How Are LLCs Taxed? Complete Guide

How the IRS Taxes LLCs in 2026

A Limited Liability Company (LLC) is one of the most popular business structures in the United States, largely because of its tax flexibility. Unlike corporations, which have a fixed tax classification, an LLC can choose how it wants to be taxed by the IRS. This flexibility allows business owners to select the tax treatment that minimizes their overall tax burden.

The IRS does not recognize "LLC" as a tax classification. Instead, it classifies LLCs using existing tax categories: disregarded entity, partnership, S-Corporation, or C-Corporation. The default classification depends on the number of members (owners), but LLC owners can elect a different classification by filing the appropriate IRS form.

The Four Ways an LLC Can Be Taxed

1. Disregarded Entity (Single-Member LLC Default)

When a single person owns an LLC, the IRS treats it as a disregarded entity by default. This means the IRS essentially ignores the LLC for tax purposes and treats it as if it does not exist as a separate entity from its owner.

All income and expenses are reported directly on the owner's personal tax return using Schedule C (Profit or Loss from Business), which is attached to Form 1040. The LLC's profit is added to the owner's other income and taxed at their individual income tax rate.

• Tax form: Schedule C attached to Form 1040
• Self-employment tax: Yes, 15.3% on net profit (12.4% Social Security + 2.9% Medicare)
• Federal income tax: 10% to 37% depending on total taxable income
• Filing deadline: April 15 (with personal return)
• Separate tax return required: No -- reported on personal return
• EIN required: Only if the LLC has employees or files excise tax returns

2. Partnership (Multi-Member LLC Default)

When two or more people own an LLC, the IRS automatically classifies it as a partnership. The LLC must file an informational tax return (Form 1065), but the partnership itself does not pay income tax. Instead, each member receives a Schedule K-1 showing their share of the LLC's income, deductions, and credits.

Each member then reports their K-1 amounts on their personal tax return. The allocation of income among members is governed by the LLC's operating agreement and does not have to be proportional to ownership percentages (though it must have "substantial economic effect" under IRS rules).

• Tax form: Form 1065 (partnership return) + Schedule K-1 for each member
• Self-employment tax: Yes, for members who are active in the business
• Filing deadline: March 15 (one month before personal returns)
• Late filing penalty: $235 per member per month (up to 12 months)
• Guaranteed payments: Fixed payments to members for services are deductible by the LLC and taxable to the member

3. S-Corporation Election

Any LLC -- whether single-member or multi-member -- can elect to be taxed as an S-Corporation by filing Form 2553 with the IRS. This election does not change the LLC's legal structure; it only changes how the IRS taxes it.

The primary benefit of S-Corp taxation is the potential to reduce self-employment tax. With an S-Corp, the LLC's owner-employees must pay themselves a "reasonable salary," which is subject to FICA taxes (Social Security and Medicare). However, any remaining profit distributed as shareholder distributions is not subject to self-employment tax.

• Tax form: Form 1120-S + Schedule K-1 for each shareholder
• Self-employment tax: Only on salary, not on distributions
• Reasonable salary requirement: IRS requires owner-employees to pay themselves a reasonable salary for the work they perform
• Filing deadline: March 15
• Election deadline: Within 75 days of the start of the tax year (or by March 15 for calendar-year entities)
• Eligibility: Must be a domestic entity, have no more than 100 shareholders, have only one class of stock, and have only eligible shareholders (individuals, certain trusts, estates)

4. C-Corporation Election

An LLC can also elect to be taxed as a C-Corporation by filing Form 8832 (Entity Classification Election) with the IRS. Under C-Corp taxation, the LLC pays corporate income tax at a flat 21% rate on its profits. If the LLC distributes profits to members as dividends, those dividends are taxed again on the members' personal returns (the so-called "double taxation").

• Tax form: Form 1120
• Corporate tax rate: Flat 21%
• Self-employment tax: No (owners who work in the business are W-2 employees)
• Dividend tax: 0%, 15%, or 20% on qualified dividends (plus 3.8% NIIT for high earners)
• Filing deadline: April 15 (for calendar-year corporations)
• Retained earnings: Profits left in the company are only taxed at the 21% corporate rate (no personal tax until distributed)

Understanding Pass-Through Taxation

Three of the four LLC tax classifications -- disregarded entity, partnership, and S-Corporation -- use pass-through taxation. This means the LLC itself does not pay federal income tax. Instead, all income, deductions, and credits "pass through" to the members' personal tax returns.

