The Complete Guide to LLC Taxes

To create an LLC, you have to apply to your state’s Secretary of State, put together an operating agreement, and secure your required licenses, all of which you can read about in our guide to LLCs.

But here’s the best part of being an LLC: if getting taxed as a partnership or sole prop doesn’t result in a lower tax bill, you can opt to file your taxes as a C corporation or S corporation instead.

What does that mean for your particular tax situation? Are LLCs really better from a tax standpoint than all the other business entity types?

Here’s what you need to know.

(And if you just want to calculate how much tax your LLC owes, you can jump straight to our free LLC estimated tax calculator.)

How are LLCs taxed?

How an LLC is taxed will depend on how the business chooses to be taxed. The flexibility of the LLC structure means there are four separate tax classifications that your LLC could fall under for federal income tax purposes:

1. If it’s a single-member LLC (one shareholder) and hasn’t opted to file as a corporation, it will file its taxes exactly as a sole proprietor would.
2. If it’s a multi-member LLC (multiple shareholders) and hasn’t opted to file as a corporation, it will file its taxes exactly like a partnership.
3. If it has opted to file its taxes as a C corporation by submitting IRS Form 8832, then it will file its taxes like a C corporation.
4. If it has opted to file its taxes as an S corporation by submitting IRS Form 2553, then it will file its taxes like an S corporation.

Filing taxes as a single-member LLC

If you run an LLC by yourself and haven’t opted to file your taxes as a corporation, you file your federal income taxes as a sole proprietor would. This means reporting your income and expenses on your personal income tax return (Form 1040). When you file as a sole proprietor, you pay taxes based on your personal income tax rate.

To do this, you’ll first have to calculate and report your LLC’s profits (or losses) using an IRS form called Schedule C. This determines your taxable income. To fill that out, you need an income statement as well as financial records and receipts for all the deductions you plan on making.

You’ll also have to report and make Social Security and Medicare tax payments (i.e., your self-employment taxes) using Schedule SE.

Filing taxes as a multi-member LLC

If you’re part of an LLC with multiple members, you use informational return Form 1065 to report the business income or loss to the IRS.

An LLC prepares a Schedule K-1 for each of its members. Schedule K-1s must be completed as part of Form 1065, but they are also used by members to report their share of the LLC’s income and deductions on their personal tax returns. LLCs are considered pass-through or disregarded entities, meaning their profits and losses pass through directly to the business owners. Owners of multi-member LLCs report their business’s profits and losses on Schedule E and report self-employment taxes using Schedule SE.

To file Form 1065, you need all of your LLC’s important year-end financial statements, including a profit and loss statement that shows net income and revenues, a list of all the partnership’s deductible business expenses, and a balance sheet for the beginning and end of the year.

An LLC completes each member’s Schedule K-1 as part of Form 1065, which identifies each partner’s share of the profits or losses over the course of the reporting period. Each partner’s Schedule K-1 is necessary as part of their personal tax return.

Filing taxes as a C corporation

If the members of an LLC believe it can lower its tax bill by being taxed as a corporation, they can file Form 8832 with the IRS and opt to be taxed as a C corporation.

Changing your tax status to a C corporation means that the IRS treats your business as a separate taxpayer. Instead of letting the LLC’s corporate income and expenses flow through to their personal tax returns, the LLC owners are taxed separately from the company, and the LLC files its own separate corporate tax return.

LLC owners use the corporate tax return, also known as Form 1120, to report the corporation’s income, gains, losses, deductions, and credits to calculate its tax liability. Like Schedule C, you’ll need all of your company’s important financial information and statements on hand before filling it out.

Read more about filing a corporate tax return.

Filing taxes as an S corporation

An LLC can also file Form 2553 and elect to be taxed as an S corporation.

S corporation status is a special tax designation granted by the IRS—it allows corporations to pass their corporate income, credits, and deductions through to the business owners, just like in a partnership or sole proprietorship.

Why would an LLC elect to be taxed as an S corporation instead of a sole proprietorship or partnership? It all has to do with self-employment tax: sole proprietorships and partnerships have to pay it on 100% of the business profits, but S corp owners only pay self-employment taxes on the salary they take from the business.

LLCs filing as S corporations must file Form 1120S, the U.S. Income Tax Return for an S corporation. Members receive a Schedule K-1 from the business reporting their share of the business’s income (or losses) and use the K-1 to complete their personal tax returns, just like a partner would.

Learn more: The Complete Guide to S Corporation Taxes

What are the tax rates on LLCs?

The tax rates for LLCs depend on the tax classification the LLC chooses, as the LLC itself does not have a fixed tax rate. Instead, it takes on the tax rates of the entity type it elects to be taxed as. Here’s a breakdown:

Single-member LLCs (Sole Proprietorship): Taxed at the individual’s personal income tax rate. Federal income tax rates for individuals range from 10% to 37%, depending on your total taxable income.

Multi-member LLCs (Partnerships): Like single-member LLCs, multi-member LLCs are taxed at the individual members' personal income tax rates. Each member reports their share of the LLC's profits or losses on their personal tax return, which will be subject to their individual tax bracket.

