How Do LLC Taxes Work, And What Are Your Options? (2026)

How LLCs Are Taxed by Default

The Internal Revenue Service (IRS) treats LLCs as pass-through entities. This means that profits pass through the LLC to you (and any other owners). You then pay personal income tax on those earnings.

Beyond that designation, tax treatment varies based on the number of owners:

Single-Member vs. Multi-Member LLC Taxes

LLCs are considered “disregarded entities” for tax purposes. Although the IRS recognizes the LLC, it’s ignored for tax purposes. Multi-member LLCs are taxed as partnerships by default, and each person pays taxes on their share of profit.

Electing Corporate or S-Corp Taxation

If you prefer, you can make a C-corporation (C-corp) or S-corporation (S-corp) election. Your LLC will then be taxed like the corporate structure you choose. For instance, C-corporations are taxed at the corporate and individual levels, but if you’re seeking venture capital, a C-corp election may be needed.

When you’re deciding on electing taxes for S-corp vs. C-corp vs. LLC structures, ensure you take time to weigh your options. If you’re part of a multi-member LLC, all owners should be on the same page.

Self-Employment Tax for LLC Owners

If your LLC is taxed as a sole proprietorship or partnership, you’ll need to pay both personal income tax and self-employment tax. To do so, you would pay the employer and employee portions of self-employment tax when filling out Schedule SE on your Form 1040.

Tax Forms Your LLC Must File

The exact forms you need to file are based on the type of LLC you have:

Single-Member LLC

You typically report income on Schedule C on your 1040 and also fill out Schedule SE.

Multi-Member LLC

Multi-member LLCs must submit Form 1065 to show the company’s profits and losses. They also need Schedule K to show how profits and losses were divided.

LLCs Taxed as S-Corps

If you made this election, your LLC must file Form 1120-S, which is also called a corporate pass-through return.

LLCs Taxed as C-Corps

LLCs that make this election usually must submit a corporate income tax return, called Form 1120.

Paying Estimated Quarterly Taxes

Because taxes aren’t withheld from your LLC’s profits, many LLC owners have to make quarterly estimated tax payments to the IRS. The IRS sets four payment deadlines per year.

If you don’t pay enough in estimated taxes over the course of the year, you might face tax penalties even if you pay your full tax liability by the end of the year.

State and Local Taxes on LLCs

Depending on where your LLC is located, you may also be liable for state, county and/or city taxes. These are a few to be aware of:

• Annual Fees/Franchise Taxes: Some states charge LLCs a flat fee each year.
• State Income Tax: Owners may need to pay federal and state taxes on profits.
• Sales and Use Tax: Depending on your location, you may have to collect and pay sales tax on items you sell.
• State Payroll Tax: If you have employees, you may have to withhold state income tax from paychecks.
• Local Taxes: In some areas, you might owe both state and local taxes on your profits or your gross receipts.

If your company operates across multiple states, you could potentially owe state and local taxes across multiple jurisdictions.

Tax Deductions LLCs Can Claim

If you know what tax deductions to claim, you might be able to dramatically reduce what you owe. These are some major deductions to consider:

• Qualified Business Income (QBI): You may be able to deduct up to 20% of net business income on your personal taxes.
• Employee Wages and Benefits: If you have employees, you can write off their salaries, wages, insurance and other benefits.
• Everyday Operating Expenses: You may be able to deduct workspace rent, office supplies, software subscriptions and other essentials.
• Startup Costs: In your first year of business, you might be able to deduct up to $5,000 in startup costs.

Ensure you keep receipts and other proof of anything you deduct in case the IRS decides to audit you.

Ways to Reduce Your LLC Tax Bill

Does it seem like you owe too much in taxes even after you’ve claimed all deductions that apply? Here are a few next steps:

• Check to see if electing S-corp status would reduce what you owe.
• Make pre-tax contributions to retirement accounts to lower taxable income.
• Look for any state or local tax credits that might be applicable.

Being proactive is more likely to get better results. Tax planning isn’t something to rush.

Tax Benefits and Drawbacks of an LLC

One of the main tax benefits of an LLC is the fact that, because it’s a pass-through entity, profits aren’t taxed twice. You also get the flexibility of electing to be taxed like a C-corp or S-corp if you wish.

However, there are downsides. You have the considerable burden of self-employment tax, and your LLC’s profits are taxed even if you leave them in the company bank account.

The Importance of Using the Right Forms

Choosing the right forms while navigating LLC taxation isn’t just a formality. Properly handling taxes can help you avoid piercing the corporate veil and possibly undoing the financial protections that come with an LLC.