business Privilege Tax each year. This is sometimes referred to as a franchise tax, and the Alabama Business Privilege Tax functions similarly to an annual report, which most states require LLCs to submit in order to keep operating within the state.
The Business Privilege Tax is paid to the Alabama Department of Revenue in two parts.
First is the Initial Business Privilege Tax, which starts at $50 and must be submitted before two and a half months have passed following the LLC’s formation date. You may need to pay more than $50, depending on your net worth and taxable income.
Second is the Business Privilege Tax. The cost will vary depending on different factors like business income but will always be a minimum of $50 and must be filed by April 15 each year. This will start being a factor the year after you for your LLC.
For example, if you start your business on October 7, 2023, the Initial Business Privilege Tax will be due in mid-December 2023, but the annual Business Privilege Tax would still be due on April 15, 2024.
To see the Business Privilege Tax forms and learn more about this process, visit the Alabama Department of Revenue website.
Alabama LLC Taxes Owed
LLCs benefit from pass-through taxation, meaning the business’s profits pass through to the members’ individual tax returns. As a result, your LLC itself does not pay taxes to the federal government or to the State of Alabama. Instead, LLC owners must pay taxes on their portion of the income made from the LLC.
In Alabama, LLC owners can expect to pay the following taxes:
Federal Taxes
Regardless of where your business is located, if you have an LLC within the United States, you will have to pay federal income taxes and federal self-employment taxes. These taxes are reported on your Form 1040.
Federal Self-Employment Taxes
It doesn’t matter if your LLC is a single-member LLC or a multi-member LLC; all LLC members must pay self-employment taxes on their share of the LLC’s profits. The self-employment tax rate is 15.3%.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets, as well as the percent owed, will change each year.
Alabama State Taxes
Every state has its own individual laws and regulations on how citizens and businesses are taxed. For example, the Business Privilege Tax (mentioned above) is unique to Alabama. Below are some additional important taxes that will affect LLCs formed in Alabama.
Alabama Income Taxes
The income tax rate for Alabama is 5% which puts it near the average of all US states. While this number is not enticingly low, it is certainly lower than some states, which can exceed 10%.
Alabama Sales and Use Tax
In Alabama, the state sales tax rate is 4%. Like many other states, different counties and cities in Alabama have their own individual sales tax rates, which are added to the state rate. The average of these local sales tax rates is 5.25%, making the average combined sales tax rate in Alabama 9.25%.
For more information on sales tax in Alabama and the areas that use local rates, visit the Alabama Department of Revenue’s About Sales Tax page.
File an Alabama Sales and Use Tax Return
If your LLC sells products to consumers in Alabama, your business will need to file a Sales and Use Tax Return with the Alabama Department of Revenue. Whether you will be selling these products in a physical location or online, you will still need to file the return.
Visit the Sales Tax page on the Alabama Department of Revenue website for more information on the process.
Additional State Taxes
Alabama’s Department of Revenue oversees the collection of various taxes that businesses may have to pay depending on their location, industry, and number of employees.
These are a few taxes that business owners in Alabama may be responsible for paying:
- Hazardous Waste Fee
- Compressed Natural Gas Tax
- Motor Carrier Mileage Tax
- Transient Occupancy Tax
- State Horse Wagering Fee
Visit the Tax Types page on the Alabama Department of Revenue’s website to see the full list of state-level taxes that may affect your Alabama LLC.
Alabama Local Taxes
The local laws and ordinances in the different cities and counties across Alabama are likely to vary from one another. Regardless of where you live in Alabama, we recommend you check with your local jurisdiction and ensure that your business obtains the proper local permits and follows any local regulations that may impact your business’s operation.
Alabama LLC Compliance
You must obey Alabama’s state and local laws to maintain your business's compliance and good standing. While LLCs in Alabama technically do not file taxes with the state, they must still file annually each year with the state.
Alabama LLC Business Privilege Tax
As mentioned above, LLCs in Alabama are required to file both parts of the Business Privilege Tax for operating in the state. Filing your Business Privilege Tax can be done easily on the Alabama Department of Revenue website.
To learn more about the Business Privilege Tax and associated license, visit our How to Start an LLC in Alabama guide.
Alabama Business Privilege License
Each year, Alabama businesses are required to purchase a Business Privilege License from the local county probate judge in every county where they do business. The price will vary by county.
LLC taxes are complex. While our guide can provide you with important information, we recommend you schedule a free consultation with an accountant to ensure that you handle your business taxes correctly.