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Note: Our tax lesson is not as step-by-step as our other South Dakota LLC formation lessons, due to the uniqueness and variation among businesses formed in South Dakota.
Taxes are not as straightforward as forming an LLC, and therefore, the information below is an overview, and not a comprehensive guide.
We recommend speaking with a few accountants in South Dakota to make sure you meet all your federal, state, and local tax obligations.
We recommend reading our How to Find an Accountant guide and then using Thumbtack and/or Yelp.
Federal Income Tax
Most LLCs do not pay taxes directly to the federal government. Instead, the members of the LLC are responsible for reporting income or losses on their personal 1040 tax return with the IRS.
LLC income is most often reported on a Schedule C, however, you may need to include additional Schedules, depending on how you derive your income.
By “most LLCs”, we are specifically referring to LLCs taxed in their default status. Unless you elect to have your LLC taxed as a Corporation, single-member LLCs are taxed like a Sole Proprietorship and multi-member LLCs are taxed like a Partnership.
Alternatively, LLCs may elect to be taxed as a C-Corp, or more popularly, LLCs may elect to be taxed as an S-Corp (in order to save money on self-employment taxes).
If an LLC is taxed as a C-Corp, it must file federally, using Form 1120. If an LLC is taxed as an S-Corp, it must file federally, using Form 1120S.
LLC taxed as an S-Corp:
Typically, most accountants recommend that your LLC’s net income (income minus expenses, but not including salaries) be around $70,000 per year (per Member), plus or minus. At this point, the accounting and administrative costs of maintaining the S-Corp election for the LLC are offset by the self-employment tax savings.
South Dakota State Taxes
Although South Dakota does not have any personal income tax, corporate income tax, personal property tax, inheritance tax, or business inventory tax, there are:
- Sales taxes (state and municipal)
- Use taxes
- Real property taxes
- Unemployment insurance taxes
South Dakota’s state sales tax is 4.5%, combined with general or municipal (city) sales tax, which ranges from 0% to 2%.
Note: Motor vehicles are not covered by sales taxes at the state and local level. Instead,they fall under the 4% motor vehicle tax on the purchase price.
Cities can subject lodging, hotels, restaurant meals, and alcohol drinks to a 1% municipal gross receipt tax.
Taxable goods or services not covered by sales tax in South Dakota are subjected to a use tax instead. The rate is the same as that of sales (both at the state and local level).
Real Property Taxes (real estate taxes):
Local real property taxes in South Dakota have rates ranging from 1% to 4% of the actual value of the structure (most fall between 2% to 3%). Incentives, such as 5-year tax abatement (tax reduction) programs, are available for construction of new structures or improvements of existing property.
South Dakota’s unemployment insurance tax varies from 0% to 9.5% of the first $15,000 in wages paid to each employee during a calendar year.
Other business taxes include:
- Contractor’s excise tax
- Municipal tax
- 911 emergency surcharge
Local Taxes for South Dakota LLCs
If your business is located in South Dakota, you may also need to file and pay local taxes with your city, township, and/or county.
This depends on where your LLC is located and what type of business you are in. We recommend seeking professional assistance from a local accountant.
South Dakota also imposes the following taxes:
- Motor Fuel Tax (includes gasoline, ethanol blends, undyed diesel fuel, liquefied petroleum gas, aviation fuel, jet fuel, and compressed natural gas)
- Property Taxes (includes public utilities, railroads and airline companies)
- Special Taxes (includes cigarette excise, estate, bank franchise, ore, energy mineral severance, coin-operated laundromat license fees, beer, wine and distilled spirits, gaming excise, beer and liquor license fees; and alcohol beverage brand registration fees)
South Dakota Tax Resources
South Dakota Tax Application
South Dakota Department of Revenue
Calculating your tax obligations federally (with the IRS), on the state-level (with South Dakota), and locally (with your city, county, or township), can be complicated and if done improperly can negatively impact your LLC.
We recommend that you get help from a local accountant once your South Dakota LLC is formed. We recommend reading our How to Find an Accountant guide and then using Thumbtack and/or Yelp to find a local tax professional.
Hiring a tax professional will not only help you keep your South Dakota LLC in compliance, but it will also give you an advisor to go to for other business questions.
You’ll want someone who’s a good fit for your company, makes you feel comfortable, and is willing to answer all of your questions. It should be someone you like personally as well as professionally. We recommend talking with at least 2-3 accountants before making your final decision.
South Dakota Department of Revenue: Businesses – Taxes
South Dakota Governor’s Office of Economic Development: Tax climate
SOUTH DAKOTA LLC GUIDE
Follow the lessons below to form your South Dakota LLC.