Starting a new business is exciting—until tax season rolls around. If you’ve formed a Limited Liability Company (LLC), you’ve taken a smart step toward protecting your personal assets. But how exactly are LLCs taxed? What forms do you need to file? And can you really choose how your business is taxed?
LLC taxes might sound complicated, but once you understand the basics, they’re actually one of the most flexible parts of running your business. Whether you’re a one-person shop or a growing team, this guide will walk you through the essentials you need to know as a new LLC owner.
How Are LLCs Taxed? (The Short Answer)
By default, an LLC is a “pass-through” entity for tax purposes. This means the business itself doesn’t pay federal income taxes. Instead, profits and losses are passed through to the owners, who report them on their personal tax returns.
But here’s the twist:
LLCs can also choose how they’re taxed—giving you options to fit your income level, business goals, and strategy.
LLC Tax Options at a Glance
| LLC Type | Default Tax Status | Optional Election |
|---|---|---|
| Single-member LLC | Sole proprietorship (Schedule C) | Can elect S Corp or C Corp status |
| Multi-member LLC | Partnership (Form 1065) | Can elect S Corp or C Corp status |
1. Default Taxation for Single-Member LLCs
If you’re the sole owner of your LLC, the IRS considers you a “disregarded entity.” That just means your business income is reported directly on your personal tax return, using:
- Form 1040 (your individual tax return)
- Schedule C to report income and expenses from your business
- Schedule SE to calculate self-employment tax
This setup is simple and works well for solopreneurs, freelancers, and independent contractors who are just getting started.
2. Default Taxation for Multi-Member LLCs
If your LLC has two or more members, it’s treated as a partnership by default. This means the LLC must file:
- Form 1065 – U.S. Return of Partnership Income
- Schedule K-1 – Provided to each member to report their share of income/loss
Each member includes their K-1 information on their personal tax return. Like the single-member setup, the business itself doesn’t pay income tax directly.
3. Electing S Corporation Status
This is where things get interesting. LLCs can choose to be taxed as an S Corporation (S Corp) by filing IRS Form 2553—usually done to save on self-employment taxes.
Why would you do this?
In a default LLC, you pay self-employment taxes (Social Security and Medicare) on all your net income. But as an S Corp, you pay yourself a “reasonable salary” (subject to payroll taxes) and take additional profits as distributions—which aren’t subject to self-employment tax.
What you’ll need to do:
- Run payroll for yourself (and any employees)
- File quarterly payroll tax forms
- File Form 1120-S annually
Heads up: You should be earning at least $40,000–$50,000 in profit before the S Corp tax savings outweigh the extra complexity and cost.
4. Electing C Corporation Status
You can also elect to have your LLC taxed as a C Corporation by filing IRS Form 8832. This means the business pays corporate tax on its profits, and then you pay personal tax on any dividends.
Why would anyone choose this?
- To reinvest profits into the company without passing through to owners
- To access fringe benefits like health insurance or retirement plans
- If planning to raise capital or attract institutional investors
This strategy is rare for small businesses, but it can make sense in certain high-profit or high-growth situations.
What About Self-Employment Taxes?
This is one of the biggest shocks for new business owners. If your LLC is taxed as a sole proprietorship or partnership, you’ll pay:
- 15.3% self-employment tax on your net income (12.4% Social Security + 2.9% Medicare)
This is in addition to your regular income tax, and it kicks in whether or not you actually took money out of the business.
How to plan for it:
- Set aside 25%–30% of your profits for taxes
- Make quarterly estimated payments (Forms 1040-ES)
- Work with a tax pro to ensure you don’t underpay
Common Deductions for LLC Owners
The good news? You can write off business expenses to lower your tax bill. Common deductions include:
- Office supplies and software
- Home office use (if it’s a dedicated space)
- Phone and internet
- Travel and meals (with restrictions)
- Professional services (legal, accounting)
- Marketing and advertising
- Business insurance
Pro tip: Keep excellent records and consider using bookkeeping software like QuickBooks, Wave, or FreshBooks.
State Taxes for LLCs
Don’t forget your state’s rules. Some states (like Texas or California) require an annual franchise tax, gross receipts tax, or minimum fee—regardless of your income level.
Examples:
- California: $800 minimum franchise tax (waived first year for new LLCs)
- Delaware: $300 annual franchise tax
- Texas: No income tax, but a franchise tax applies if gross revenue exceeds $1.23 million (as of 2023)
Check with your Secretary of State and Department of Revenue to understand your state-specific obligations.
LLC Tax Filing Deadlines
Key dates to know:
- January 15: Final quarterly estimated tax payment for previous year
- March 15: Deadline for S Corp and partnership returns (Forms 1120-S and 1065)
- April 15: Deadline for individual and single-member LLC taxes (Form 1040 + Schedule C)
If you need more time, file an extension (Form 4868 for individuals, Form 7004 for businesses)—but remember, an extension to file isn’t an extension to pay.
Taxes Don’t Have to Be Terrifying
LLCs give you the flexibility to run your business your way—and that includes how you handle taxes. Whether you stick with the default setup or elect S Corp status down the road, understanding how your LLC is taxed puts you in control.
As your business grows, your tax strategy should grow with it. Start with solid bookkeeping, pay attention to deadlines, and don’t be afraid to get help when things get complicated. With a little planning, your LLC can be both legally sound and tax efficient—just the way it should be.
