Introduction
An LLC has no single tax rate. How it's taxed depends on the number of members, the classification filed with the IRS, how active the owners are, and the states where it operates.
The LLC is a legal structure that protects owners from liability. It doesn't pick your federal tax treatment.
The IRS treats an LLC as a sole proprietorship, partnership, S-corporation, or C-corporation depending on membership and elections. LLCs are common: they made up 72.7% of partnerships in tax year 2023, according to IRS partnership statistics.
This guide covers default classifications, elections, owner pay, filings, deductions, state taxes, and how to choose. Tax rules change, so confirm current figures or get personalized advice before acting.
Key Takeaways
- One-member LLCs are disregarded by default; multi-member LLCs default to partnerships.
- Pass-through income avoids entity-level federal tax but can still trigger self-employment, estimated, and state taxes.
- S-corp and C-corp elections add payroll, filing, and compliance duties.
- The best choice depends on profit, owner activity, pay, and compliance cost.
How LLCs Are Taxed by Default
Pass-through taxation
Income, deductions, gains, losses, and credits generally flow to the members. The LLC itself usually pays no federal income tax.
Single-member LLCs
The IRS disregards the LLC as separate from its owner. An individual owner typically reports the activity on Form 1040 with Schedule C. "Disregarded" does not mean "tax-exempt." The owner pays tax on all the profit.
Multi-member LLCs
A partnership-classified LLC generally files Form 1065 and gives each member a Schedule K-1. Members report their allocated share on their own returns.
Members can owe tax on their share of profit even if the LLC keeps the cash. That's why the operating agreement matters: it governs ownership percentages and how income and loss are allocated.
Income tax vs. self-employment tax
Active owners generally owe both income tax and self-employment tax. Key SE figures:
- 15.3% SE tax (12.4% Social Security + 2.9% Medicare)
- $184,500 Social Security wage base for 2026
- 0.9% Additional Medicare Tax above $200,000 for single filers (IRS Topic 560)
Passive members may qualify for the limited-partner exception under IRC 1402(a)(13), but the statute doesn't define "limited partner." In a January 2025 training unit, the IRS said an LLC member who actively directed operations was not a limited partner and owed SE tax on the full distributive share. A passive label alone doesn't create an exclusion.
LLC Tax Election Options
An LLC can keep its legal form and elect a different tax classification. An S-corp or C-corp election changes how the business is taxed and reported. It doesn't convert the LLC into a corporation under state law.
S-corporation taxation
An S election (Form 2553) lets income pass through while the owner's pay is split between wages and distributions. Key rules:
- Domestic entity with no more than 100 shareholders
- Only eligible shareholders and one class of stock
- Form 2553 generally due within 2 months and 15 days of the start of the tax year
- Annual Form 1120-S filing
An owner who performs services must receive reasonable compensation through payroll before taking distributions. The IRS weighs training, duties, time, comparable pay, and payments to other employees.
In Watson v. United States (8th Cir. 2012), a firm paid its owner $24,000 a year, and the court upheld $91,044 as reasonable. That was a professional corporation, not an LLC, but the enforcement principle carries over.
Possible SE tax savings must be weighed against payroll, bookkeeping, return preparation, and compensation documentation. Don't assume the election pays for itself.
States may differ, too. New York City doesn't recognize the state S election, and California taxes S corporations at 1.5% with an $800 minimum franchise tax.
C-corporation taxation
A C-corp election uses Form 8832 and Form 1120. Corporate income is taxed at 21%, and distributed profits may be taxed again as dividends (qualified dividends are taxed at 0%, 15%, or 20%). It can suit businesses that retain earnings or attract outside investors.
Comparing the elections
| Factor | Default pass-through | S-corp | C-corp |
|---|---|---|---|
| Entity-level federal tax | No | No | Yes, 21% |
| Owner payroll required | No | Yes, reasonable pay | If working as employee |
| Main return | 1040/1065 | 1120-S | 1120 |
| Fits | Simple setups | Profitable, active owners | Reinvestment, investors |
Changing classification has timing limits. After an elective change, another is generally barred for 60 months. A Form 8832 effective date can be up to 75 days before filing and 12 months after. Review the operating agreement and timing before filing.
What Taxes and Tax Filings Apply to an LLC?
Federal income and employment taxes
Depending on classification, an LLC or its owners may face:
- Individual income tax on pass-through profit
- SE tax for eligible owners
- Payroll taxes for employees and owner-employees
- Corporate income tax if taxed as a C-corp
Payroll rates for 2026: 6.2% Social Security each for employer and employee up to $184,500, plus 1.45% Medicare each. FUTA is 6.0% on the first $7,000 of wages, usually reduced to 0.6% by state credit.
Match forms to classification:
- Disregarded: Form 1040 with Schedule C
- Partnership: Form 1065 and K-1s (2025 returns were due March 16, 2026)
- S-corp: Form 1120-S (same date)
- C-corp: Form 1120 (April 15 for calendar-year filers)
- Payroll: Form 941 quarterly, Form 940 annually, W-2s by February 2, 2026 for 2025 wages
Late filing is costly. A 2025 Form 1065 filed late carries $255 per partner per month, up to 12 months.
