For federal income tax purposes, the IRS treats every LLC as one of four things: a disregarded entity, a partnership, an S corporation, or a C corporation. There is no separate LLC tax classification. Which one applies depends on how many owners the LLC has and whether anyone files an election to change the default. The choice drives how much you pay in self-employment tax, whether you can claim the qualified business income deduction, and how much paperwork lands on your desk each year.
The Two Default Classifications
If you form an LLC and file nothing extra with the IRS, your classification is assigned automatically based on the number of members.
A single-member LLC is a “disregarded entity.” The IRS ignores the LLC as a separate taxpayer and treats all business income and expenses as belonging directly to you.1Internal Revenue Service. Single Member Limited Liability Companies You report the profit or loss on Schedule C of your personal Form 1040, the same way a sole proprietor does.2Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)
An LLC with two or more members defaults to partnership treatment. The LLC files an informational Form 1065 and issues each member a Schedule K-1 showing their share of profits, losses, deductions, and credits.3Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income The LLC itself pays no federal income tax; the members do, on their personal returns.
Both defaults are pass-through structures. The rules come from federal regulations classifying any domestic eligible entity with one owner as disregarded and any with two or more as a partnership, unless the entity elects otherwise.4eCFR. 26 CFR 301.7701-3 – Classification of Certain Business Entities
Electing S Corporation Status
Most LLC owners who change their classification are electing S corporation treatment, and the reason is self-employment tax. Under the default classifications, your entire share of net business income is subject to self-employment tax. Under an S corp election, only the salary you pay yourself runs through payroll taxes. Profit taken as a distribution does not.
The catch: the IRS requires S corporation owner-employees to take a “reasonable salary” before pulling distributions. Set the salary artificially low and the IRS can reclassify distributions as wages and assess back taxes plus penalties. What counts as reasonable depends on your role, your hours, what comparable businesses pay for similar work, and the company’s revenue. Comparable market pay tends to carry the most weight in IRS and tax court analysis.
You make the election by filing Form 2553. The deadline is no later than two months and 15 days after the beginning of the tax year the election is meant to cover, or any time in the preceding tax year. Every shareholder must consent.5Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination File after the deadline but before the 15th day of the third month of the following tax year and the election automatically applies to that following year instead.6Internal Revenue Service. Instructions for Form 2553
S corp status also carries eligibility limits. No more than 100 shareholders. All shareholders must be U.S. citizens or residents. Only one class of stock. Small businesses rarely bump into these, but they can become a barrier as a company grows or takes on outside investors.
Electing C Corporation Status
An LLC can also elect C corporation treatment by filing Form 8832.7Internal Revenue Service. Form 8832, Entity Classification Election A C corporation is a separately taxed entity. The business pays federal income tax on its profits at the flat 21% corporate rate. If those profits are later distributed as dividends, the owners pay tax on the dividends at their individual rate. That’s the “double taxation” you hear about.
Qualified dividends are taxed at preferential capital gains rates of 0%, 15%, or 20% depending on the shareholder’s income, which softens the sting. Even so, the combined corporate-plus-shareholder tax often exceeds what an owner would pay under a pass-through structure, especially for smaller businesses that distribute most of what they earn.
C corp status makes the most sense for businesses that plan to reinvest rather than distribute profits, since retained earnings avoid the second layer of tax entirely. It’s also the structure venture capital investors typically prefer, since they usually want multiple classes of stock and can’t hold shares in an S corporation. The effective date of a Form 8832 election can go no more than 75 days before the filing date and no more than 12 months after it.7Internal Revenue Service. Form 8832, Entity Classification Election
How Classification Affects Self-Employment Tax
The self-employment tax rate is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare.8Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) It applies to 92.35% of your net self-employment earnings, since the IRS gives you a deduction equal to the employer’s half.9Internal Revenue Service. Topic No. 554, Self-Employment Tax
The Social Security portion caps out at an annually adjusted wage base. For 2026, earnings above $184,500 are not subject to the 12.4% Social Security piece.10Social Security Administration. Contribution and Benefit Base The 2.9% Medicare tax has no cap. An additional 0.9% Medicare tax kicks in on self-employment income above $200,000 for single filers or $250,000 for married couples filing jointly.11Internal Revenue Service. Topic No. 560, Additional Medicare Tax
Under the default classifications, all of that applies to your entire share of net income. Under an S corp election, it applies only to your W-2 salary. If your LLC earns $200,000 in profit and you pay yourself a reasonable salary of $100,000, the self-employment tax savings on the remaining $100,000 in distributions can easily exceed $14,000 in a year. That math is why S corp elections are popular. But if your profit is modest enough that nearly all of it would need to go toward a reasonable salary anyway, the savings evaporate and you’re left running payroll for nothing.
