How LLC Taxes Work in 2025
Owning an LLC comes with significant flexibility — and significant tax responsibility. Unlike a traditional W-2 employee who has taxes withheld from every paycheck, LLC owners are responsible for calculating, setting aside, and remitting their own taxes. Understanding how the pieces fit together is essential for managing your cash flow and avoiding unpleasant surprises at tax time.
Pass-Through Taxation: The Foundation
The default tax treatment for an LLC is pass-through taxation. The LLC itself does not pay federal income tax. Instead, all profits and losses flow through directly to the owners' personal tax returns. A single-member LLC (SMLLC) is treated as a "disregarded entity" — you report business income and expenses on Schedule C of your Form 1040. A multi-member LLC files an informational partnership return (Form 1065) and issues each member a Schedule K-1 showing their share of income.
This means your LLC income is stacked on top of any other income you earn — wages from a job, investment income, a spouse's income — and all of it is taxed together at your marginal rate. The total can push you into a higher federal bracket quickly if you are not planning carefully.
Key 2025 Standard Deductions: Single — $15,000 | Married Filing Jointly — $30,000 | Head of Household — $22,500. These reduce your taxable income before any tax is calculated.
Self-Employment Tax: What Most People Miss
The biggest tax surprise for new LLC owners is self-employment (SE) tax. When you work as a W-2 employee, your employer pays half of your Social Security and Medicare taxes (FICA). When you own an LLC, you are both employer and employee — so you pay both halves yourself.
The SE tax rate is 15.3%: 12.4% for Social Security (applied to the first $168,600 of net earnings in 2025) and 2.9% for Medicare (applied to all net earnings, with an additional 0.9% on earnings above $200,000 for single filers). SE tax is calculated on 92.35% of your net business income (this represents the employee-equivalent portion after accounting for the "employer deduction").
The silver lining: you can deduct 50% of your SE tax as an above-the-line deduction on your federal return, which reduces your adjusted gross income (AGI) and, in turn, your federal income tax.
Example: With $100,000 net profit, your SE tax is approximately $14,130 ($100,000 x 92.35% = $92,350 x 15.3%). You deduct $7,065 (50% of SE tax) from your AGI, reducing your federal income tax bill accordingly.
S-Corp Election: When It Makes Sense
Once your LLC is consistently generating $40,000 to $50,000 or more in annual net profit, it is worth evaluating an S-Corporation election (filed via IRS Form 2553). This does not change your legal structure — you remain an LLC — but it changes how you are taxed.
With an S-Corp election, you must pay yourself a reasonable W-2 salary for the work you perform. FICA taxes (Social Security and Medicare) are paid on that salary. However, any remaining profit distributed to you beyond your salary is treated as a distribution, which is not subject to self-employment or FICA tax. For someone earning $150,000 in profit who pays themselves a $70,000 salary, the $80,000 in distributions avoids the 15.3% SE tax — saving roughly $12,240 in self-employment taxes alone.
The trade-off: you must run payroll (adding accounting costs of $1,500 to $3,000 per year), file a separate S-Corp return (Form 1120-S), and pay any applicable state-level fees. The break-even point depends on your profitability and state, but many tax professionals consider $50,000+ in net profit the threshold worth analysing.
The QBI Deduction: 20% Off Your Business Income
The Qualified Business Income (QBI) deduction, created by the Tax Cuts and Jobs Act of 2017 and extended for 2025, allows eligible pass-through business owners to deduct up to 20% of their qualified business income from their taxable income. This is one of the most valuable deductions available to LLC owners.
For 2025, the full 20% deduction is available if your total taxable income is below $197,300 (single) or $394,600 (married filing jointly). Above those thresholds, limitations begin to apply. For most service businesses (law, accounting, financial services, consulting), the deduction phases out completely above the upper threshold. Non-service businesses above the threshold face limits based on W-2 wages paid and qualified property.
In practical terms: if your net business income is $80,000 and you qualify for the full QBI deduction, you only pay federal income tax on $64,000 of that business income — a significant reduction.
2025 Federal Income Tax Brackets
Federal income tax is levied on your taxable income after all deductions (standard deduction, SE deduction, QBI deduction). The US uses a progressive tax system — you pay each rate only on income within that bracket.
| Rate | Single Filer Income | Married Filing Jointly |
|---|---|---|
| 10% | $0 – $11,925 | $0 – $23,850 |
| 12% | $11,926 – $48,475 | $23,851 – $96,950 |
| 22% | $48,476 – $103,350 | $96,951 – $206,700 |
| 24% | $103,351 – $197,300 | $206,701 – $394,600 |
| 32% | $197,301 – $250,525 | $394,601 – $501,050 |
| 35% | $250,526 – $626,350 | $501,051 – $751,600 |
| 37% | Over $626,350 | Over $751,600 |
Quarterly Estimated Tax Payments
LLC owners do not have taxes withheld from income. This means you are responsible for making quarterly estimated tax payments to the IRS (and typically your state) to avoid underpayment penalties. The four due dates for 2025 are:
- April 15, 2025 — Q1 (January–March)
- June 16, 2025 — Q2 (April–May)
- September 15, 2025 — Q3 (June–August)
- January 15, 2026 — Q4 (September–December)
A practical rule: set aside 25–30% of every payment you receive in a separate savings account. Pay quarterly using IRS Form 1040-ES or through the IRS Direct Pay website. The safe harbour amount to avoid a penalty is 90% of your current year tax liability, or 100% of the prior year's tax (110% if your prior year AGI exceeded $150,000).