Key Takeaways

  • An LLC’s tax rate depends on its tax classification—single-member, multi-member, or corporate election—and on federal, state, and sometimes local taxes.
  • Most LLCs are “pass-through” entities, meaning profits pass to owners’ personal tax returns and are taxed at individual income tax rates.
  • Owners of pass-through LLCs typically owe self-employment tax (15.3% for Social Security and Medicare) on business income.
  • LLCs electing corporate taxation may face double taxation: a flat corporate tax rate plus taxes on dividends paid to members.
  • State-level LLC taxes vary and may include franchise taxes, gross receipts taxes, or minimum fees regardless of profitability.
  • Choosing the right tax classification can minimize tax liability, depending on income level, reinvestment plans, and state rules.

LLC tax rate is one important consideration when choosing a business entity. Every state in the U.S. recognizes a limited liability company (LLC) as a form of business organization. Business owners who pay income taxes at a personal tax rate may form an LLC to obtain limited liability protection.

The most important reason business owners form an LLC is to protect their personal assets, separating them from the business. That way, if there is a lawsuit, or unpaid debts, owners' personal assets cannot be seized by banks or bill collectors. However, taxes are what most small business owners have in mind when they consider forming an LLC.

Small business owners often consider different structures for their businesses to avoid paying self-employment taxes, or eliminate “double taxation” when tax time rolls around. Unlike a corporation, a limited liability company (LLC) is called a “pass-through entity” by the IRS; this works in a similar way to a partnership or sole proprietorship. 

Depending on the choices made by the owners, or members, the LLC is permitted by the IRS to be taxed as either a sole proprietorship, a corporation, or a partnership.

Single-Member LLCs and Income Taxes

For tax purposes, one-member LLCs are treated the same way the IRS treats sole proprietorships. The LLC does not have to file a return on its own behalf, and does not pay its own taxes.

  • If you are an LLC's sole owner, you will pay self-employment tax on your profit.
  • Profits and losses are reported on the Schedule SE form.
  • Your business income will be reported on Schedule C.
  • All profits and losses that the LLC incurs must be reported on the sole owner's personal 1040 tax return using Schedule C.
  • You must pay taxes on all profits, even if they are left in the company's bank account to cover operating expenses.

Self-Employment Tax Considerations for Single-Member LLCs

In addition to income tax, single-member LLC owners are generally subject to self-employment tax, which covers Social Security and Medicare contributions. For 2025, this rate is 15.3% on net earnings up to the Social Security wage base limit, with a reduced Medicare-only rate applied to amounts above that threshold. This tax applies whether or not you take distributions from the LLC, and it can significantly impact your effective LLC tax rate. Owners can reduce taxable income through legitimate business deductions such as home office expenses, equipment purchases, and retirement plan contributions.

Multiple-Member LLCs and Income Taxes

When an LLC has more than one member, or owner, it is treated like a partnership for income tax purposes. This includes co-owned LLCs, which are treated as partnerships for tax filing. As with single-member LLCs, co-owned LLCs do not file their own taxes.

  • LLC owners must pay income taxes on their own share of the business profits, reporting this income on their 1040 tax returns using Schedule E.
  • A distributive share will be specified in the LLC operating agreement; this is the share of profits and losses that belongs to each LLC member.
  • A co-owned LLC must file Form 1065 with the IRS, even though it does not pay taxes on its own behalf.
  • Form 1065, which is also filed by partnerships, is used by the IRS for information purposes. It is reviewed in order to check accuracy of each LLC members' tax returns.
  • Each member's share of the LLC's profits and losses must also be reported with a Schedule K-1 form.
  • This profit and loss information will be reported by each LLC member's personal 1040 tax form, and they must attach Schedule E.

Members' distributive shares are figured in proportion to the percentage of the business they own. A “special allocation” may be used, following IRS rules, to split up the profits and losses in a different manner that is not proportionate to the percentage of ownership for each member.

No matter which allocation method is used, the IRS requires each member to claim their entire distributive share at the end of the year.

Even if the money is not actually distributed to the owners and remains in the business's bank account, each member must still pay taxes on their share. This means that if the LLC members leave their profits in the business's coffers to provide operating capital, they are still responsible for paying taxes on it.

Guaranteed Payments and Member Tax Obligations

In multi-member LLCs, some members may receive “guaranteed payments” for services rendered or capital contributed, regardless of the LLC’s profitability. These payments are considered ordinary income and are subject to self-employment tax. In addition, all members must report their share of profits on their personal returns, even if the LLC retains earnings for future growth. The LLC tax rate for each member depends on their personal income tax bracket and applicable state taxes. Multi-member LLCs also need to account for the potential impact of state-level partnership filing requirements and fees, which may be assessed even if the LLC operates at a loss.

C Corporation vs. S Corporation Election for LLCs

LLCs may elect to be taxed as either a C corporation or an S corporation by filing the appropriate IRS forms.

  • C Corporation Election: The LLC pays a flat federal corporate tax rate (currently 21%), and owners pay taxes again on dividends received. This structure can be beneficial for businesses planning to reinvest profits, as corporate tax rates may be lower than some high individual tax brackets. However, it does introduce double taxation.
  • S Corporation Election: Profits and certain salaries paid to owner-employees flow through to personal returns, potentially reducing self-employment tax liability. Owner-employees must receive “reasonable compensation” for services provided, which is subject to payroll taxes, while remaining profits may be distributed free of self-employment tax.
    The decision between these elections should consider income level, reinvestment strategy, and state corporate tax rules, as some states do not recognize S corporation status.

Corporations and Income Taxes

Along with sole proprietorships and partnerships, LLCs may also choose to be treated as corporations for the purpose of tax filing.

  • This requires form 8832 to be filed with the IRS.
  • The LLC also files the Form 1120 tax return.
  • Profits from an LLC that is treated as a corporation are not subject to self-employment tax.
  • If the owners receive dividends, however, they are taxed at the qualifying dividend rate of 15 percent.
  • A corporation must also pay taxes on LLC members' wages, if they are working in the business.

The decision about your LLC's tax entity requires serious consideration and depends upon your business's unique needs. You'll need to take time to investigate changing tax rules for both federal and state returns.

Frequently Asked Questions

  1. What is the typical LLC tax rate? Most LLCs are taxed at the owner’s personal income tax rate, plus a 15.3% self-employment tax on net earnings for pass-through entities.
  2. Do all LLC owners pay self-employment tax? Yes, unless the LLC elects corporate taxation and owners are paid as employees, in which case payroll taxes apply instead.
  3. How do state taxes affect my LLC tax rate? State taxes vary widely and can include income taxes, franchise taxes, or minimum annual fees, which apply regardless of profitability.
  4. Can electing S corporation status lower my LLC tax burden? Possibly—S corporation status can reduce self-employment taxes on profits, but requires paying reasonable salaries and meeting IRS rules.
  5. Is corporate taxation better for high-earning LLCs? It can be, especially if profits are reinvested, but owners should weigh the benefits of the flat corporate tax rate against the drawback of double taxation.

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