How LLCs Are Taxed

An LLC (limited liability company) is a state-level legal structure, but the IRS does not have a special "LLC tax rate." Instead, your LLC's profits flow through to your personal tax return and are taxed at your individual income tax rate. On top of that, you owe 15.3% self-employment tax on net earnings, which covers Social Security (12.4%) and Medicare (2.9%).

Think of it like this: if you had a job that paid you $100,000, your employer would pay half of your Social Security and Medicare taxes. As an LLC owner, you pay both halves. That doubles your FICA obligation compared to a W-2 employee earning the same income.

The IRS gives your LLC four possible tax classifications, each with different forms, deadlines, and tax consequences.

• Sole proprietorship (default for single-member LLCs) reports on Schedule C of Form 1040. All net profit is subject to self-employment tax.
• Partnership (default for multi-member LLCs) files Form 1065 and issues Schedule K-1 to each member. Each member pays SE tax on their share.
• S Corporation (elected via Form 2553) files Form 1120-S. Owners split income between salary (subject to payroll tax) and distributions (not subject to SE tax).
• C Corporation (elected via Form 8832) files Form 1120 and pays a flat 21% federal corporate tax. Dividends to owners are taxed again at the shareholder level.

Choosing the wrong tax classification (or sticking with the default when you should not) can cost you thousands of dollars every year. A single-member LLC earning $100,000 in net profit pays approximately $14,130 in self-employment tax. If that same LLC elected S Corp status and paid a $60,000 reasonable salary, the SE tax would drop to roughly $9,180, saving about $6,000 annually.

Missed quarterly estimated tax payments trigger an IRS underpayment penalty. If you expect to owe $1,000 or more, you must pay estimated taxes using Form 1040-ES four times per year. The safe harbor rule says you must pay at least 100% of last year's total tax liability (or 110% if your AGI exceeded $150,000).

State taxes add another layer. California, for example, charges an $800 annual LLC franchise tax regardless of income. Some states like Florida, Texas, and Wyoming have no state income tax, while New Jersey tops out at 11.5% for corporate income. Your total tax burden depends heavily on where your LLC operates.

This content is for informational purposes only and does not constitute financial, legal, or tax advice. Business setup requirements, costs, and regulations vary by state, industry, and business structure. Consult a qualified CPA, attorney, or licensed insurance agent for advice specific to your situation.

Here is how each LLC tax classification works in practice for 2026.

Single-member LLC (sole proprietorship)

• You report all business income and expenses on Schedule C (Form 1040).
• Net profit is subject to self-employment tax at 15.3% (calculated on 92.35% of net earnings).
• The Social Security portion (12.4%) applies to earnings up to $184,500 for 2026. Medicare (2.9%) applies to all earnings, with an extra 0.9% surtax on income above $200,000 (single).
• You can deduct 50% of your SE tax as an above-the-line deduction on Form 1040.
• Filing deadline: April 15, 2026.

Multi-member LLC (partnership)

• The LLC files Form 1065 and issues a Schedule K-1 to each member.
• Each member reports their share of income on their personal return and pays SE tax on active business income.
• Filing deadline: March 17, 2026 (for calendar-year businesses).

S Corporation election

• File Form 2553 with the IRS. The 2026 deadline is March 17 for calendar-year businesses.
• You must pay yourself a "reasonable salary" subject to payroll taxes. Remaining profits are taken as distributions not subject to SE tax.
• The LLC files Form 1120-S annually. Filing deadline: March 17, 2026.
• Requirements include being a domestic entity, having no more than 100 shareholders, only one class of stock, and only allowable shareholders (U.S. citizens or residents; no other entities as owners).

C Corporation election

• File Form 8832 with the IRS.
• The LLC pays a flat 21% federal corporate income tax on net profits. Dividends to owners are then taxed at the shareholder's personal rate, creating double taxation.
• Filing deadline: April 15, 2026.

The QBI Deduction (Section 199A)

Pass-through LLC owners (sole proprietorships, partnerships, and S Corps) may deduct up to 20% of qualified business income. The OBBBA (signed in 2026) made this deduction permanent. For 2026, limitations begin at $203,000 (single) or $406,000 (married filing jointly), with phase-outs extending to $272,300 (single) or $544,600 (MFJ). A new minimum deduction of $400 applies if your QBI is at least $1,000. Learn more about the LLC vs S Corp tax comparison.

If you already have an LLC, your tax classification is already set to the default. Here is how to change it or get started with filing.

Step 1: Determine your current classification. Single-member LLCs are automatically taxed as sole proprietorships. Multi-member LLCs default to partnership taxation. If you have never filed Form 2553 or 8832, you are on the default.

Step 2: Run the S Corp math. If your net profit consistently exceeds $50,000 to $60,000, the S Corp election likely saves you money. At $100,000 in net profit with a $60,000 salary, you would save approximately $6,000 in self-employment taxes. Factor in the additional cost of payroll processing ($500 to $2,000/year) and a more expensive tax return ($1,200 to $3,500) to see if the net savings justify the switch.

Step 3: File the election (if applicable). Submit Form 2553 by March 17, 2026 for calendar-year S Corp elections. New businesses have 2 months and 15 days from formation. Late elections are possible with IRS consent.

Step 4: Get an EIN. If you do not already have one, apply free at IRS.gov. Multi-member LLCs and S Corps require an EIN. Read our EIN application guide for a step-by-step walkthrough.

