An LLC generally doesn’t pay federal income tax itself. By default the IRS treats it as a pass-through entity, so profits land on the owners’ personal returns and get taxed at individual rates from 10% to 37%. On top of that, members owe 15.3% self-employment tax on their share of the earnings, and the LLC may owe state franchise fees, sales tax, and payroll taxes if it has employees. So the question of what taxes an LLC pays is really a question about several overlapping layers: federal income tax at the owner level, self-employment tax, state and local taxes at the entity or owner level, and employment taxes once workers are on the payroll.
How the IRS Classifies Your LLC by Default
Everything else follows from classification. A single-member LLC is a “disregarded entity” for income tax purposes, meaning the IRS ignores it as a separate taxpayer.1Internal Revenue Service. Single Member Limited Liability Companies You report all business income and expenses on Schedule C of your personal Form 1040, the same way a sole proprietor would.2Internal Revenue Service. Publication 3402, Taxation of Limited Liability Companies
An LLC with two or more members defaults to partnership treatment.3Internal Revenue Service. LLC Filing as a Corporation or Partnership The partnership itself doesn’t pay income tax, but it must file Form 1065 as an informational return and issue each member a Schedule K-1 showing their share of profits, losses, and deductions. Each member reports those amounts on their personal return. The income is taxed once, at the member level.
Federal Income Tax on LLC Profits
Because the profits flow through, they’re taxed at whatever rate applies to your total personal income for the year. Federal income tax rates for 2026 run from 10% on the lowest slice of taxable income up to 37% on income above $640,600 for single filers ($768,600 for married couples filing jointly).4Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates These are marginal rates, so only the income within each bracket is taxed at that bracket’s rate.
Self-Employment Tax
Income tax is only part of the bill. LLC members also owe self-employment tax, which funds Social Security and Medicare. Nobody is withholding these contributions from a paycheck for you, so you cover both the employer and employee sides.
The combined self-employment tax rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.5Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates The tax doesn’t apply to 100% of your net profit. The IRS lets you calculate it on 92.35% of net earnings, which mirrors the deduction traditional employers get for their half of payroll taxes.6Internal Revenue Service. Topic No. 554, Self-Employment Tax On $100,000 of net profit, you’d compute self-employment tax on $92,350.
The Social Security portion has an annual cap. For 2026, only the first $184,500 in combined wages and self-employment earnings is subject to the 12.4% Social Security tax.7Social Security Administration. Contribution and Benefit Base Earnings above that still owe the 2.9% Medicare portion, and high earners face an additional 0.9% Medicare surtax on self-employment income above $200,000 for single filers or $250,000 for married couples filing jointly.8Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
You calculate these figures on Schedule SE and attach it to Form 1040. You can deduct half of your self-employment tax when computing your adjusted gross income, which lowers the income figure your income tax is based on.9Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
The Qualified Business Income Deduction
Pass-through LLC members may qualify for a Section 199A deduction that reduces taxable income by up to 20% of qualified business income. Originally part of the 2017 Tax Cuts and Jobs Act and set to expire after 2025, the deduction was made permanent by the One Big Beautiful Bill Act, so it remains available for 2026 and beyond.
If your LLC generates $150,000 in qualified business income and you’re eligible for the full deduction, you subtract $30,000 before calculating income tax. The deduction doesn’t reduce self-employment tax, only income tax.
The math is straightforward when your total taxable income is below the annual thresholds (roughly $201,750 for single filers and $403,500 for married couples filing jointly in 2026). Above those levels the deduction starts phasing out based on W-2 wages the LLC pays and the value of qualified property it holds. Service-based businesses (law practices, medical offices, consulting firms and similar) face additional limits; once income crosses the threshold, the deduction for these businesses phases out completely.
Electing S-Corp or C-Corp Treatment
The default pass-through structure works for most LLCs, but you can opt into corporate taxation if a different structure fits better.
C-Corporation Election
Filing Form 8832 converts your LLC’s tax treatment to that of a C-corporation.10Internal Revenue Service. About Form 8832, Entity Classification Election The LLC pays a flat 21% federal income tax on its profits. When after-tax profits are distributed as dividends, members pay tax again at qualified dividend rates of 0%, 15%, or 20% depending on personal income. Members with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly) also owe the 3.8% net investment income tax on those dividends.11Internal Revenue Service. Topic No. 559, Net Investment Income Tax
Double taxation is the main drawback. The upside is that members don’t owe self-employment tax on corporate profits, and the flat 21% entity rate can be attractive if the business retains most of its earnings rather than distributing them. Losses stay inside the corporation and cannot offset the members’ other personal income.
S-Corporation Election
Filing Form 2553 elects S-corporation treatment, which keeps the pass-through structure but changes how owners are paid.12Internal Revenue Service. S Corporations Your LLC must have no more than 100 shareholders, only one class of stock, and shareholders limited to U.S. citizens or residents (no partnerships or corporations as owners).
