How are LLCs Taxed?


LLCs do not pay federal taxes on business income. Instead, the profits of the LLC "pass-through" to the members. Members are then taxed at their individual tax rates.

Pass-through taxation is a major advantage of the LLC business structure. Unlike the LLC, most corporations are "double-taxed." Not only does the corporation itself pay income tax on all profits, but its owners also have to pay an income tax on their individual dividends.

For an LLC, all income is only taxed at the level of the individual LLC members. This is known as "pass-through taxation," and it means that LLC income is only taxed once.

Pass-Through Taxation for Single Member LLCs

For a single-member LLC, the owner is entitled to 100% of the LLC income.

Here is an example:

Bob’s Baseball Gear, LLC is a single-member LLC. If Bob’s LLC had $100,000 in gross receipts in one year, and $60,000 in total expenses, then Bob would have earned $40,000 in net profit. All of this is reported to the IRS on Bob’s individual tax return using Form Schedule C.

Pass-Through Taxation for Multi-Member LLCs

For a multi-member LLC, members are entitled to their share of LLC income, whatever that might be.

Here is an example:

Meghan owns 20% of Smith Home Repair, LLC. If Meghan’s LLC had $200,000 in gross receipts in one year, and $100,000 in total expenses, then the LLC would have earned $100,000 in net profit. Meghan would be responsible for paying taxes on 20% of the LLC’s profit, or $20,000.

Because LLCs are pass-through entities, LLC owners are responsible for paying taxes on their share of LLC income, whether or not they are given a disbursement.

The Value of an EIN


An Employer Identification Number, or EIN, is like a social security number for small businesses. The EIN allows the IRS to keep track of a business’ tax reporting.

All multi-member LLCs are required to have an EIN. Although single-member LLCs are not always required to have one, it is a good idea to get an EIN anyway. Here are some advantages of having one:

  • Most banks require an EIN in order to open a business banking account.
  • You will need an EIN if you ever wish to hire employees.

As a business owner, you will need a business bank account to keep your personal and business expenses separate. So getting an EIN is always a good idea.

EINs can be obtained for free from the IRS website

Get an EIN

Most small businesses find that the default tax status is best. For single-member LLCs, this is as a disregarded entity, and for multi-member LLCs it is as a partnership.

For more information about EINs, including a step-by-step guide to completing the online application, check out our article.

Don't Neglect Bookkeeping


Once you have opened a business bank account and separated your personal assets from your business assets, keeping accurate records of your LLCs financial history is essential for managing your taxes.

Getting your bookkeeping right from the start will save your business time and money in the long run. For a small fee, a professional accountant can help you setup your business with accounting software. We recommend Xero or Quickbooks Online.

Forming a relationship with a professional accountant can also help you avoid common bookkeeping mistakes. Such errors may seem small at first sight, but poorly kept accounts can lead to thousands of dollars in unpaid taxes, and can even ruin a business.

One common error business owners make is confusing business expenses and capital expenditures. A business expense is something you purchase for your business that is used up, and capital expenditures are purchases of fixed assets that you can use for at least one full year.

Here are examples of common business expenses:

  • Basic office supplies
  • Rent or mortgage payments for your office
  • Office utilities
  • Business-related travel
  • Payments to employees
  • Materials for a construction job (paint, lumber, etc.)

These and other applicable business expenses can be deducted from your gross receipts at the end of the tax year to calculate your net profit.

Here are examples of common capital expenditures:

  • Buildings
  • Office renovations
  • Machinery
  • Equipment (computers, printers, etc.)
  • Vehicles

Capital expenditures can be deducted from your gross receipts over a period of time. This process is known as depreciation. Your accountant will be help you determine the appropriate amount to deduct per applicable item each year.

Federal Income Tax for LLC Owners


Because LLCs are pass-through entities, the business itself doesn’t pay income tax. LLC owners simply report their share of income on their personal tax return, whether it’s business income, interest and dividend income, or capital gains. How reports are made to the IRS is different for single-member LLCs and multi-member LLCs.

