What Is the Tax Rate for an LLC?

Limited Liability Companies (LLCs) offer a flexible business structure, providing owners with liability protection and various tax treatments. An LLC does not have a single, inherent “tax rate.” Its tax obligations are determined by how it elects to be treated for federal income tax purposes, which influences the applicable rates. This flexibility means an LLC can be taxed in several ways, leading to different financial outcomes for its owners. Understanding these options is crucial for LLC owners to manage their tax liabilities.

Default Tax Treatment: Pass-Through Taxation

The most common way an LLC is taxed is through “pass-through taxation.” The business itself is not a separate taxable entity for federal income tax purposes. Business profits and losses are passed through directly to the owners’ personal tax returns, where individual owners pay income tax on their share at their personal income tax rates.

For a single-member LLC (SMLLC), the Internal Revenue Service (IRS) generally treats it as a “disregarded entity,” taxed as a sole proprietorship. The owner reports all business income and expenses on Schedule C (Form 1040), filed with their personal income tax return. The net profit or loss from the LLC directly impacts the owner’s taxable income, subject to their individual marginal tax rates.

When an LLC has multiple members, it is typically treated as a partnership for federal income tax purposes. The LLC files an informational return, Form 1065, to report its overall income, deductions, and credits. The LLC does not pay income tax at the entity level. Instead, it issues a Schedule K-1 to each member, detailing their proportionate share of the LLC’s income, losses, deductions, and credits. Each member then uses this Schedule K-1 to report their share on their personal Form 1040, where it is taxed at their individual income tax rates.

A significant consideration for both single-member and multi-member LLCs under default pass-through taxation is self-employment tax. Owners are considered self-employed individuals, and their net earnings from the business are generally subject to self-employment taxes, which cover Social Security and Medicare contributions. This tax rate is 15.3%, comprising 12.4% for Social Security and 2.9% for Medicare. Self-employed individuals calculate this tax using Schedule SE (Form 1040) and can deduct one-half of their self-employment taxes when calculating their adjusted gross income.

Electing Corporate Tax Status

An LLC can elect taxation as a corporation, rather than its default pass-through treatment. This election is made by filing specific IRS forms: Form 2553 for S corporation status, or Form 8832 for C corporation status. This choice can significantly alter the tax implications for the business and its owners.

Electing S corporation (S-Corp) taxation can be an attractive option, particularly for LLCs seeking to reduce self-employment tax obligations. An S-Corp remains a pass-through entity, with profits and losses reported on owners’ personal tax returns and taxed at individual rates. Owner-employees must take a “reasonable salary” for their services, subject to payroll taxes, including Social Security and Medicare. Any remaining profits distributed to the owners as dividends are generally not subject to self-employment taxes, which can lead to tax savings for profitable businesses once their income exceeds the reasonable salary threshold.

An LLC can elect to be taxed as a C corporation (C-Corp) by filing Form 8832. This status introduces “double taxation,” a distinct characteristic of C-Corps. The C-Corp itself pays corporate income tax on its profits at the federal corporate tax rate, which is a flat 21%. When the corporation distributes its after-tax profits to shareholders (the LLC members) as dividends, those dividends are then taxed again at the individual shareholders’ personal income tax rates. While this double taxation can be a drawback for many small businesses, electing C-Corp status might be considered in specific situations, such as when seeking venture capital, planning to retain significant earnings for reinvestment and growth, or when corporate tax rates are lower than individual rates for substantial income levels.

State and Local Tax Considerations

Beyond federal income tax classifications, LLCs are subject to a diverse array of state and local taxes that can significantly impact their overall tax burden. These obligations vary considerably depending on the jurisdiction where the LLC operates.

Many states impose their own income tax on LLC profits, which may align with the federal tax classification or have unique rules. Some states, for instance, tax LLCs as pass-through entities, similar to federal treatment, while others may impose a corporate income tax even if the LLC is federally taxed as a partnership. In addition to income taxes, a common state-level imposition is a franchise tax or annual fee. These are typically levied for the privilege of doing business in the state, and they can be flat fees, such as California’s $800 annual fee, or based on factors like income, net worth, or gross receipts.

LLCs involved in the sale of goods or certain services are generally required to collect and remit sales and use taxes to the state and sometimes local authorities. These taxes are collected from customers at the point of sale and then remitted to the taxing authority. If an LLC owns real estate or certain tangible personal property used in the business, it will also be subject to local property taxes, which are assessed by counties or municipalities. Furthermore, if an LLC has employees or if an owner takes a salary under an S-Corp election, the LLC becomes responsible for state payroll taxes in addition to federal payroll taxes. These include state unemployment insurance taxes and potentially state-level income tax withholding. The exact combination and rates of these state and local taxes underscore the importance of evaluating the specific tax environment of each location where an LLC conducts business.