IRS Publication 3402: How LLCs Are Classified and Taxed

IRS Publication 3402, Taxation of Limited Liability Companies, is the IRS’s plain-language guide to how a domestic LLC is classified and taxed at the federal level. It explains the default classification the IRS assigns your LLC based on how many members it has, how to elect a different classification if you want one, and what federal income, employment, and excise tax obligations follow from whichever classification applies. It does not address state law on forming or running an LLC, and it does not cover state taxes.¹

How Your LLC Is Classified by Default

The federal tax treatment of an LLC starts with a simple headcount. An LLC with two or more members is treated as a partnership. An LLC with one member is a “disregarded entity,” meaning the IRS looks through the LLC and treats it the same as a sole proprietorship for income tax purposes.¹ These defaults apply automatically. You do not file anything to get them.

There is one important exception baked into the default rules. Even when a single-member LLC is disregarded for income tax, it is treated as a separate entity for federal employment tax and certain excise taxes. That split creates most of the confusion single-member owners run into, and it is discussed further below.²

Electing a Different Classification

An LLC that does not want its default status can elect to be taxed as a C corporation or an S corporation. Which form you file depends on the destination.

Electing C Corporation Status

To be taxed as a C corporation, file Form 8832, Entity Classification Election. Attach a copy of the filed form to the federal income tax return of each direct and indirect owner for the tax year that includes the effective date. The LLC then files Form 1120, pays tax at the entity level, and distributions to members are taxable to them to the extent of the entity’s earnings and profits, which produces the classic double tax.¹

Electing S Corporation Status

To be taxed as an S corporation, file Form 2553, Election by a Small Business Corporation. You do not need to file Form 8832 first. Filing Form 2553 is treated as a deemed election to be classified as a corporation, on top of the S election itself.¹ An S corporation generally pays no entity-level income tax. Income, deductions, gains, losses, and credits pass through to members, who receive a Schedule K-1 and report their share on their own returns. The LLC files Form 1120-S.³

Deadlines and Late Election Relief

A Form 8832 election cannot take effect more than 75 days before it is filed and cannot take effect more than 12 months after it is filed.⁴ If you miss that window, late relief may be available under Revenue Procedure 2009-41. You must show that the failure to file was the sole reason the desired classification was not obtained, that all returns were filed consistent with the classification you wanted, and that you had reasonable cause. The late election has to be filed within three years and 75 days of the requested effective date.⁵

The 60-Month Lock

Once your LLC elects to change its classification, you generally cannot change it again for 60 months after the effective date. Two carve-outs matter. A new LLC’s initial election effective on the date of formation does not trigger the lock, and the IRS may waive the period if there has been a more-than-50-percent change in ownership.⁶

What Happens When You Change Classification

A classification change is not a paperwork-only event. The IRS treats each change as a series of deemed transactions that can trigger real tax.

Partnership to corporation: the partnership is deemed to contribute all assets and liabilities to the corporation for stock, then immediately liquidates and distributes the stock to its partners.
Corporation to partnership: the corporation is deemed to liquidate by distributing everything to its shareholders, who then contribute the assets and liabilities to a new partnership.
Corporation to disregarded entity: the corporation is deemed to liquidate by distributing everything to the single owner.
Disregarded entity to corporation: the owner is deemed to contribute all assets and liabilities to the corporation in exchange for stock.

The partnership-to-corporation conversion may qualify as tax-free under Section 351, but gain can be recognized if the corporation assumes liabilities that exceed the contributor’s basis in the assets. Going the other direction, converting a corporation to a partnership is treated as a complete liquidation, which often produces tax at both the corporate and shareholder levels.⁶ Get this modeled before you file.

