Yes. By default, an LLC is a pass-through entity for federal tax purposes, which means the business itself pays no federal income tax and every dollar of profit or loss flows through to the owners’ personal returns, where it’s taxed at individual rates.1Internal Revenue Service. Limited Liability Company (LLC) That treatment is automatic. It applies to every LLC unless the owners file paperwork to opt into corporate taxation.
What Pass-Through Status Actually Means for Your LLC
The IRS assigns a default tax classification based on how many owners the LLC has, and both defaults are pass-through.
A single-member LLC is treated as a “disregarded entity.” The IRS ignores the business as a separate taxpayer and treats all its income and expenses as belonging directly to the owner.1Internal Revenue Service. Limited Liability Company (LLC) The LLC still exists as a legal entity that shields your personal assets from business debts. For income tax purposes, though, the IRS looks straight through it to you.
An LLC with two or more members is classified as a partnership by default.2Internal Revenue Service. LLC Filing as a Corporation or Partnership The partnership files an informational return on Form 1065 that reports total income, deductions, and each member’s share, but the LLC pays no federal income tax at the entity level. Each member picks up their allocated share on their own return. Same result in both cases: the tax obligation lives with the individuals, not the business.
How the Income Reaches Your Personal Return
If you’re the sole owner of a single-member LLC, you report your business income and expenses on Schedule C, attached to your Form 1040.3Internal Revenue Service. Single Member Limited Liability Companies Schedule C nets out your profit, which then feeds your adjusted gross income. Rental activity in a single-member LLC usually goes on Schedule E instead, and farming operations use Schedule F.
Members of a multi-member LLC each receive a Schedule K-1 from the partnership return. The K-1 breaks out that member’s individual share of profits, losses, deductions, and credits.2Internal Revenue Service. LLC Filing as a Corporation or Partnership You report those figures on your personal return whether or not the LLC actually distributed any cash. That’s the part that catches people off guard: you can owe tax on income you never received, because the LLC retained the profits for business use.
Self-Employment Tax on Pass-Through Income
Pass-through income from an LLC generally triggers self-employment tax, which funds Social Security and Medicare. The combined rate is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare.4Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The tax kicks in once your net self-employment earnings reach $400 in a year.5Internal Revenue Service. Topic No. 554, Self-Employment Tax
The Social Security portion applies only on net earnings up to $184,500 in 2026.6Social Security Administration. What Is the Current Maximum Amount of Taxable Earnings for Social Security Earnings above that cap keep facing the 2.9% Medicare tax, and high earners owe an additional 0.9% Medicare surtax on self-employment income over $200,000 (single) or $250,000 (married filing jointly).7Internal Revenue Service. Topic No. 560, Additional Medicare Tax
Because the LLC doesn’t withhold anything from owner draws the way an employer withholds from a paycheck, most LLC owners have to send the IRS money throughout the year themselves.
Quarterly Estimated Tax Payments
The IRS expects taxes to be paid as income is earned, not just at filing time. For the 2026 tax year, the four estimated payment deadlines are April 15, June 15, and September 15 of 2026, plus January 15, 2027.8Internal Revenue Service. 2026 Form 1040-ES, Estimated Tax for Individuals You can skip that January payment if you file your full 2026 return and pay any balance by February 1, 2027.
You’ll generally avoid an underpayment penalty if your estimated payments and withholding together cover at least 90% of your current-year tax, or 100% of last year’s tax. The safe-harbor jumps to 110% of last year’s tax if your adjusted gross income topped $150,000.9Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty If your income runs unevenly through the year, the annualized installment method lets you size each quarter’s payment to that quarter’s income instead of paying equal amounts.
The 20% Qualified Business Income Deduction
Pass-through owners get one of the biggest benefits of the arrangement: a deduction of up to 20% of qualified business income under Section 199A, taken directly against taxable income.10Internal Revenue Service. Qualified Business Income Deduction The deduction was originally set to expire after 2025, but the One Big Beautiful Bill Act, signed in mid-2025, made it permanent.
The deduction covers income from a domestic business operated as a sole proprietorship, partnership, or S corporation. It reduces income tax only, not self-employment tax. Above certain income thresholds, the deduction phases out or disappears entirely for specified service trades like law, accounting, consulting, and healthcare. Below those thresholds, you typically qualify for the full 20% no matter your industry. At higher income levels the math gets more involved, with limits tied to W-2 wages the business pays and the value of qualified property.
Limits on Deducting Pass-Through Losses
Losses flow through the same way profits do, but you can’t always deduct the full amount in the year it happens.
Basis Limitation
You can only deduct LLC losses up to your adjusted basis in the business. Basis starts with what you invested. It goes up with additional contributions and your share of LLC income, and down with distributions and your share of losses. Any loss above your remaining basis carries forward until you build basis back up.11Office of the Law Revision Counsel. 26 U.S. Code 704 – Partners Distributive Share Sloppy basis tracking is where many LLC owners run into trouble at audit.
Passive Activity Rules
If you don’t materially participate in the LLC on a regular, continuous, and substantial basis, the IRS classifies your share of income and losses as passive. Passive losses can only offset passive income. They can’t offset wages or active business profits.12Internal Revenue Service. Topic No. 425, Passive Activities – Losses and Credits Unused passive losses carry forward until you either generate passive income or dispose of your entire interest in the activity. Rental real estate is generally treated as passive regardless of how involved you are, with a limited exception for active participants and a broader one for qualifying real estate professionals.
When Owners Choose Not to Be Taxed as a Pass-Through
Pass-through is the default, not the only option. An LLC can affirmatively elect corporate tax treatment, and two elections are common.
An S-corporation election, made on Form 2553, keeps pass-through income treatment but splits an owner’s take into a reasonable salary (subject to payroll taxes) and remaining profit distributed as a shareholder (not subject to self-employment tax). For a profitable LLC, the payroll tax savings can be sizable. The IRS requires that the salary reflect what someone in a comparable role would earn, and courts have reclassified distributions as wages when shareholders paid themselves unreasonably little.13Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers The LLC also has to be a domestic entity with no more than 100 shareholders, one class of stock, and only individuals, certain trusts, and estates as owners. Nonresident aliens can’t be shareholders.14Internal Revenue Service. S Corporations
A C-corporation election, made on Form 8832, ends pass-through taxation entirely.15Internal Revenue Service. About Form 8832, Entity Classification Election The business pays tax on profits at the flat 21% corporate rate, and owners pay tax again on any dividends. This double layer is the main drawback. C-corp status still makes sense for LLCs that reinvest most profits, seek venture capital, or want to fully deduct fringe benefits like employer-paid health insurance for shareholder-employees.
Pass-Through Federally Doesn’t Always Mean Pass-Through at the State Level
Federal pass-through status doesn’t automatically mean your LLC escapes state-level entity taxes. Many states impose franchise taxes, gross receipts taxes, or minimum annual fees on LLCs regardless of federal classification. Amounts range from nothing to several hundred dollars a year depending on the state.
More than 30 states have also adopted pass-through entity-level taxes, which let the LLC itself pay state income tax on behalf of its members. The members then claim a credit on their personal state returns. The structure exists primarily as a workaround to the $10,000 federal cap on state and local tax deductions, and where it’s available it can produce meaningful federal savings for members who would otherwise lose part of their state tax deduction. Your state’s revenue department or a tax professional can tell you whether the election is on the table in your state and whether it helps in your situation.