How Much Are LLC Taxes? Federal & State Rates Explained

A Limited Liability Company (LLC) offers a flexible business structure that provides liability protection to its owners. An LLC is a legal entity that can choose how it is taxed by the Internal Revenue Service (IRS). The LLC itself typically does not pay federal income tax; instead, its income “passes through” to its owners. Specific tax obligations depend on the elected tax classification and the states where the LLC operates.

Federal Income Tax as a Pass-Through Entity

The default federal income tax treatment for LLCs involves income “passing through” to the owners. This means the business itself generally does not pay income tax, avoiding the double taxation seen in some corporate structures. The tax burden falls on individual owners, who report their share of the LLC’s profits or losses on their personal tax returns.

Single-Member LLCs

A single-member LLC is treated as a “disregarded entity,” and its owner is taxed as a sole proprietorship. The LLC’s income and expenses are reported on the owner’s personal tax return, specifically on Schedule C (Form 1040). The net profit or loss from Schedule C is then carried over to the owner’s individual Form 1040.

Owners of single-member LLCs are subject to self-employment tax on their net earnings from the business. This tax covers Social Security and Medicare contributions. For the 2024 tax year, the self-employment tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. The Social Security portion applies to net earnings up to $168,600 for 2024, while the Medicare portion applies to all net earnings. One-half of the self-employment tax paid is deductible for income tax purposes.

Multi-Member LLCs

A multi-member LLC is treated as a partnership by default. Unlike single-member LLCs, a multi-member LLC must file an informational return with the IRS, Form 1065. This form reports the LLC’s financial performance, but the LLC itself does not pay income tax. Instead, profits and losses are allocated among the members.

Each member receives a Schedule K-1 (Form 1065), detailing their share of the LLC’s income, deductions, and credits. Members use this information to report their share of the business’s income on their personal Form 1040. Similar to single-member LLC owners, multi-member LLC members are subject to self-employment tax on their distributive share of earnings. This flow-through of income means the owner’s personal income tax bracket and self-employment tax influence the overall federal tax liability.

Federal Income Tax with Corporate Election

An LLC can elect to be taxed as either an S-corporation or a C-corporation, offering alternative federal income tax treatments. This election is made by filing specific forms with the IRS, such as Form 2553 for S-corporation status or Form 8832 for C-corporation status. The choice of corporate election changes how profits are taxed and how owner compensation is handled.

S-Corporation Election

When an LLC elects to be taxed as an S-corporation, it maintains the pass-through nature for income tax purposes. The business generally avoids corporate income tax. A difference for S-corporations is the requirement for owner-employees to take a “reasonable salary” for services rendered. This salary is subject to federal payroll taxes, including Social Security and Medicare taxes, similar to traditional employee wages.

Any remaining profits after the reasonable salary can be distributed to owners as dividends, which are generally not subject to self-employment tax. This structure can potentially reduce the overall self-employment tax burden compared to default pass-through methods, as self-employment taxes are only levied on the salary portion, not on the distributions. The IRS scrutinizes S-corporation owner salaries to ensure they are not artificially minimized to avoid payroll taxes.

C-Corporation Election

An LLC can also elect to be taxed as a C-corporation, which operates differently from pass-through entities. A C-corporation is a separate taxable entity and pays corporate income tax on its profits at the corporate level. For the 2024 tax year, the federal corporate income tax rate is a flat 21%.

A characteristic of C-corporations is “double taxation.” This occurs because the corporation pays tax on its profits, and then shareholders pay tax again on any dividends received from after-tax profits. Owner-employees typically receive a salary, which is a deductible business expense for the corporation and is subject to payroll taxes. This election might be considered by businesses that plan to retain earnings for reinvestment or offer fringe benefits to employees.

Other Taxes and Fees

Beyond federal income tax, LLCs may incur various other taxes and fees. These additional costs vary considerably based on the state and local jurisdictions where the LLC operates.

State-level income tax obligations for LLCs can differ widely. Many states align with the federal pass-through treatment, taxing income at the owner’s individual level. However, some states impose an income tax directly on the LLC’s income, even if it’s federally classified as a pass-through entity. State corporate income tax rates can range from 0% to over 10% for LLCs that elect to be taxed as corporations.

Many states also charge annual fees, often called franchise taxes, privilege taxes, or annual report fees, for the right to operate as an LLC within their borders. These fees can range from a nominal flat amount to thousands of dollars, sometimes based on factors like revenue, net worth, or the number of members. Failing to pay these recurring fees can lead to penalties or administrative dissolution of the LLC.

LLCs that sell goods or certain services are responsible for collecting and remitting sales tax to state and local governments. The obligation to collect sales tax, known as sales tax nexus, can be established through physical presence in a state (e.g., having an office or employees) or through economic activity (e.g., exceeding certain sales thresholds). Rules for what constitutes nexus and what goods or services are taxable vary by jurisdiction.

If an LLC owns real estate or specific types of personal property used in the business, it may be subject to property taxes levied by local governments. These taxes are assessed annually based on the property’s appraised value. If the LLC has employees, including owner-employees of S-corporations or C-corporations, it will be responsible for employer-side payroll taxes. These include Social Security and Medicare taxes (FICA), federal unemployment tax (FUTA), and state unemployment tax (SUTA).