State and local taxes
Obligations vary by location, employees, property, sales, and customers. No LLC owes every state and local tax, but common ones include:
- State income tax
- Franchise or gross receipts tax
- Sales and use tax
- Property tax
- Unemployment tax and withholding
Examples: California charges an $800 annual LLC tax. Ohio's CAT applies above $6 million in Ohio gross receipts. Washington levies a B&O tax on gross receipts.
Estimated payments and cash flow
Pass-through owners have no employer withholding. Pay estimates when at least $1,000 will remain due.
The 2026 estimated payment dates are:
- April 15
- June 15
- September 15
- January 15, 2027
The safe harbor is the smaller of 90% of current-year tax or 100% of prior-year tax (110% if prior AGI exceeded $150,000). Set cash aside every month.
W-9s and multi-state operations
Classification drives the Form W-9:
- Disregarded LLC: owner's name on line 1, LLC name on line 2, usually the owner's TIN
- Partnership LLC: check LLC, enter P, use the LLC's EIN
- Corporate-classified LLC: enter C or S, use the LLC's EIN
A W-9 is not a tax return. It only tells payers how to report payments. Keep vendor, contractor, payroll, and multi-state records consistent.
Common LLC Deductions and Tax Planning Considerations
Ordinary and necessary expenses reduce taxable income. "Ordinary" means common in your trade; "necessary" means helpful and appropriate. Typical examples:
- Supplies, software, and equipment
- Insurance and professional fees
- Rent and advertising
- Business travel and contractor costs
- Vehicle mileage at 72.5 cents per mile (2026 rate)
Expense categories that change the treatment
Startup costs, capital purchases, personal costs, and mixed-use items follow different rules:
- Startup costs: elect to deduct up to $5,000 (reduced once costs exceed $50,000); amortize the rest over 180 months
- Section 179 (2026): limit of $2,560,000 for qualifying property
- Bonus depreciation: 100% for qualifying property acquired and placed in service after January 19, 2025
- Business meals: generally 50% deductible
Planning opportunities
Verify current limits before relying on these:
- Qualified Business Income deduction: up to 20% of eligible pass-through income
- 2026 retirement limits: 401(k) deferral $24,500; SEP lesser of 25% of compensation or $72,000
- Self-employed health insurance deduction, limited by business net profit
- Timing of purchases and income
Commercial property owners can also use cost segregation to accelerate depreciation on building components.
Documentation controls
Audits turn on records. One JFT Group client's 2016–2018 IRS audit involved a $210,000 levy and under-reported expenses including vehicles, insurance, repairs, meals, and cell phones. Habits that help:
- Separate business and personal accounts
- Organized receipts and invoices
- Contemporaneous mileage logs with date, destination, purpose, and miles
- Monthly bank reconciliations by someone other than the person who processed the transactions
- Payroll records kept at least 4 years; general records 3 years
Contractors with paper receipts, restaurants with heavy transaction volume, and multi-location owners benefit most from tight systems.
How to Choose the Right Tax Treatment
Questions to evaluate before making an election
- How many members, and are any entities or trusts?
- Do all owners work in the business?
- What is expected profit, and what pay is reasonable?
- Will you reinvest earnings or need outside investors?
- How many employees do you have?
- Which states are involved?
- Who will handle payroll and bookkeeping?
When an S-corporation review may be appropriate
A review makes sense when profit and owner pay are high enough to justify added payroll and compliance work. Model projected tax effects against reasonable compensation, payroll taxes, professional fees, and state rules. No published general threshold exists, so run your own numbers.
Ongoing compliance and professional support
Revisit classification when you add members, hire, enter new states, acquire locations, or change pay. JFT Group provides nationwide tax preparation, bookkeeping, payroll, tax planning, and business advisory support for owners who need records and filings to line up.
Frequently Asked Questions
Should my LLC be taxed as an S-Corp or partnership?
It depends on ownership, profit, owner participation, pay, state treatment, and costs. Compare both scenarios side by side instead of assuming an S-corp always lowers taxes.
How do I pay myself from my LLC?
Default-taxed owners generally take draws or distributions, and partners may receive guaranteed payments. S-corp owners performing services must take payroll wages. The method follows your tax classification.
What are some tax-deductible expenses for an LLC?
Common ones include supplies, professional services, insurance, advertising, eligible travel and vehicle costs, and equipment (often depreciated). Each needs a business purpose and records.
How do I fill out a W-9 for an LLC?
Your federal tax classification determines the name and TIN you report. Check the form against IRS instructions or ask a tax professional.
What taxes does an LLC have to pay in Texas?
Texas has no state income tax, but an LLC may face federal taxes, sales tax (up to 8.25% combined), franchise tax, and employer taxes. The 2026 franchise no-tax-due threshold is $2.65 million. Check IRS and Texas Comptroller guidance; these rules don't apply elsewhere.
