How LLC Taxes Work: Pass-Through, Self-Employment Tax, and the S-Corp Election
An LLC is not a tax status. The IRS taxes the same LLC four different ways depending on its owners and elections, and the default surprises most first-time owners. Here is the whole federal picture in plain English, with the actual forms.
The core idea: the LLC is not a tax status
The IRS does not have a tax category called "LLC." An LLC is a state legal structure, and for federal taxes the IRS sorts it into a category it does have: disregarded entity, partnership, S corporation, or C corporation. Which one you land in decides what forms you file, what the business itself pays, and what lands on your personal return. The sort happens automatically by default, and you can override it with an election. Everything else on this page is a consequence of that one mechanic.
The defaults, by owner count
| Your LLC | Default IRS treatment | What gets filed |
|---|---|---|
| One owner (single-member) | Disregarded entity. The IRS treats the business as you, for income tax. | No separate business return. Profit goes on your personal return, usually Schedule C (Schedule E for rental activity, Schedule F for farming). |
| Two or more owners | Partnership. | Form 1065, the partnership return, plus a Schedule K-1 to each owner showing their share. Each owner reports that share on their own return. |
| Any LLC, by election | S corporation or C corporation. | The election forms and returns described below. |
"Pass-through" describes the first two rows: the business itself pays no federal income tax. The profit passes through to the owners, who pay tax on it on their own returns at their own rates, whether or not the money was actually distributed. Leave $40,000 of profit sitting in the business account all year and you are still taxed on $40,000. That single fact surprises more new owners than everything else in this guide combined.
Self-employment tax, with real numbers
Pass-through owners generally owe self-employment tax on top of income tax. It is 15.3% in total: 12.4% for Social Security and 2.9% for Medicare, applied to 92.35% of your net self-employment earnings. On $60,000 of net profit, that is about $8,478, owed whether you run the business as a sole proprietor or as a default-taxed LLC; forming the LLC changes nothing about this number, as our comparison page shows with the same example. Two refinements worth knowing: the 12.4% Social Security part applies only up to a wage base ($184,500 of combined wages and net earnings for 2026), while the Medicare part has no cap and gains an extra 0.9% above higher income thresholds. And you deduct half of the self-employment tax on your return, the part that mimics the employer's share. A disregarded single-member LLC is disregarded for income tax only; for payroll and certain excise taxes the IRS still treats it as a separate entity, which is why it needs its own EIN once it has employees.
Quarterly estimated taxes
Employees have tax withheld every paycheck. Pass-through owners do not, so the IRS expects the money quarterly instead, through estimated tax payments (Form 1040-ES for individuals). The standard due dates are April 15, June 15, September 15, and January 15 of the following year, shifting for weekends and holidays. Owners who skip the quarterlies and settle up in April usually owe an underpayment penalty on top of the tax. The discipline that works: treat every profitable month as owing a slice to the IRS, park it in a separate account, and pay it on the quarterly dates. Your state may run its own estimated tax schedule alongside the federal one.
Electing S corporation taxation
An LLC can elect to be taxed as an S corporation by filing Form 2553 with the IRS, generally due by the 15th day of the third month of the tax year it should take effect (March 15 for a calendar-year business), with late-election relief available in some cases. The LLC stays an LLC under state law; only its tax treatment changes. The payoff owners chase: instead of all profit being subject to self-employment tax, the owner-employee takes a salary (subject to payroll taxes) and the remaining profit comes out as distributions, which are not subject to self-employment tax. The costs are real: payroll must actually be run, the salary must be reasonable for the work (the IRS polices lowball salaries aggressively), and the entity files Form 1120-S and issues K-1s. The election only wins above a certain profit level, and that level depends on your numbers, your state's treatment, and your tolerance for paperwork. It is the single most oversold idea in small business tax, and the single most valuable one when the math genuinely works. Run it with a tax professional, with your real profit figure, before electing.
Electing C corporation taxation
The other election, Form 8832, makes the LLC taxable as a C corporation: the entity files Form 1120 and pays the flat 21% federal corporate rate, and owners are taxed again when profits come out as dividends. That double layer is why almost no small LLC elects it. The exceptions are businesses planning to raise institutional capital or retain large profits inside the company for growth. For everyone else it is a paragraph to know exists, not a plan.
The state layer
Federal treatment is only half the bill. States add their own structures on top, and they do not mirror the federal sort: California charges every LLC an $800 annual tax plus an income-based fee at higher incomes, Texas runs a franchise tax on margin with a $2.65 million no-tax-due threshold for 2026 and 2027, and Illinois charges a Personal Property Replacement Tax whose return depends on your federal classification. Our state cost pages carry each one with its official source: California, Texas, Illinois, Florida, Indiana.
Myths to retire
- "An LLC makes income tax-free." No. Pass-through means the tax lands on you instead of the entity. It does not disappear.
- "An LLC unlocks special deductions." The deduction rules for business expenses are essentially the same for a sole proprietor and a default-taxed LLC. The LLC is not where deductions come from.
- "Form the LLC in a no-tax state and skip home-state tax." You owe tax where you live and where the income is earned. A foreign formation does not move your personal tax home, and usually adds a second state's fees, as our foreign qualification guide details.
- "I will elect S corp status in April for last year." Elections have deadlines, generally in the first two and a half months of the tax year. Put the decision on the formation calendar, not the filing-season calendar.
Common questions
Do I file a separate tax return for a single-member LLC?
Not for federal income tax. A single-member LLC is disregarded by default, so its profit is reported on your personal return, usually Schedule C. You do file separate returns the moment the LLC has employees (payroll returns) or elects corporate treatment.
My LLC made no profit. Do I still file?
Usually something is still due. A multi-member LLC files its partnership return even in a lean year. A single-member owner reports the activity on their own return. And state obligations like California's $800 tax and your annual report do not care whether the year was profitable.
Can I switch to S corporation taxation later?
Yes. Form 2553 can be filed for a future tax year, generally by the 15th day of the third month of that year, and the IRS grants late-election relief in some circumstances. What you cannot do is decide retroactively in filing season for a year that has already closed, so calendar the decision.
My spouse and I own the LLC together. Are we a partnership?
By default, yes, a two-member LLC is a partnership for federal tax purposes, including when the two members are spouses (special rules let spouses in some situations elect simpler treatment, and community property states have their own wrinkle for wholly spouse-owned LLCs). This is a common surprise and a good reason to settle the tax picture at formation, not at the first filing.
Does the LLC get deductions a sole proprietor does not?
No. Ordinary and necessary business expenses are deductible under the same rules either way. If a promoter's pitch for forming an LLC is a list of write-offs, the write-offs were already available; what the LLC actually adds is the liability shield.
When are estimated taxes due?
For individuals, April 15, June 15, September 15, and January 15 of the following year, adjusted when a date lands on a weekend or holiday. Miss them and the IRS charges an underpayment penalty even if your April payment covers the full tax.
General Information Only
LLCForming publishes general information about forming and running an LLC. It is not legal, tax, or accounting advice, and it does not create an attorney or advisor relationship. Rules vary by state and by your situation. For a decision that matters, talk to a licensed attorney or tax professional in your state.