How Are LLCs Taxed in Indiana?

A Limited Liability Company (LLC) is a business structure that combines the liability protection of a corporation with the operational flexibility of a partnership or sole proprietorship. This hybrid nature extends to its tax treatment. For those operating in Indiana, understanding the interplay between federal and state tax obligations is a necessary step in maintaining compliance.

Federal Income Tax Classification for LLCs

The Internal Revenue Service (IRS) automatically assigns a tax status to an LLC based on its number of owners, known as members. A single-member LLC is, by default, considered a “disregarded entity,” meaning the IRS ignores the LLC for tax purposes and treats its financial activity as that of the owner. The business’s income and expenses are reported on the owner’s personal tax return using Schedule C.

For an LLC with two or more members, the default classification is a partnership. In this arrangement, the LLC itself does not pay federal income tax. Instead, it uses “pass-through taxation,” where profits and losses are passed through to the members. Each member reports their share of the income on their personal tax returns and pays taxes at their individual rate.

LLC members are required to pay self-employment taxes on their share of the company’s net earnings. This tax covers Social Security and Medicare contributions and is applied to 92.35% of the business’s net earnings. The 15.3% rate consists of 12.4% for Social Security, up to an annual income limit, and 2.9% for Medicare, which has no limit. Members should make quarterly estimated tax payments to the IRS to cover this obligation and avoid underpayment penalties.

An LLC can also choose to be taxed as a corporation by filing an election with the IRS. To be taxed as an S Corporation, an LLC must meet certain IRS requirements and then file Form 2553, “Election by a Small Business Corporation.” This retains pass-through taxation but can offer different tax implications regarding owner compensation and distributions.

Indiana State Income Tax Treatment

The Indiana Department of Revenue (DOR) aligns its income tax treatment of LLCs with the federal classification established with the IRS. For state tax purposes, the default pass-through status is honored, meaning income is not taxed at the entity level. Instead, the profits flow through to the individual members.

Members of an Indiana LLC report their share of the business’s income on their personal state income tax return, Form IT-40. Multi-member LLCs taxed as partnerships must also file an annual information return, Form IT-65, to report each partner’s share of income.

LLCs electing S Corporation status file an Indiana S Corporation Return, Form IT-20S, which reports the allocation of income to each shareholder. Indiana also offers an elective Pass-Through Entity Tax (PTET) for partnerships and S Corporations. This allows the LLC to pay state tax at the entity level, which can be a beneficial workaround to the federal limitation on state and local tax (SALT) deductions for owners.

Common Indiana Business Taxes

LLCs in Indiana may also be responsible for other state taxes based on their business activities. The most common is the state sales tax. If an LLC sells tangible personal property, certain products transferred electronically, or provides specific services in Indiana, it must register with the DOR to collect sales tax from its customers.

A related tax is the use tax. This applies to tangible personal property purchased from an out-of-state seller for use, storage, or consumption in Indiana when no sales tax was paid at the time of purchase. The use tax rate is the same as the sales tax rate, and businesses are responsible for self-assessing and remitting this tax to the DOR.

LLCs with employees must manage withholding tax. Any business that pays wages to employees in Indiana must withhold state and county income taxes from those wages. These withheld funds are held in trust for the state and must be remitted to the DOR on a regular basis.

How to Register and File Indiana LLC Taxes

The first step for an Indiana LLC to manage its tax obligations is to register with the necessary state agencies. The business owner will need key information, including the LLC’s legal name, business address, and Federal Employer Identification Number (EIN). The EIN is obtained from the IRS and is a prerequisite for state tax registration, especially for LLCs with employees or those electing corporate tax status.

Registration with the Indiana Secretary of State and the Department of Revenue (DOR) is handled through the state’s online portal, INBiz. This is the primary hub for most business needs. LLCs with employees must also register separately with the Indiana Department of Workforce Development (DWD) for unemployment insurance taxes.

Upon completing registration with the DOR, the LLC will be issued an Indiana Taxpayer Identification Number (TID). This number is distinct from the federal EIN and is used for all state-level tax filings in Indiana.

Once registered, ongoing tax filing and payments are managed through the DOR’s dedicated online system, the Indiana Taxpayer Information Management Engine (INTIME). For example, sales tax is reported on Form ST-103 and employee withholding on Form WH-1. The DOR determines the filing frequency (monthly, quarterly, or annually) based on the amount of tax the business collects or withholds.