Which Return the LLC Files

The return follows the classification:

Partnership: Form 1065, with a Schedule K-1 to each member.
C corporation: Form 1120.
S corporation: Form 1120-S, with a Schedule K-1 (Form 1120-S) to each member.
Disregarded single-member LLC: no separate return. The owner reports the LLC’s income and deductions on their personal return, typically Schedule C, Schedule E, or Schedule F.²

Employment Taxes

Any LLC that pays wages must withhold federal income tax, pay FICA (Social Security and Medicare), pay FUTA, file employment tax returns such as Form 941, make timely deposits, and issue Forms W-2.⁷

For single-member LLCs, this is where the disregarded status ends. The LLC is treated as a corporation for employment tax and files under its own name and its own EIN. The owner is not an employee of the LLC. Instead, the owner pays self-employment tax on the LLC’s net earnings.¹ This separate-entity treatment applies to wages paid on or after January 1, 2009, under Treasury Decision 9356.⁸

Self-Employment Tax for Members

An individual who owns a single-member LLC operating a trade or business owes self-employment tax on the LLC’s net earnings, computed on Schedule SE, just like a sole proprietor.⁷

For multi-member LLCs taxed as partnerships, the answer is less clean, and Publication 3402 does not resolve it. Under IRC Section 1402(a)(13), a “limited partner’s” distributive share is generally excluded from self-employment tax, except for guaranteed payments for services. No final regulations define which LLC members qualify as limited partners. Proposed regulations from 1997 would have applied a three-part test based on personal liability, contracting authority, and hours worked, but Congress imposed a moratorium and the proposal has stayed unfinished. The Tax Court has held in Renkemeyer, Campbell & Weaver, LLP v. Commissioner (2011) and Castigliola v. Commissioner (2017) that members who provide services in that capacity, or who share management control of a member-managed LLC, are not limited partners for this purpose and owe self-employment tax on their distributive share.⁹ If you are an active member of a multi-member LLC, assume your share is subject to self-employment tax unless a tax adviser tells you otherwise on your facts.

Excise Taxes

For federal excise tax purposes, a disregarded single-member LLC is treated as a separate entity, regardless of its income tax classification. The LLC files under its own name and taxpayer identification number and may need to obtain its own EIN to do so.¹ The relevant forms include Form 637 (registration), Form 720 (quarterly excise return), Form 730 (monthly wagering), Form 2290 (heavy highway vehicle use), Form 11-C (occupational wagering), and Form 8849 (refund claims). Separate-entity treatment for excise tax applies to liabilities imposed in periods beginning on or after January 1, 2008.⁸

EIN Rules for a Disregarded LLC

The identification number rules for a disregarded single-member LLC track the split between income and other taxes. Use the owner’s SSN or EIN for income tax purposes, including on Forms W-9 and information returns. Use the LLC’s own separate EIN for employment tax filings (such as Form 941 and Form W-2) and excise tax filings. A single-member LLC with no employees and no excise tax obligations does not need its own EIN at all, though it can request one if state law or a bank requires it. Apply on Form SS-4.²

Husband-and-Wife LLCs in Community Property States

An LLC owned entirely by a husband and wife as community property may be treated as either a disregarded entity or a partnership for federal tax purposes, as long as no other person is an owner and the entity is not classified as a corporation. This comes from Revenue Procedure 2002-69. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.¹⁰

One boundary to know: the qualified joint venture election under IRC Section 761(f) that lets some husband-and-wife businesses skip partnership returns is not available when the business is run through a state-law entity such as an LLC.¹¹

What the Publication Does Not Cover, and Which Version Is Current

Publication 3402 applies to domestic LLCs organized under U.S. state law. The IRS notes that special rules exist for foreign LLCs but does not address them here.⁴ It also does not address state formation, operation, or termination rules, or any state taxes. The publication was last revised in March 2020, and as of the IRS “About” page’s January 23, 2026 review, that remains the current version with no recent developments listed.¹²

1
Internal Revenue Service. Publication 3402, Taxation of Limited Liability Companies
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Internal Revenue Service. Single Member Limited Liability Companies
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Internal Revenue Service. LLC Filing as a Corporation or Partnership
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Internal Revenue Service. Limited Liability Company (LLC)
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Internal Revenue Service. Form 8832, Entity Classification Election
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The Tax Adviser. Changing an Existing LLC’s Federal Income Tax Classification
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Internal Revenue Service. Publication 3402, Taxation of Limited Liability Companies (PDF)
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Federal Register. Disregarded Entities; Employment and Excise Taxes
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Journal of Accountancy. Self-Employment Taxes for LLC Members
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The Tax Adviser. LLC Spouses, Partnership or Joint Venture
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Internal Revenue Service. Election for Married Couples Unincorporated Businesses
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Internal Revenue Service. About Publication 3402