An LLC is typically treated as a pass-through entity for federal income tax purposes. This means that the LLC itself doesn’t pay taxes on business income. The members of the LLC pay taxes on their share of the LLC’s profits.
Federal Taxes for LLCs
There are two federal income taxes that LLCs must pay: the corporate income tax and the individual income tax. The corporate income tax is a flat rate of 21%. However, the individual income tax varies depending on income and filing status.
In addition to federal taxes, state or local governments might impose additional LLC taxes.
Tax Classification and Deductions
LLC members can choose to get taxed as a corporation instead of a pass-through entity. LLCs can opt to be treated as an S corp for federal tax purposes to avoid self-employment tax on profits. Although uncommon, LLCs can choose to be taxed as a C corp by filing Form 8832 with the IRS.
Taxable income for an LLC is defined as business income, minus expenses and deductions. Personal deductions can also be considered when filing taxes for an LLC.
Single-Member LLCs and Self-Employment Taxes
The IRS treats single-member LLCs as sole proprietorships for tax purposes. As the sole owner, all profits or losses must be reported on your personal tax return.
To calculate your LLC tax rate, you must pay taxes on income, including self-employment tax, by making estimated tax payments during the year.
Tax Benefits and Responsibilities
By forming an LLC in a favorable tax state, businesses can potentially reduce overall liability and increase profitability. The main benefit is choosing your LLC tax rate by deciding the taxation structure.
Many LLC owners are self-employed, so taxes aren’t withheld from income. The law requires estimated quarterly tax payments to the state and IRS.
While an S Corp LLC still avoids double taxation, it can help owners avoid expensive self-employment taxes.
Common Tax-Related Questions
What LLC does not pay taxes? An LLC is typically a pass-through entity for tax purposes. This means LLC owners pay income tax, not the LLC itself.
How do LLC owners avoid taxes? One of the biggest tax advantages of an LLC is avoiding double taxation.
How should I pay myself from my LLC? You pay yourself from your single member LLC by making an owner’s draw. At year’s end, you report them with Schedule C of your personal tax return (IRS Form 1040).
Which form of business pays the less taxes? Sole proprietorships are a “pass-through entity,” meaning the business itself pays no taxes.
How can a single-member LLC save on taxes? Single-member LLCs can save on taxes by being treated as a disregarded entity not subject to corporate tax rates.
How can I avoid paying taxes for my LLC? An LLC is a pass-through entity, which is a popular option for helping business owners avoid expensive self-employment taxes. If interested, check out the S Corp calculator to see if changing to this tax classification would create savings.