Step 5: Set up quarterly estimated tax payments. Use Form 1040-ES to calculate and submit quarterly payments. Due dates for 2026 are April 15, June 15, September 15, and January 15, 2027. You can pay online at IRS.gov/payments or via the Electronic Federal Tax Payment System (EFTPS).

Step 6: Choose your tax prep method. For simple single-member LLCs, accounting software with built-in tax features may be enough. Once you add employees, an S Corp election, or multi-state operations, hire a CPA. Expect to pay $150 to $400 per hour for CPA advisory work.

LLC tax costs include the taxes you owe plus the cost of preparing and filing your returns. Here is what to budget for 2026.

Self-employment tax runs 15.3% on 92.35% of net earnings (effectively 14.13%). On $100,000 net profit, that is roughly $14,130. On $50,000, it is about $7,065.

Federal income tax uses seven brackets ranging from 10% to 37% for 2026. Your LLC income stacks on top of any W-2 or other income, so combined effective rates typically fall between 25% and 40% for most LLC owners.

Tax preparation costs vary significantly by entity type (as of 2026-2026):

• Single-member LLC (Schedule C): $300 to $1,500 with a CPA, or $50 to $200 with tax software.
• Multi-member LLC partnership (Form 1065): $800 to $1,500 with a CPA.
• S Corp return (Form 1120-S): $1,200 to $3,500 with a CPA, plus $500 to $2,000 per year for payroll processing.
• C Corp return (Form 1120): $1,500 to $4,000+ with a CPA.

State-level costs add to the total. California's annual $800 LLC franchise tax is due every year regardless of revenue. States without income tax (Florida, Texas, Wyoming, Nevada, South Dakota, Washington) can reduce your burden. State corporate income tax rates range from 2% in North Carolina to 11.5% in New Jersey. Learn more about how to set up small business accounting.

Your LLC's ideal tax classification depends on what kind of business you run and how much you earn.

Freelancer or consultant (single-member LLC)

If your net profit is under $50,000, stick with the default sole proprietorship classification. The S Corp election adds $2,000 to $4,000 in payroll and tax prep costs that would eat into any SE tax savings. Above $60,000 to $80,000 in net profit, run the numbers with a CPA.

E-commerce business

Online sellers often have high gross revenue but thin margins. Focus on your net profit (after COGS and expenses) when evaluating the S Corp breakeven. If your net is under $50,000, stay default. Watch for sales tax obligations in multiple states, which add compliance complexity beyond income taxes.

Professional services (law, medicine, accounting)

These are classified as Specified Service Trades or Businesses (SSTBs), which face special QBI limitations. If your taxable income exceeds $203,000 (single) or $406,000 (joint) for 2026, the QBI deduction phases out. Consider retirement plan contributions (SEP-IRA, Solo 401(k), or defined benefit plan) to reduce taxable income below the threshold. The S Corp election is almost always beneficial at these income levels.

Brick-and-mortar retail or restaurant

Businesses with employees typically benefit from the S Corp election once profitable. Payroll infrastructure is already in place, so the added cost of putting yourself on payroll is minimal. CPA tax prep runs higher (up to $3,500+) due to inventory, payroll, and multi-form complexity.

Real estate investors

Rental income held in an LLC may qualify for the QBI deduction through the IRS safe harbor (requiring 250+ hours of rental services annually with contemporaneous records). Multi-member real estate LLCs should explore aggregation strategies to combine rental and operating entities for higher QBI deductions. See our LLC operating agreement guide for structuring tips.

These LLC tax mistakes cost real money. Avoid all of them.

1. Mixing personal and business finances. If the IRS audits you, commingled funds make it nearly impossible to prove deductions. Open a business bank account and keep every receipt. Disallowed deductions can cost you 36+ cents per dollar (SE tax + income tax) on every expense you cannot substantiate.

2. Missing quarterly estimated payments. The IRS charges an underpayment penalty (currently around 7-8% annualized) if you owe more than $1,000 at filing and did not pay enough throughout the year. Set calendar reminders for April 15, June 15, September 15, and January 15.

3. Electing S Corp status too early. If your net profit is below $50,000, the additional payroll costs ($500 to $2,000/year) and tax prep fees ($1,200 to $3,500) can exceed your self-employment tax savings. Run the numbers first.

4. Setting an unreasonably low S Corp salary. The IRS requires "reasonable compensation" for S Corp owner-employees. Paying yourself $20,000 on a business generating $200,000 in profit will trigger IRS scrutiny. The IRS can reclassify distributions as wages and assess back payroll taxes, penalties, and interest.

5. Ignoring state-level LLC taxes. California's $800 annual franchise tax applies even if your LLC earns zero income. California also charges a gross receipts fee of up to $11,790 for high-revenue LLCs. Some states do not recognize the S Corp election, adding separate state filing requirements.

6. Forgetting the QBI deduction. Eligible pass-through LLC owners can deduct up to 20% of qualified business income. On $100,000 in QBI, that is a $20,000 reduction in taxable income, saving roughly $4,400 to $7,400 depending on your bracket. Failing to claim it is leaving money on the table.

7. Not deducting half of self-employment tax. You can deduct 50% of your SE tax as an above-the-line adjustment on Form 1040. On $100,000 in net profit, that is a $7,065 deduction that reduces both your income tax and your effective SE tax rate.