How LLCs are taxed. Default rules and the elections that change them.
The LLC is a state-law entity. The IRS does not have an "LLC" tax classification. Instead, the IRS assigns a default tax treatment based on member count, which LLC owners can change via election. This guide covers the four possible tax classifications, when to elect each, and how the math actually works for owners taking distributions or salary.
Start here.
Single-member LLC: disregarded entity (Schedule C). Multi-member LLC: partnership (Form 1065 + K-1s).
Either default can elect S-Corp (Form 2553) or C-Corp (Form 8832) treatment. S-Corp is the most common election; C-Corp is rare for LLCs.
Default LLC owners pay 15.3% SE tax on all net profit. S-Corp election can reduce this; C-Corp eliminates it but introduces double taxation.
LLC owners may deduct up to 20% of qualified business income (Section 199A) on personal returns. Phaseouts apply over income thresholds.
Most states follow federal classification. California, Tennessee, and a few others impose entity-level taxes on LLCs regardless of federal classification.
The full explanation.
Disregarded entity (single-member default)
Single-member LLC profits and losses flow directly to the owner on Schedule C of the personal 1040. The LLC files no separate federal tax return. SE tax applies to all net profit at 15.3% (up to the Social Security wage base of $168,600 in 2024; Medicare portion continues uncapped). Owner pays both employer and employee shares of FICA. Quarterly estimated tax payments are required if net tax owed will exceed $1,000.
Partnership (multi-member default)
Multi-member LLC files Form 1065 partnership return at the entity level. The 1065 is informational only; the LLC pays no federal income tax. Each member receives a Schedule K-1 reporting their allocated share of income, deductions, credits. Each member pays tax on K-1 amounts on their personal 1040. Active members pay SE tax on their distributive share of business income (passive members may not).
S-Corp election
Filed via Form 2553. The LLC remains an LLC under state law but is taxed as an S-Corp for federal purposes. Owners working in the business become employee-shareholders: they receive W-2 wages (subject to FICA) plus distributions (not subject to SE tax). The IRS requires "reasonable compensation" as wages before distributions can be paid; lowballing wages to inflate distributions is a top audit target. S-Corp election typically saves money at $60-80k+ in net profit. Below that, payroll complexity is not worth it.
C-Corp election
Filed via Form 8832. The LLC is taxed as a C-Corp: entity-level tax (21% federal flat rate), plus shareholder-level tax on dividends (15-23.8% depending on bracket). Double taxation. Rarely chosen by LLCs unless raising venture capital (where Delaware C-Corp is standard) or planning for QSBS treatment (which requires C-Corp status).
Pass-through deduction (Section 199A)
LLC owners with qualified business income (QBI) may deduct up to 20% of QBI on their personal return. Phaseouts begin at $191,950 (single) / $383,900 (married joint) in 2024. Specified service trade or business (SSTB) rules limit the deduction for certain professions (consulting, law, medicine, accounting, financial services).
State income tax
Most states tax LLC income at the member level (pass-through), following federal classification. Exceptions: California ($800 minimum franchise tax + 1.5% on S-Corp election + gross receipts fee for LLCs over $250k revenue), Tennessee (excise + franchise tax), Texas (margin tax), New York (filing fee), Washington DC (unincorporated business tax).
Sales tax (different)
Sales tax is unrelated to income tax classification. Any LLC selling taxable goods or services in nexus states must register for and collect state sales tax separately, regardless of income tax treatment.
Worked example: $150,000 net profit, single-member LLC
| Default disregarded entity | SE tax 15.3% × $150k × 92.35% factor = $21,194. Federal income tax on $150k (after QBI deduction) ≈ $24,000. Total federal: ~$45,194. |
| S-Corp election (W-2 wages $80k, distribution $70k) | FICA on W-2: 15.3% × $80k = $12,240. Federal income tax on $150k personal income ≈ $24,000. Total federal: ~$36,240. |
| Savings from S-Corp | $45,194 − $36,240 = $8,954/year. Payroll service: ~$500/year. Net savings: ~$8,450. |
Common questions.
Can an LLC be taxed as a sole proprietorship?
What is the difference between an LLC and S-Corp?
When does S-Corp election make sense?
Can I elect S-Corp mid-year?
Do LLCs pay federal income tax?
What about Delaware LLC taxes?
Are LLC owners self-employed?
Can I deduct health insurance through my LLC?
What about retirement contributions?
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This guide is educational. Specific situations require professional advice from a licensed CPA or tax attorney.
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