How Much Do LLCs Actually Pay in Taxes?

A Limited Liability Company (LLC) offers a flexible business structure that combines the liability protection of a corporation with the operational simplicity of a sole proprietorship or partnership. Many individuals forming an LLC mistakenly believe it is a distinct tax entity, separate from its owners, that automatically pays its own taxes. However, an LLC’s tax obligations are not inherent to its legal structure but are instead determined by how it is classified for tax purposes with federal, state, and local authorities. This classification dictates whether the business itself pays income tax or if profits and losses are reported on the owner’s personal tax return.

Federal Income Tax Treatment for LLCs

The tax classification of an LLC at the federal level significantly impacts how its income is reported and who is responsible for paying taxes on that income. The Internal Revenue Service (IRS) offers flexibility, allowing an LLC to be taxed in several ways, either by default based on the number of members or through an election.

A single-member LLC (SMLLC) is, by default, treated as a “disregarded entity” for federal income tax purposes. This means the LLC is not considered separate from its owner for tax reporting, although it maintains its legal distinction for liability protection. The owner reports all business income and expenses on their personal income tax return, typically using Schedule C (Form 1040), Profit or Loss From Business. The business’s profits are then taxed at the individual owner’s applicable income tax rates. This approach simplifies tax filing as no separate tax return is required for the business itself.

When an LLC has two or more members, it is automatically classified as a partnership for federal income tax purposes. As a partnership, the LLC files an informational return, Form 1065, U.S. Return of Partnership Income. This form reports the LLC’s income, gains, losses, deductions, and credits but does not pay income tax at the entity level. Instead, the partnership issues a Schedule K-1 to each member, detailing their share of the LLC’s income or loss. Each member then reports their share of the profits or losses on their individual income tax return (Form 1040).

LLCs can elect to be taxed as an S corporation by filing Form 2553 with the IRS. An S corporation is a pass-through entity, with income and losses reported on owners’ personal tax returns, avoiding corporate taxation. Owner-employees must pay themselves a “reasonable salary” subject to payroll taxes, while remaining profits can be distributed as dividends exempt from self-employment taxes. The S corporation files Form 1120-S and provides Schedule K-1s to its shareholders.

Alternatively, an LLC can elect to be taxed as a C corporation by filing Form 8832. Unlike pass-through entities, a C corporation is a separate tax-paying entity, paying federal income tax on its profits at a flat 21% rate. This structure can lead to “double taxation,” as the corporation pays tax on profits, and shareholders are taxed again on distributed dividends. A C corporation files Form 1120. While double taxation is a consideration, this election might benefit businesses planning to retain earnings for reinvestment or seeking specific corporate benefits.

Other Federal Tax Obligations for LLCs

Beyond federal income tax, LLCs often face other federal tax responsibilities, regardless of their chosen income tax classification. These obligations are distinct from the income tax levied on profits and apply based on the LLC’s activities, such as having employees or engaging in certain industries.

Owners of LLCs taxed as disregarded entities or partnerships pay self-employment tax. This tax covers Social Security and Medicare contributions. The self-employment tax rate is 15.3% of net earnings, with 12.4% for Social Security (up to an annual wage base limit, which is $176,100 for 2025) and 2.9% for Medicare (no wage base limit). Owners pay both employer and employee portions, calculated on their share of net earnings. A portion of this tax can be deducted when calculating adjusted gross income.

LLCs employing individuals, including S corporation owner-employees, incur federal payroll taxes. These include withholding federal income tax and contributing to Social Security, Medicare, and Federal Unemployment Tax Act (FUTA) taxes. Social Security and Medicare taxes (FICA) are split between employer and employee, each paying 6.2% for Social Security and 1.45% for Medicare (7.65% total). For FUTA, employers typically pay 6.0% on the first $7,000 of wages annually. A significant credit (up to 5.4%) for timely state unemployment fund payments effectively reduces the federal FUTA rate to 0.6%.

Some LLCs may also pay federal excise taxes. These taxes apply to specific goods, services, or activities, not general income. Examples include fuel, airline tickets, tobacco, alcohol, and certain heavy trucks. These taxes are generally imposed on the manufacturer, retailer, or importer and often passed to the consumer. Applicability depends on the LLC’s business operations.

State and Local Tax Obligations for LLCs

In addition to federal taxes, LLCs must navigate a complex landscape of state and local tax obligations, which vary considerably depending on where the business operates and its activities. These taxes can add substantial layers to an LLC’s overall tax burden.

Many states impose their own income taxes on LLCs or their members. While most states follow the federal pass-through treatment, taxing the income at the owner’s individual level, some states may impose a state-level income tax on the LLC itself, or on the owners’ share of income, even for pass-through entities. The specific rates and rules for state income tax vary widely across jurisdictions.

Many states also levy annual fees or franchise taxes on LLCs for the privilege of doing business within their borders, regardless of whether the LLC generates income. These fees can range from a nominal amount to several hundred or even a thousand dollars annually. For instance, some states require an annual report filing accompanied by a fee, which can be around $100 to $800, depending on the state. Failure to pay these fees can result in penalties or even administrative dissolution of the LLC.

LLCs selling taxable goods or services are generally responsible for collecting and remitting state and local sales taxes. These taxes are collected from customers at the point of sale and then paid to the appropriate state and local tax authorities. The specific sales tax rates and what goods or services are subject to sales tax differ significantly by state and local municipality.

LLCs that own real estate or certain types of tangible personal property used in the business may be subject to local property taxes. These taxes are typically assessed by local governments, such as counties or municipalities, based on the assessed value of the property. The rates and assessment methods for property taxes vary by jurisdiction.

Beyond these common taxes, LLCs might encounter other local taxes, depending on their specific location and industry. These can include business license fees, which are often required by cities or counties to operate legally, or gross receipts taxes, which are levied on a business’s total revenue before deductions for expenses. Some municipalities might also impose occupational taxes or specific industry-related fees. It is essential for LLC owners to consult state and local tax regulations pertinent to their specific business activities and location to ensure full compliance.