What Is the LLC Tax Rate? It Depends on Several Factors

A Limited Liability Company (LLC) offers a flexible business structure, providing liability protection similar to a corporation while allowing for various tax treatments. The common question about a fixed “LLC tax rate” is a misconception, as an LLC itself is not taxed. Instead, its income is taxed based on how the entity is classified for federal and state tax purposes. This classification determines the applicable tax rules and rates, which can vary significantly depending on the owner’s individual income and the business’s profitability.

The flexibility in choosing a tax classification is a primary advantage of forming an LLC. This choice allows business owners to align their tax structure with their financial goals and operational needs. Understanding these classifications and their implications at both federal and state levels is important for managing an LLC’s overall tax burden.

Understanding LLC Tax Classifications

An LLC’s federal income tax classification depends on the number of its owners, known as members, and any elections made with the Internal Revenue Service (IRS). By default, the IRS assigns a classification based on the number of members. This initial classification can then be changed through specific IRS forms.

For a single-member LLC (SMLLC), the default classification is a “disregarded entity.” This means the IRS treats the LLC as an extension of its owner for federal income tax purposes. The business income and expenses are reported directly on the owner’s personal income tax return.

If an LLC has two or more members, it is automatically classified and taxed as a partnership by default. In this scenario, the LLC itself does not pay federal income tax. Instead, the profits and losses are passed through to the individual members, who then report their share on their personal tax returns.

Beyond these default classifications, an LLC can elect to be taxed in other ways. One common election is to be treated as an S corporation. To make this election, the LLC must file Form 2553, “Election by a Small Business Corporation.”

Another elective classification for an LLC is to be taxed as a C corporation. This election is made by filing Form 8832, “Entity Classification Election.”

Federal Income Tax Based on Classification

The federal income tax obligations for an LLC are directly tied to its tax classification. Each classification dictates different reporting requirements and tax rates.

Disregarded Entity (Sole Proprietorship)

For a single-member LLC taxed as a disregarded entity, all business income and losses are reported on the owner’s personal federal income tax return, Form 1040. Specifically, these amounts are detailed on Schedule C, “Profit or Loss from Business.” The net profit or loss from the business activity is then included in the owner’s gross income, subject to their individual income tax rates.

In addition to individual income tax, the owner is responsible for self-employment taxes. This covers Social Security and Medicare taxes, which are typically withheld from an employee’s paycheck. For 2024, the self-employment tax rate is 15.3% on net earnings from self-employment. This rate comprises 12.4% for Social Security, applied to earnings up to an annual threshold of $168,600 for 2024, and 2.9% for Medicare, which applies to all net earnings without a limit. Self-employment tax is calculated on Schedule SE (Form 1040), “Self-Employment Tax,” and a deduction for one-half of the self-employment tax paid can be taken to reduce adjusted gross income.

Partnership

When a multi-member LLC is taxed as a partnership, the entity itself does not pay federal income tax. Instead, it files an informational return, Form 1065, “U.S. Return of Partnership Income.” This form reports the partnership’s income, deductions, and credits. Each partner receives a Schedule K-1 (Form 1065), “Partner’s Share of Income, Deductions, Credits, etc.,” which details their share of the business’s financial items.

Partners then report their share of the partnership’s income or loss on their individual Form 1040. Active partners are also subject to self-employment tax on their distributive share of the partnership’s net earnings, similar to sole proprietors. This tax covers their contributions to Social Security and Medicare. The self-employment tax calculation is also reported on Schedule SE.

S Corporation

An LLC electing to be taxed as an S corporation files Form 1120-S, “U.S. Income Tax Return for an S Corporation,” which is an informational return. The S corporation’s income, losses, deductions, and credits are passed through directly to its shareholders. Each shareholder receives a Schedule K-1 (Form 1120-S), “Shareholder’s Share of Income, Deductions, Credits, etc.,” to report their share on their personal Form 1040.

A key difference for S corporations is how owner-employees are compensated and taxed for self-employment. Owners who also work for the business must be paid a “reasonable salary,” which is subject to payroll taxes (including Social Security and Medicare taxes). Distributions of profits beyond this reasonable salary are generally not subject to self-employment tax. This distinction can offer tax advantages compared to sole proprietorships or partnerships, where all net earnings are subject to self-employment tax.

C Corporation

If an LLC elects to be taxed as a C corporation, it becomes a separate taxable entity. The C corporation pays corporate income tax on its net profits by filing Form 1120, “U.S. Corporation Income Tax Return.” For 2024, the federal corporate income tax rate is a flat 21%.

A notable characteristic of C corporation taxation is “double taxation.” The corporation’s profits are first taxed at the corporate level. Then, if any remaining profits are distributed to owners as dividends, those dividends are taxed again at the individual shareholder level, typically at capital gains rates. This means the same income is taxed twice, once at the corporate level and again when distributed to shareholders.

State-Level LLC Taxes

Beyond federal income tax, LLCs are subject to various taxes and fees at the state level, which can significantly impact their overall tax burden. These state-level obligations vary widely by jurisdiction and can include income taxes, annual fees, and other specific business taxes.

Many states impose their own income tax on LLCs, depending on how the LLC is classified for federal purposes. For LLCs taxed as pass-through entities (sole proprietorships or partnerships), the owners typically report their share of the business income on their personal state income tax returns. If an LLC elects to be taxed as a C corporation, it will generally pay state corporate income tax on its profits, in addition to the federal corporate tax.

States often levy annual fees, franchise taxes, or minimum taxes on LLCs for the privilege of doing business within their borders. These charges can be flat fees, such as an annual registration fee, or they may be calculated based on factors like gross receipts, income, or the number of members. For example, some states have a fixed annual fee of around $100 to $800, while others may impose a franchise tax that can range from a few hundred dollars to several thousand, depending on the business’s revenue or net worth.

Some states or localities also impose gross receipts taxes, which are taxes levied on a business’s total revenue before deducting expenses. These taxes apply to LLCs operating in those jurisdictions, regardless of their profitability. The rates for gross receipts taxes can vary, often ranging from a fraction of a percent to a few percent of total receipts.

LLCs, like other businesses, are also subject to general business taxes that are not specific to the LLC structure. These may include sales tax, which applies if the LLC sells goods or certain services, and payroll taxes, if the LLC has employees. Property taxes are also applicable if the LLC owns real estate.