LLCs taxed as C corporations: These are subject to the flat corporate tax rate of 21% on their net income at the federal level. However, profits distributed to LLC members as dividends may also be subject to an additional tax at the individual level, leading to “double taxation.”

LLCs taxed as S corporations: S corporations do not pay corporate income tax; instead, income passes through to the owners, who are taxed at their individual rates. However, owners who draw a salary must pay self-employment taxes (Social Security and Medicare) on their wages, while distributions are not subject to these taxes.

State taxes and fees

In addition to federal taxes, LLCs may face state-level taxes or fees, such as:

Franchise taxes: Some states impose a flat franchise tax or a tax based on LLC revenue or net income.

Annual fees: These vary by state and can range from $50 to several hundred dollars per year.

Sales tax (if applicable): If your LLC sells goods or services, you may also need to collect and remit sales taxes based on your state’s requirements.

LLC tax calculator

Once you know which entity type your LLC will be taxed as, you can calculate exactly how much tax your LLC owes. We’ve made it easy with our free estimated tax calculator.

Is an LLC better for taxes?

Switching your business structure to an LLC may seem like a surefire way to reduce your taxes. But LLCs are sometimes subject to additional annual fees and state franchise taxes. It’s actually the flexibility of the LLC designation that benefits most small businesses.

An LLC could cut your tax bill if:

You’re currently subject to double taxation

LLCs that opt to be treated as pass-through entities avoid double taxation. Instead of getting taxed when they earn income and distribute profits to shareholders, LLCs pass their gains or losses onto their owners and are only taxed once, which can result in a lower tax bill. If your company is making a profit and you want to take some of that money out of the company, it’s generally cheaper to do so as a pass-through entity than a C corp.

You’re paying lots in self-employment tax

Unlike owners of sole proprietorships and partnerships, S corporation owners only pay self-employment taxes on their wages rather than their entire share of the company’s profits. All other income goes to shareholders in the form of “distributions” that are not subject to self-employment tax.

You need liability protection

Like C corps and S corps, LLCs give their owners limited liability. This means that if the LLC ever goes under or gets sued, your personal assets are off-limits. If your LLC is using an owner’s personal bank account, though, their personal funds can still be seized. You can make sure your personal assets are safe by opening a business bank account.

You’re focused on growth

If you’re a new and growing business and intend to reinvest most of your profits back into the business, electing to be taxed as a C corporation could lower your tax bill. That’s because C corporations pay a tax rate that is often lower than individual tax rates.

What are the tax advantages of LLCs and their potential drawbacks?

LLCs offer significant tax advantages, but they also come with some potential drawbacks that business owners should consider before choosing this structure.

Tax advantages of LLCs

1. Flexibility in tax classification: LLCs can choose how they want to be taxed—whether as a sole proprietorship, partnership, S corporation, or C corporation. This allows businesses to select the tax treatment that minimizes their liability.
2. Pass-through taxation: By default, LLCs are pass-through entities, meaning profits and losses pass through to the owners' personal tax returns. This avoids the double taxation seen with C corporations.
3. Self-employment tax savings (S Corp election): LLCs taxed as S corporations only pay self-employment taxes on the owner’s wages, not on the entire business income. This can lead to significant savings for businesses with substantial profits.
4. Deductible business expenses: LLC owners can deduct qualified business expenses like office supplies, software subscriptions, and professional services, reducing taxable income.
5. Liability protection: LLCs offer the same personal asset protection as corporations, shielding owners from business liabilities.

Potential Drawbacks of LLCs

1. Self-employment tax (default status): Sole proprietors and partners pay self-employment tax on 100% of their profits, which can be a larger burden compared to corporate structures.
2. State-level fees: LLCs may be subject to annual fees or franchise taxes depending on the state, which can increase the cost of maintaining the business.
3. Administrative complexity: Managing an LLC can require additional record-keeping, tax filings, and compliance compared to simpler business structures like sole proprietorships.
4. Double taxation (C corp election): If an LLC opts to be taxed as a C corporation, it faces the risk of double taxation—once at the corporate level and again on dividends paid to owners.

By weighing these advantages and drawbacks, you can determine if an LLC is the best structure for your business goals and tax situation.

Your Next Steps for LLC Tax Success

Choosing the right tax strategy for your LLC is a crucial step in maximizing your profits and staying compliant. Here’s how to set yourself up for success:

1. Consult a tax professional: A tax advisor can help you evaluate your unique financial situation and recommend the best tax classification for your LLC.
2. Use a tax calculator: Tools like our free LLC estimated tax calculator can provide a quick snapshot of your tax liability based on your chosen tax structure.
3. Stay compliant with state requirements: Ensure you understand the specific fees, franchise taxes, and filing deadlines in your state to avoid penalties.
4. Reevaluate your tax classification annually: Your business needs may change as it grows, so revisit your LLC’s tax classification each year to confirm it’s still the most advantageous option.
5. Maintain organized financial records: Accurate financial documentation is key to filing your taxes correctly and taking full advantage of deductions.

By taking these steps, you’ll be better prepared to navigate the complexities of LLC taxes and focus on growing your business.