Does LLC Income Count as Personal Income?

A Limited Liability Company (LLC) is a business structure created by state law that protects an owner’s personal assets from the company’s debts and liabilities. Whether the income an LLC earns is considered personal income depends on how the LLC is treated for federal tax purposes. The Internal Revenue Service (IRS) provides default classifications but also allows LLC owners to choose alternative tax treatments, each with different implications for how income flows to the owner.

The Default Tax Treatment of LLCs

The IRS automatically assigns a tax status to an LLC based on its number of owners, known as members. For a single-member LLC (SMLLC), the default classification is a “disregarded entity,” meaning the IRS treats it as a sole proprietorship for income tax purposes. All the business’s profits and losses are considered earned directly by the owner, making the LLC’s net income the owner’s personal income.

The owner is responsible for paying self-employment taxes on all net earnings from the LLC. This tax covers Social Security and Medicare contributions, amounting to a 15.3% tax rate on top of regular income tax.

For an LLC with two or more members, the default tax treatment is a partnership. The LLC itself does not pay income tax but files an informational return, Form 1065, U.S. Return of Partnership Income, to report its financial performance to the IRS. The profits and losses are then “passed through” to the members.

Each member receives a Schedule K-1 detailing their share of the LLC’s income. Members report these figures on their personal tax returns and pay taxes at their individual rates. This income is also subject to self-employment taxes.

Elective Tax Classifications for LLCs

An LLC is not bound by its default tax status and can elect to be taxed as a corporation. One option is to be taxed as an S Corporation by filing Form 2553, Election by a Small Business Corporation, with the IRS. Owners who actively work in the business must be paid a “reasonable salary” as formal employees. This salary is personal income, and the LLC is responsible for withholding income taxes and paying the employer’s share of payroll taxes.

Any remaining profits after the salary and other business expenses are paid can be passed through to the owners as distributions. These distributions are also considered personal income but are not subject to self-employment or payroll taxes. This can result in considerable tax savings compared to the default LLC structure.

Alternatively, an LLC can file Form 8832, Entity Classification Election, to be taxed as a C Corporation. This is the only structure where the LLC’s income is not automatically treated as the owner’s personal income. Under this classification, the LLC becomes a separate taxable entity and pays corporate income tax on its profits by filing Form 1120, U.S. Corporation Income Tax Return. The current federal corporate income tax rate is a flat 21%.

An owner only receives personal income from a C Corp-taxed LLC as a salary for working in the business or as dividends paid from the corporation’s after-tax profits. This structure can lead to “double taxation,” where the corporation pays tax on its profits, and shareholders then pay personal income tax on the dividends they receive.

How LLC Owners Get Paid

The method for an owner to take money out of their LLC depends directly on its tax classification. For LLCs taxed under the default rules as either a sole proprietorship or a partnership, owners are not employees. Instead, they take money from the business through a process called an “owner’s draw,” which is a transfer of funds from the business bank account to a personal account.

For an LLC that has elected S Corporation status, owners who work for the business must receive a reasonable W-2 salary. Any additional profits can be taken out of the company as distributions. In the case of an LLC taxed as a C Corporation, owners who are employees also receive a W-2 salary, and any further distribution of profits is done through dividends. For all LLC types, maintaining a separate business bank account is fundamental to keeping finances distinct for tax and liability purposes.

Reporting LLC Income on Your Personal Tax Return

The specific tax forms you use to report LLC income on your personal tax return are dictated by the LLC’s tax status. Because taxes are generally not withheld from draws or distributions, most LLC owners must make estimated tax payments to the IRS throughout the year to cover their income and self-employment tax obligations.

For a single-member LLC taxed as a sole proprietorship, the owner reports all business income and expenses on Schedule C, “Profit or Loss from Business.” The net profit or loss calculated on Schedule C is then transferred to the owner’s Form 1040.

If the LLC is a multi-member entity taxed as a partnership, the business files Form 1065. From this return, each member receives a Schedule K-1 detailing their share of the income or loss. Members then use the information from their K-1 to complete Schedule E, “Supplemental Income and Loss,” which is filed with their personal Form 1040.

For an LLC that has elected S Corporation status, an owner-employee will receive a W-2 for their salary and a Schedule K-1 for any profit distributions. The W-2 income is reported directly on Form 1040, while the K-1 information is reported on Schedule E. If an LLC is taxed as a C Corporation, an owner-employee reports their W-2 salary on Form 1040, and any dividends received are reported on Form 1099-DIV.