Pass-through taxation has several important implications:

• No double taxation: Unlike C-Corps, profits are taxed only once at the member level
• Losses pass through: Business losses can offset members' other income (subject to at-risk and passive activity rules)
• Individual tax rates apply: Income is taxed at each member's marginal tax rate (10% to 37%)
• QBI deduction available: Pass-through income may qualify for the 20% Qualified Business Income deduction under Section 199A
• Phantom income risk: Members owe tax on their share of LLC income even if no cash is actually distributed to them

Federal Tax Rates for LLC Owners (2026)

Self-Employment Tax Explained

LLC members who are active in the business must pay self-employment tax, which covers Social Security and Medicare contributions. For 2026:

• Social Security: 12.4% on the first $176,100 of net self-employment earnings
• Medicare: 2.9% on all net self-employment earnings
• Additional Medicare: 0.9% on earnings above $200,000 (single) or $250,000 (married filing jointly)
• Total SE tax rate: 15.3% (up to the Social Security wage base)
• Deduction: You can deduct 50% of self-employment tax as an above-the-line deduction on your personal return

Self-employment tax is calculated on 92.35% of net self-employment income (the remaining 7.65% accounts for the employer-equivalent portion of the tax). This is one of the most significant tax costs for LLC owners and a primary reason many elect S-Corp status.

State Taxes on LLCs

In addition to federal taxes, LLCs must comply with state tax obligations. These vary enormously by state:

• Income tax: Most states impose income tax on LLC pass-through income at rates ranging from 0% (in states like Texas, Florida, Wyoming) to 13.3% (California)
• Franchise tax: Some states charge an annual franchise tax regardless of income (e.g., California's $800, Delaware's $300)
• Gross receipts tax: A few states impose taxes on gross revenue rather than net income
• Sales tax: LLCs selling taxable goods must collect and remit sales tax
• Annual report fees: Most states require an annual or biennial filing with associated fees

For a detailed state-by-state comparison, see our LLC State Tax Guide.

Choosing the Right Tax Classification

The best tax classification depends on your specific situation. Here are general guidelines:

• Disregarded entity (Schedule C): Best for single-member LLCs with net income under $40,000-$50,000, or those who want the simplest possible filing
• Partnership: Required default for multi-member LLCs; flexible income allocation makes it ideal for partnerships with unequal contributions
• S-Corporation: Best for LLCs with net income above $50,000 where the self-employment tax savings exceed the additional accounting costs ($1,500-$3,000/year for payroll and S-Corp return)
• C-Corporation: Best for LLCs planning to retain significant profits in the business, raise venture capital, or eventually go public

How to Change Your LLC's Tax Classification

If you want to change how your LLC is taxed, here are the steps for each election:

• S-Corp election: File Form 2553 with the IRS. Must be filed within 75 days of the start of the tax year (or within 75 days of forming the LLC if mid-year). Late elections may be accepted with reasonable cause.
• C-Corp election: File Form 8832 (Entity Classification Election). Can be filed at any time and takes effect on the date specified (up to 75 days prior).
• Revoking S-Corp status: Requires consent of shareholders owning more than 50% of shares. File a revocation statement with the IRS.
• Returning to default: File Form 8832 to elect back to disregarded entity or partnership status (subject to a 60-month limitation).

Tax Forms Summary by Classification

Common LLC Tax Mistakes to Avoid

• Not paying estimated taxes: LLC owners must make quarterly estimated payments or face underpayment penalties
• Missing the S-Corp election deadline: The 75-day window is strict; missing it means waiting until the next tax year (unless the IRS grants relief)
• Setting S-Corp salary too low: The IRS scrutinizes "reasonable compensation" and may reclassify distributions as wages, adding FICA tax plus penalties
• Forgetting state obligations: Filing federal returns does not satisfy state requirements; many states have separate LLC filings
• Co-mingling personal and business funds: This can jeopardize your LLC's liability protection and create bookkeeping nightmares
• Not tracking business expenses: Lost deductions mean higher taxable income and more tax paid
• Ignoring the QBI deduction: The 20% qualified business income deduction can significantly reduce your tax bill if you qualify