Single-Member LLC

The vast majority of single member LLCs are treated as "disregarded entities" by the IRS. This means that the IRS doesn’t distinguish between the business and the owner for tax purposes. However, the term "disregarded entity" is only an IRS designation and has no impact on other benefits of being an LLC.

Single-member LLCs report all income and expenses on Schedule C of their personal tax return, just like a sole proprietorship.

For more information, read our article, Taxes for Single-Member LLCs.

Multi-Member LLC

The IRS treats all multi-member LLCs as partnerships, unless they choose to be taxed as a C-Corp or S-Corp. Therefore, most multi-member LLCs are required to report their income to the IRS using a Form 1065 Partnership Return.

LLC Reporting Requirements

Multi-member LLCs directly report their income to the IRS using a Form 1065 Partnership Return. In this way, the IRS treats all multi-member LLCs as partnerships, unless they choose to be taxed as a C-Corp or S-Corp.

At the end of the fiscal year, the LLC's net reportable income or losses are split up among owners based on their share of ownership. Ultimately, it is up to your LLC’s Operating Agreement to decide how business profits will be divided among members.

All multi-member LLCs must issue each LLC owner a Form K-1 stating his or her share of income or losses for the previous year. Individual LLC members will not be able complete their individual tax returns until they receive their K-1, so it is important that the LLC sends out the K-1s in a timely fashion.

Because LLCs are pass-through entities, LLC owners are responsible for paying taxes on their share of LLC income, whether or not they are given a disbursement.

LLC Owner Reporting Requirements

Once they have received their K-1 from the LLC, individual owners use this form to report their portion of the LLC’s income and losses on their personal tax return.

For more information, read our article, Taxes for Multi-Member LLCs.

Self-Employment Tax

Anyone who is self-employed must pay self-employment taxes in addition to their income tax. This applies to most LLC owners. The self-employment tax consists of two taxes: Social Security tax and Medicare tax, and it equals 15.3% of your gross income.

Self-employment taxes are the equivalent of the Social Security and Medicare taxes paid by all wage earners. As a business owner, you can deduct the employer-equivalent portion of your self-employment tax from your adjusted gross income on your tax return.

State LLC Taxes


As pass-through entities, LLCs normally do not pay income tax on business income. In most states, LLC owners simply report their business income on their personal tax return, and that income is then subjected to individual tax rates.

Franchise Tax

Although most states have no separate income tax for LLCs, some states have another kind of tax known as a franchise tax. Tax policies vary from state to state. For more information about LLC taxes in your state, select your state below:

Look Up Your State’s LLC Taxes

Note: If you do not see your state in the drop-down menu, then your state does not charge LLC franchise tax.

Sales Tax

If your business sells goods or services, you may need to collect sales tax from your customers on behalf of your state. To learn more about how sales tax will affect your business, check out our informative guide, Sales Tax for Small Businesses.

Learn More About Sales Tax in Your State

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Employee Taxes


If you choose to hire employees, there are other taxes that your business will also need to pay:

  • Social Security tax
  • Medicare tax
  • Federal unemployment tax
  • State unemployment tax
  • Workers compensation

In addition to these taxes, your business will also need to withhold income taxes and FICA taxes (Social Security and Medicare) from your employees’ paychecks. Businesses pay these taxes to the IRS on behalf of their employees.

A professional payroll service can help you manage your payroll tax obligations, in addition to handling your company’s payroll.

To learn more about the employee taxes, read our article, Employee Taxes for Small Businesses.

When to Pay Taxes


The IRS requires all self-employed workers to pay estimated taxes four times per year. A good rule of thumb is to budget 30% of your net profit for taxes. This includes around 15% for federal and state income tax and 15.3% for self-employment tax.

Each quarter, LLC owners use IRS Form 1040 ES to remit estimated tax payments. The deadlines for submitting estimated payments are:

  • April 17th (for Jan. 1st - March 31st)
  • June 15th (April 1st - May 31st)
  • Sept. 17th (June 1st - Aug. 31st)
  • Jan. 15th of next year (Sept. 1st - Dec. 31st)