How an LLC is taxed depends on a classification the IRS assigns it, because the agency does not treat “LLC” as its own tax category. Every LLC is taxed as one of four things: a disregarded entity, a partnership, a C-corporation, or an S-corporation. Which one applies comes down to how many owners (called members) the LLC has and whether the owners have filed an election to change the default.1Internal Revenue Service. Limited Liability Company (LLC) That classification decides which forms you file, whether the business itself pays income tax, and how much self-employment tax you owe.
The Default Rules
If you never file an election, the IRS assigns your LLC a classification automatically based on member count.
One Owner: Disregarded Entity
A single-member LLC is a “disregarded entity” for federal tax purposes, which means the IRS treats the LLC and the owner as the same taxpayer.2Internal Revenue Service. Instructions for Schedule C (Form 1040) There is no separate business return. You report business income and expenses on Schedule C, which attaches to your personal Form 1040.3Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) Net profit on Schedule C rolls into your adjusted gross income, and you owe income tax on it whether you pull the cash out or leave it in the business account.
Two or More Owners: Partnership
An LLC with more than one member is automatically taxed as a partnership.4Internal Revenue Service. LLC Filing as a Corporation or Partnership The partnership itself owes no income tax. It files Form 1065, an information return that reports total income, deductions, and credits, and it issues a Schedule K-1 to each member showing that member’s share.5Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income Each member then reports the K-1 amounts on their personal return and pays tax at their individual rate.
One consequence surprises new LLC owners: pass-through taxation means you owe tax on your share of profits even if none of it was distributed. If the LLC earned $200,000 and reinvested every dollar, a 50% member still owes income tax on $100,000.
Electing C-Corporation Status
Any LLC can opt out of pass-through taxation by filing Form 8832 and asking to be taxed as a C-corporation.6Internal Revenue Service. About Form 8832, Entity Classification Election The election can take effect up to 75 days before the filing date or up to 12 months after it.7Internal Revenue Service. Form 8832 – Entity Classification Election
Once the election is in place, the LLC pays a flat 21% federal corporate income tax on its profits.8Office of the Law Revision Counsel. United States Code Title 26 – 11 When after-tax profits are distributed to members as dividends, the members owe tax again. That is the double taxation that makes C-corp status a poor fit for most small LLCs. The second layer is often lighter than it sounds, though, because qualified dividends are taxed at 0%, 15%, or 20% rather than at ordinary income rates.
C-corp status can still make sense if the business plans to retain most of its earnings for growth, because 21% may sit below the owners’ individual rates. It also opens the door to certain fringe benefits that pass-through owners cannot deduct in the same way. For most small LLCs that distribute profits regularly, the combined corporate and dividend burden ends up higher than pass-through taxation. Form 8832 elections generally cannot be revoked for five years, so the decision is not casual.
Electing S-Corporation Status
The more common corporate election for small LLCs is S-corporation status, made by filing Form 2553.9Internal Revenue Service. About Form 2553, Election by a Small Business Corporation An S-corp keeps the pass-through structure, so profits flow to members’ personal returns and there is no entity-level income tax. Its appeal is what it does to self-employment tax, covered below.
Not every LLC qualifies. The LLC must have no more than 100 shareholders, all shareholders must be U.S. individuals (certain trusts and estates also qualify), and the business can have only one class of ownership interest.10Office of the Law Revision Counsel. United States Code Title 26 – 1361 If your LLC has a foreign member, or another LLC as a member, S-corp status is off the table.
The Reasonable Compensation Rule
An S-corp member who works in the business must receive a salary the IRS considers reasonable for the services performed.11Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers Payroll taxes apply to that salary. Profit above the salary can be taken as a distribution, which is not subject to payroll taxes. Setting the salary low and taking most income as distributions is a tempting move, and the IRS watches for it.
There is no official formula. The IRS looks at comparable pay for similar roles in your industry, the hours you work, your experience and training, and the business’s revenue history. Bureau of Labor Statistics data and industry salary surveys are common benchmarks. Paying yourself far below market for the work you actually do is the fastest way to draw scrutiny.
Self-Employment Tax and Why Classification Matters
Self-employment tax is the cost most LLC owners underestimate. It covers Social Security and Medicare, and because you are both the employer and the employee, you pay both halves. The combined rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.12Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) For 2026, the Social Security portion applies only to the first $184,500 of net earnings.13Social Security Administration. Contribution and Benefit Base The 2.9% Medicare portion has no cap.
If your net self-employment income exceeds $200,000 ($250,000 for married couples filing jointly), you owe an additional 0.9% Medicare surtax on the amount above the threshold.14Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates You can deduct half of your self-employment tax as an adjustment to income on your personal return, which reduces your adjusted gross income even if you do not itemize.15Internal Revenue Service. Topic No. 554, Self-Employment Tax
Here is where classification bites. For a disregarded entity or a partnership, the general rule is that each member’s entire share of business profit counts as self-employment income and is subject to the full 15.3%. With an S-corp election, only the owner’s salary is subject to payroll taxes. Distributions above the salary escape self-employment tax entirely, though ordinary income tax still applies to them.