The payoff is a potential reduction in self-employment tax. Members who work in the business must pay themselves a reasonable salary, subject to normal payroll tax withholding. Profits distributed beyond that salary are not subject to the 15.3% self-employment tax. They flow through as ordinary income taxed at your individual rate, but without the Social Security and Medicare bite.13Internal Revenue Service. Instructions for Form 2553
The “reasonable salary” requirement is where the IRS focuses. Setting your salary artificially low to enlarge the tax-free distribution invites an audit. The IRS looks at training, duties, hours worked, what comparable businesses pay for similar work, and the company’s financial picture.14Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues A working rule: pay yourself what you’d have to pay someone else to do the same job.
Payroll Taxes When You Hire Employees
Once your LLC has employees beyond the members themselves, a separate set of payroll obligations kicks in. The LLC withholds income tax from employee paychecks and pays the employer’s share of FICA: 6.2% for Social Security and 1.45% for Medicare on each worker’s wages.5Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates The employee pays the same rates through withholding, for a combined FICA cost of 15.3% per dollar of wages.
The LLC also pays Federal Unemployment Tax (FUTA) at 6% on the first $7,000 of wages paid to each employee per year.15Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax In practice, credits for state unemployment taxes usually reduce the effective FUTA rate to 0.6%, or $42 per employee. FUTA is entirely the employer’s expense.
Deposits go through the Electronic Federal Tax Payment System. You report wages and withholding quarterly on Form 941 and file Form 940 annually for FUTA. Missing payroll deposits carries serious personal risk. Any person responsible for collecting and paying over withheld employee taxes who willfully fails to do so faces a penalty equal to 100% of the unpaid amount.16Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax The IRS calls this the trust fund recovery penalty, and it pierces the LLC’s liability protection to reach managing members personally.
State and Local Taxes
Federal taxes get most of the attention, but state and local obligations add up fast, and the specifics vary widely depending on where the LLC is formed and where it operates.
Most states with an income tax follow the federal pass-through structure. A handful impose an entity-level tax or fee on the LLC itself regardless of profitability. These franchise or privilege taxes range from nothing in some states to $800 in the most expensive. Many states also require an annual or biennial report with its own filing fee.
If your LLC sells physical goods or certain taxable services, you collect sales tax from customers and remit it to the state. Since the Supreme Court’s 2018 decision in South Dakota v. Wayfair, states can also require you to collect sales tax on out-of-state sales once you cross an economic nexus threshold, typically $100,000 in annual sales or 200 transactions delivered into the state. Thresholds vary by state, and tracking them across jurisdictions adds real compliance cost for LLCs selling online.
Local jurisdictions may add business license fees, personal property taxes on equipment and vehicles, and in some cities a gross receipts or business privilege tax. These are easy to overlook during planning and often surprise owners in the first year of operation.
Quarterly Estimated Tax Payments
Because LLC income isn’t subject to payroll withholding, the IRS expects you to pay throughout the year. Quarterly estimated payments on Form 1040-ES cover both income tax and self-employment tax. Payments are required if you expect to owe $1,000 or more when you file.17Internal Revenue Service. Estimated Taxes
The four due dates for 2026 are:
- April 15, covering income earned January through March
- June 15, covering April and May
- September 15, covering June through August
- January 15, 2027, covering September through December
Safe harbor rules protect you from underpayment penalties. You avoid the penalty if you pay at least 90% of your current year’s tax liability, or 100% of the tax shown on your prior year’s return (110% if your adjusted gross income that year exceeded $150,000).18Internal Revenue Service. Estimated Tax The prior-year safe harbor is usually the easiest to use when income is unpredictable: base quarterly payments on last year’s total tax and settle any difference at filing.
Penalties for Late Filing and Underpayment
The IRS imposes distinct penalties depending on whether you filed late, paid late, or got the numbers wrong. For multi-member LLCs taxed as partnerships, failing to file Form 1065 on time triggers a penalty of $255 per partner for each month the return is late, up to 12 months.19Internal Revenue Service. Failure to File Penalty
Unpaid balances accrue a failure-to-pay penalty of 0.5% per month, capped at 25%.20Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges That rate jumps to 1% per month if the IRS issues a notice of intent to levy your property. Interest compounds on top of the penalty. An installment agreement drops the monthly rate to 0.25%.
LLCs that pay independent contractors $600 or more in a year must file Form 1099-NEC for each one. Per-form penalties escalate with delay: $60 if filed within 30 days of the due date, $130 if filed by August 1, and $340 if filed later or not at all.21Internal Revenue Service. Information Return Penalties Intentional disregard pushes the penalty to $680 per form with no cap.
The accuracy-related penalty applies when you substantially understate your income tax, typically defined as understating by the greater of 10% of the correct tax or $5,000. The penalty is 20% of the underpaid amount.22Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments Solid records and a preparer who understands pass-through returns are the best defense.