Does an LLC Pay Federal Taxes?

Income Taxation of LLCs

• 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. State or local governments might levy additional LLC taxes. Members can choose for the LLC to be taxed as a corporation instead of a pass-through entity.

Taxation of Single-Member LLCs

• The IRS treats a single-member LLC as a disregarded entity for federal income tax purposes. This means income and expenses go directly on the member’s tax return.

Taxation Options for LLCs

• Each business structure has different tax rules. For example, a single-member LLC is taxed as a sole proprietorship by default. An LLC owner may choose to be taxed as an S corporation instead.

Taxation as a C Corporation

• Although uncommon, LLCs can choose C corp tax status, filing Form 8832 with the IRS. The company then pays corporate tax while members also pay income tax on capital gains.

Overview of LLC Income Taxation

• For the purposes of federal income tax, LLCs are treated as pass-through entities. This means that LLCs themselves do not pay taxes on their business income. It is rather its members who pay the taxes on their share of LLC’s profits.

Tax Issues for LLCs

• Unlike C corporations, LLCs and sole proprietors are legally considered pass-through entities. The structure means their earnings go directly to their owners, who pay their taxes through their personal income tax.

LLC Tax Filing

• The default tax situation for an LLC is that it doesn’t pay federal income taxes directly. Instead, its profits go straight to the owners, who then report this money and pay personal income and self-employment tax on their earnings. This process is known as “pass-through taxation.”

Conclusion

• LLCs with C corp elections lose pass-through entity treatment. LLCs taxed as C corps pay 21% federal income tax. C corp owners pay federal tax on corporate dividends and employee wages they earn.