Consider a single-owner LLC earning $150,000 in net profit. As a disregarded entity, the full $150,000 is subject to self-employment tax, producing roughly $21,200 in combined Social Security and Medicare tax after the adjustment for the employer-equivalent portion. With an S-corp election and a reasonable salary of $80,000, payroll taxes apply only to the salary, and the remaining $70,000 in distributions avoids approximately $10,700 in self-employment tax. Real savings, but they come with the cost of running payroll and filing Form 1120-S.
The Qualified Business Income Deduction
LLC owners taxed as pass-throughs may qualify for a deduction worth up to 20% of their qualified business income under Section 199A. The deduction was originally set to expire at the end of 2025, but Congress made it permanent. It reduces your taxable income without requiring you to spend anything or itemize.16Internal Revenue Service. Qualified Business Income Deduction
For owners with 2026 taxable income below $201,750 (single) or $403,500 (married filing jointly), the calculation is straightforward: 20% of qualified business income, subject to an overall cap. Above those thresholds, the deduction phases down based on W-2 wages paid and the cost of business property, and it phases out completely for certain service-based businesses at $276,750 (single) or $553,500 (married filing jointly).
The service-business restriction applies to fields like law, medicine, accounting, consulting, and financial services. If your LLC is in one of those fields and your income exceeds the phase-out range, you get no deduction at all. Businesses outside those categories keep a partial deduction at higher income levels, though the math gets more complex. LLCs taxed as C-corporations are not eligible, since the deduction applies only to pass-through income. That fact alone often tips the balance against a C-corp election.
State-Level Taxes and Fees
Federal classification is only part of the picture. Most states impose their own taxes or annual fees on LLCs regardless of how the IRS classifies the business. Some states charge a flat annual report fee. Others impose a franchise tax based on revenue, net worth, or the number of members. A handful levy gross receipts taxes that apply to total revenue before expenses are deducted.
Annual state fees typically range from under $10 to several hundred dollars. Some states also impose minimum annual taxes simply for the privilege of operating as an LLC, even if the business earns nothing. Failing to pay these fees can result in the state administratively dissolving the LLC, which strips away liability protection. Check your state’s secretary of state or tax authority website for the exact requirements.
Filing Deadlines and Late Penalties
Your deadline follows your classification:
- Single-member (disregarded entity): Schedule C is part of your personal Form 1040, due April 15 for calendar-year filers.17Internal Revenue Service. When to File
- Multi-member (partnership): Form 1065 is due March 15, a month earlier than the individual deadline, so members get their K-1s in time to file.18Internal Revenue Service. Starting or Ending a Business 3
- S-corporation: Form 1120-S is due March 15.
- C-corporation: Form 1120 is due April 15.
Form 7004 grants an automatic six-month extension for partnership and corporate returns.19Internal Revenue Service. About Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns Single-member LLCs use Form 4868 to extend the individual return to October 15. Either extension gives you more time to file, not more time to pay. Any tax owed still has to be estimated and paid by the original due date, or interest and penalties start running.
Partnership returns carry an especially harsh late penalty. The IRS charges a per-partner amount for each month the return is late, up to 12 months.20Office of the Law Revision Counsel. United States Code Title 26 – 6698 Failure to File Partnership Return The amount adjusts annually for inflation; for returns due after December 31, 2024, it is $245 per partner per month. A five-member LLC three months late owes $3,675 before interest. A two-member LLC one month late owes $490.
For single-member LLCs, the individual late-filing penalty applies: 5% of the unpaid tax per month, capped at 25%. If the return is more than 60 days late, the minimum penalty is $525 or 100% of the unpaid tax, whichever is less.21Internal Revenue Service. Failure to File Penalty
Quarterly Estimated Payments
Pass-through LLC income has no employer withholding, so you pay tax throughout the year rather than at filing. The IRS expects estimated payments four times a year covering both income tax and self-employment tax, calculated on Form 1040-ES.22Internal Revenue Service. Estimated Taxes23Internal Revenue Service. About Form 1040-ES, Estimated Tax for Individuals
Underpaying triggers a penalty even if you pay the full balance at filing. The safe harbor is generally to pay at least 100% of the prior year’s total tax (110% if your adjusted gross income exceeded $150,000) or 90% of the current year’s, whichever is smaller. First-year owners with irregular income routinely undershoot.
How To Think About Choosing
There is no universally best classification for an LLC. The right choice depends on your income level, whether you actively work in the business, how many members you have, and how much you are willing to spend on payroll and filings. A single-member LLC earning $40,000 has little reason to elect S-corp status, because payroll costs and the extra return would eat the self-employment tax savings. An LLC earning $250,000 with an owner who works full time in the business could save thousands a year with the same election.
C-corp status rarely fits a small LLC that distributes most profits, but it can work for a business planning to reinvest heavily or bring on institutional investors. QBI adds another variable: pass-through status becomes more valuable when you qualify for the full 20% deduction, since electing C-corp status eliminates it. Running the numbers with a tax professional before filing an election is worth the cost, especially given the five-year lockout on reversing a Form 8832 election.