The Qualified Business Income Deduction
Owners of pass-through LLCs can claim the Section 199A qualified business income deduction, worth up to 20% of qualified business income.12Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income The deduction was scheduled to expire after 2025 but was made permanent by the One Big Beautiful Bill Act signed in 2025. C corporations do not qualify. That’s a real cost to weigh against the 21% corporate rate.
The full 20% is available when taxable income falls below certain thresholds. Above them, the deduction phases out based on the W-2 wages the business pays and the value of its depreciable property. For specified service businesses (law firms, medical practices, consulting, accounting), the deduction phases out entirely once income exceeds the upper limit of the phase-in range. For 2026, the thresholds are approximately $197,000 for single filers and $395,000 for married filing jointly, with the phase-out completing roughly $75,000 and $150,000 above those figures.
Starting in 2026, a minimum deduction of $400 applies for taxpayers with at least $1,000 of QBI from a business in which they materially participate. For an owner whose income sits well below the thresholds, the effect is straightforward: taxable income drops by 20% of business profit.12Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
How to Change Your LLC’s Classification
Two forms handle the elections. Form 2553 is for S corporation status. Form 8832 covers everything else, including electing C corporation treatment or switching between disregarded entity and partnership classifications.7Internal Revenue Service. Form 8832, Entity Classification Election An LLC electing S corp status doesn’t have to file Form 8832 separately; Form 2553 handles both the corporate classification and the S election at once.6Internal Revenue Service. Instructions for Form 2553
The 60-Month Lock
Once you file Form 8832 to change classification, you generally can’t change it again for 60 months from the effective date. The IRS may grant an exception if more than 50% of the ownership interests change hands between elections. An initial classification chosen when the LLC is formed doesn’t count as a change under this rule, so a newly formed LLC that elects C corp treatment on day one can still switch later without waiting five years.4eCFR. 26 CFR 301.7701-3 – Classification of Certain Business Entities
Relief for Late Elections
Missing the Form 2553 deadline doesn’t automatically mean waiting a year. The IRS offers simplified relief for late S corp elections when the failure was unintentional. To qualify, the entity must have intended to be an S corp, all owners must have reported income consistently with S corp treatment since the intended effective date, and the request must be filed within three years and 75 days of that date. If a late corporate classification election is also needed for the same date, the LLC must show that Form 8832 was the only thing preventing corporate status and that all federal returns were filed consistently with S corp treatment.13Internal Revenue Service. Late Election Relief
The relief exists because the alternative is harsh. Without it, an LLC that intended to be an S corp from January 1 but filed Form 2553 a week late could be stuck filing as a partnership or disregarded entity for the entire year, owing self-employment tax on income the owners already treated as S corp distributions.
State Tax Treatment
Most states follow the federal classification. If your LLC is a partnership federally, the state generally treats it that way, and the same holds for S corp and C corp elections. A handful of states, though, require a separate state-level filing to recognize S corporation status. Skip it and the state may tax your LLC as a C corporation even though the IRS treats it as an S corp.
Beyond income tax, some states charge fees and taxes on LLCs regardless of federal classification: annual registration fees, franchise taxes, gross receipts taxes. Amounts vary widely. Some states charge a nominal annual fee; others impose minimum franchise taxes that apply even if the LLC earns nothing. Check requirements in every state where the LLC is formed or does business, since operating across state lines can trigger filings in each one.